The United States came close to the first default in its history. Since January, Congress has not allowed the government to increase public debt, and in a month the richest country in the world could stop paying its bills. A default would be catastrophic for America and cause a global crisis.
How did we get to this point, what else can we do, and what will happen if the default on the astronomical $31.4 trillion debt occurs?
Is the United States running out of money?
No, they haven’t, but the United States spends more on the budget than it collects in taxes. What is missing is borrowed. The deficit budget was approved by Congress, and now it does not allow borrowing.
The problem is that the maximum amount of public debt is limited by law. The ceiling was reached in January, but once again, instead of a routine review, it was the subject of political bargaining. Republicans, who control the lower house of Congress, are demanding spending cuts and refusing to raise the ceiling without concessions from Democrats, who control both the upper house of the Senate and the White House.
President Joe Biden promised to meet with Republicans on May 9, but warned he was not going to haggle over a borrowing limit increase. “It’s not up for discussion,” he said.
So far, the Ministry of Finance is spending the money accumulated in advance in its account and current tax receipts, but without new debts, in June, it will not have enough for everything. He is not allowed to choose who to pay and who not, so he will be forced to stop all payments, including on the public debt – something that has never happened in American history.
“A default on our debts will lead to economic and financial disaster,” Treasury Secretary Janet Yellen warned.
How does the US default threaten the rest of the world?
The global financial system is based on the notion that the United States will never default on its dollar obligations because it prints as much as it needs. US public debt is the main reserve asset in the world, nearly 60% of savings are held in dollars (20% in euros, 5% in yen and pounds, 3% in yuan).
“A default will have serious and lasting financial and economic consequences. Even a default is not necessary – a single threat of default will send markets plummeting and hurt household incomes,” White House economists warn.
“Financial markets will lose confidence in the United States, the dollar will fall, stocks will crash. The American rating will probably be downgraded, loans will go up in price,” the Council of Economic Advisers predicted in of the previous debate on the national debt ceiling two years ago.
When America sneezes, the whole world catches a cold, as 2008 demonstrated. Then the financial crisis in the United States led to a recession in the global economy, from which the world recovered for an entire decade.
“The consequences of default will not be limited to the United States. The financial crisis will begin to spread and the global economy will face the threat of a recession,” Biden’s advisers wrote.
This time it will be even worse, they warn, because without the ability to borrow from the government, there will still be no money for state support to mitigate the effects of the crisis, such as after the crisis. financial collapse of 2008 and during the covid pandemic.
The recession is now very untimely. The world has not yet recovered from the covid crisis. Second economy after the United States, China has just started to recover and the third European economy is reeling from the energy crisis and Russia’s war against Ukraine.
Can the disaster be avoided?
The easiest way is to raise the national debt ceiling or cancel it. This requires the consent of Congress. While he’s gone, the government can delay default with a series of emergency measures, from the bland to the extravagant, like minting a $1 trillion platinum coin.
How soon the Biden cabinet can and, crucially, wants to get out is a $31.4 trillion question. Estimates vary from June to October, and even up to 2024.
Here is a rough list of measures that theoretically allow the United States to avoid default, even if Congress does not allow the public debt to increase.
Hide behind the constitution
The US Constitution prohibits not paying debts – this is stated in the 14th Amendment. The Ministry of Finance can refer to it and continue to borrow to refinance itself as if nothing had happened. However, this path leads to the courts and turns Treasury Department accountants from technocrats into active participants in the political battle between Republicans and Democrats, which they do their best to avoid.
1 trillion dollar platinum coin
In theory, the Ministry of Finance has the right to launch a “collectible” platinum coin of any denomination, of at least $1 trillion, and receive money from the central bank – the system United States Federal Reserve – on the security of this coin. However, since the dispute is political and the Fed is out of politics, it may not accept the coin so as not to challenge its own independence.
Another Fed Tip: Buy and Sell
For the same reason, the central bank is unlikely to agree to another maneuver: in the event of default, buying up bonds whose principal the Treasury cannot pay, and selling similar bonds from its gigantic portfolio of US government debt which did not default for the same amount. Since the sole purpose of such an operation is to help the government out of an uncomfortable situation, and since buying and selling does not make economic sense, the Fed’s agreement will tarnish its reputation as an independent central bank and will undermine the credibility of monetary policy. policy of the world’s leading financial power, with all the resulting consequences. Trying to avoid one crisis will lead to another.
Some pay, some don’t.
Theoretically, the Treasury Department is able to prioritize payments and pay debts first, then what remains to be distributed among US government employees. As Senate Democratic Leader Chuck Schumer put it, “Republicans have held the American people hostage” and presented them with a choice: either default on their obligations to their creditors or “default on their obligations to the America: a sharp reduction in benefits for security, support for veterans, families, teachers and children.”
The Ministry of Finance claims that it is neither technically nor politically capable of setting priorities. Can pay everyone or no one. He does not have the power to determine which spending approved by Congress is more important and prioritized than others, and any attempt to voluntarily assume this function will be drowned in a tsunami of lawsuits.
“Priorization won’t solve the problem of the national debt ceiling. Prioritization just means not paying the public accounts. It hasn’t happened since 1789,” Treasury Secretary Yellen said. “If we stop paying, there will be an economic and financial collapse.” .”
Accounting maneuvers
The government temporarily suspended the issuance of government securities to public institutions and funds, such as a pension fund for state employees, and the investment of the dollar portion of the stabilization fund in government securities. Such “accounting maneuvers” will make it possible to hold out until June, believes Yellen.
Debt maneuvers
The impossibility of increasing the debt does not deprive the Ministry of Finance of the right to issue new bonds exactly for the amount of those whose maturity has come due. Another debt maneuver is to issue bonds with a giant coupon, which will allow you to get money now without increasing debt. The two fire-fighting measures do not fundamentally solve the problem. Moreover, the issuance of new debt securities in this case contradicts, if not the letter, but the spirit of the law on the public debt ceiling. The threat of litigation demotivates the Ministry of Finance and increases the price of borrowing.
When and how everything will be resolved
“All of these dubious maneuvers will not avoid the chaos created by the very fact of reaching the national debt ceiling”, write the economists of the Brookings Institution (USA) Wendy Edelberg and Louise Scheiner.
“The only effective solution is to raise the debt ceiling immediately, or better yet, to cancel it altogether.”
“You can analyze the economic and financial aspects of this all you want, but in the end it all comes down to the fact that the problem is political,” agrees George Purks, macroeconomics analyst at Bespoke Investment Group.
“Politicians created the problem, they made it worse, and only they can solve it. Only politically — there’s no other way,” Purