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The looming U.S. debt-limit crisis, summed up in 5 points

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The US debt ceiling stalemate continues just started And it could be the country’s most important political showdown over the next few months.

Treasury Secretary Janet Yellen said the country had reached its debt ceiling on Thursday and would have to take “special measures” to avoid a default.

Everyone has a stake in this standoff, so naturally the rest of the world will have their doubts.

The Republican Party has demands, the debt ceiling is a weapon, and the global economy is a hostage.

Here are some answers.

What is the US debt ceiling?

US Constitution give Congress has power over finances and Congress has always played a role some role In setting debt levels.It created the first modern debt ceiling 1939.

That’s Exactly What It Sounds Like: The Maximum Level Of U.S. Debt. Lawmakers Had To Raise It dozens Many years ago.

The United States owes people and institutions around the world, two-thirds of which is in the United States and one-third abroad. They include purchasers of government-issued securities such as bonds and Treasury bills, such as pension funds, mutual funds, term investors, the US Federal Reserve, and other central banks. High on the list are Japan, China and the UK.

The debt ceiling was raised to its current level two years ago, $31.4 trillionor more 120% of US GDP.

In a similar stalemate in 2011, the threat of a potential US debt default triggered the first credit rating downgrade in US history and a 7% stock market crash in a single day. (Brendan McDiarmid/Reuters)

The US will technically reach that limit next week. However, the disaster could be delayed for months.

Many economists hate this system.in one economist Research84% agreed that it creates unnecessary uncertainty for the economy.

“I don’t think it makes sense,” Lee Roberts, who teaches public budgets at Duke University, said in an interview.

He said the normal way to set debt levels is through the normal budget process, where Congress approves spending.

What if Congress doesn’t raise the limit?

bad thing.Reported by Moody’s analysis It’s filled with adjectives of horror like “catastrophe,” “unimaginable,” and “catastrophic.”

Moody’s 2007 onwards Financial crisis: GDP fell by about 4%, about 6 million people lost their jobs, and stock prices plummeted by almost a third.

old research It was published The US Federal Reserve’s forecasts are similar to Moody’s, if slightly less dire.

Those are short-term effects. The long-term problem is the new uncertainty that is permanently embedded in the global economy.

The global financial system is built on the premise that US government-backed securities are safe and readily available investment assets, says Mark Goldwain.

If this causes a global recession, it’s because long-held assumptions are rattling, said Gold, an economics professor and vice chairman of the Washington-based Committee on a Responsible Federal Budget. Wayne said.

Let’s take a look at what happened to the debt ceiling stalemate in 2011. The mere talk of a possible US debt default triggered the first credit downgrade in US history, wiping 7% from the stock market in a single day.

Watch | How another US debt ceiling crisis played out in 2013:

US debt default is imminent

CBC’s Neil Macdonald provides an update on negotiations for a US debt ceiling deal

why are we discussing this now?

Because the limits are approaching and the situation is similar to 2011. Full Political Storm: Republicans have the House and are ready to battle the Democrats in the White House and Senate.

Remember the recent soap opera in Congress? It attracted more votes to elect its Speaker than at any time since the American Civil War. The debt ceiling played a role.

Several conservative holdouts made demands on Kevin McCarthy, one of which was to hold tough negotiations before lifting the debt limit.

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The process of electing a speaker alone has degenerated into denunciations and almost physical altercations among Republicans. It may be an omen. The debt ceiling strategy was part of the battle. (Andrew Harnik/AP)

They want spending cuts and believe federal deficits are unsustainable. they are not alone. what do they want to cut? Still do not know.

What we do know is that McCarthy needs to keep these members happy. I have.

What will really happen in the coming months?

Don’t think of default as a light switch that flips on and off. It’s like a rising tide, steadily increasing in danger.

You can actually see the tide come in. daily statementthe US Treasury lists its cash flows.

Using that data, the Treasury Debt Management Office Deciding when to borrow money instruct of Finance Bureau You can get that money by issuing securities such as treasury bills and bonds that are later repaid.

This Congress should approve new debt disbursements within months. Otherwise, the United States will risk possibilities never before considered. Seen here: A tally of US Treasury bonds in a photo from New York City in 2017.
Republicans say the national debt is unsustainable. In fact, debt service costs are skyrocketing. But one thing Republicans won’t discuss is raising taxes to address it. They want to cut spending. (Shannon Stapleton/Reuters)

Once the debt limit is reached, its activity ceases.

Cash is tight, and the Treasury Department will resort to “special measures” Yellen referred to to cut costs, such as deferring contributions to the Civil Servants Pension Fund.this is 2019 When 2021and it’s about to start happening again in the next few days as government cash flows dwindle.

Cash is even tighter in the spring as taxpayers send checks with their annual returns. But the tide keeps rising.

At some point, the federal contractor will be notified of the late payment.

Beyond that, we might see what happened in California 1992 When 2009: Instead of a regular benefit check, I sent a regular citizen IOU.

At this point, the government is doing the equivalent of the fiscal nuclear button: as much as it can before it defaults.

Without action by Congress, the US is likely to face this situation by the fall, which Goldwayne calls uncharted territory.

He’s actually optimistic. He doesn’t think we’ll get there.

“I don’t want to guess [what happens next]’ said Goldwayne.

What are politicians saying?

McCarthy said he hopes to address this soon. He, 2019 Agreement A place where ceilings have been raised in exchange for small budget cuts.

Republicans say spending must be restrained as the cost of debt explodes under the triple whammy of inflation, rising interest rates and the budget deficit.

Congressional Budget Office predict It will cost us $2.5 trillion more over the next 10 years just to pay the interest on our debt than we had previously estimated. (Context: United States spend, a year, less than $2 trillion in military and old-age pensions combined. )

What Republicans aren’t interested in is reviewing past tax cuts that coincided in 2018. Worsening fiscal deficit Under Ronald Reagan, George W. Bush, and Donald Trump. They want spending cuts from the Democrats.

Here is the White House’s position: No bargaining. Congress says it has a basic obligation to pay bills already incurred from spending approved by Congress.

White House spokeswoman Carine Jean-Pierre said there would be “no hostage taking.”

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Both the U.S. House and Senate must approve an extension of the debt ceiling. Here, on Nov. 29, President Joe Biden meets with leaders of the Houses of Representatives. Republican Kevin McCarthy (left) and Democrat Chuck Schumer. (Kevin Lamarck/Reuters)

The position may prove unsustainable.

The basic reality is that the House has power here. Republican leaders have been told by their members to use it rather than the imprecise language.

And as conservative radio and television warn against caving, the pressure to fight McCarthy will only increase in the coming months.

Even President Joe Biden seems to admit that it doesn’t happen automatically. He recently mentioned the long days he had in 2011. New Year’s Eve,During negotiations handle to avoid the debt crisis. It cost nearly $1 trillion in spending cuts.

“We’ve always worked together,” Biden said.

However, that deal was made under John Boehner. The Republican Speaker of the House at the time had to work hard to convince enough lawmakers to pass the bill.

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Former Republican Party chairman John Boehner said he persuaded Paul Ryan (left) to run as his successor. Right McCarthy was the favorite for the job, but Boehner says McCarthy’s actions in the 2011 debt ceiling battle betrayed his lack of leadership qualities. (Yuri Gripus/Reuters)

Could McCarthy achieve the same?

in him biographyBoehner mentioned McCarthy only once — denouncing McCarthy’s actions in that 2011 crisis as weak, he failed in his leadership mandate, and before asking why Boehner bailed out the budget deal. said he left in a hurry.

“[That] It really pissed me off,” Boehner wrote.

That incident ultimately helped to bypass McCarthy as heir-at-law and persuade Paul Ryan to take over the chairmanship, according to Boehner. He said Ryan has shown leadership qualities by standing firm and voting on the budget bill.

Well, here we are again.

McCarthy is in charge this time. Hardliners have more control.

Some moderates in both parties have already begun to voice concerns preliminary meeting On employing an unusual tactic of Congress to bypass McCarthy and force a vote on the debt ceiling.

that is long shot.

Duke University’s Roberts said he hopes no matter what happens, the sooner the better.

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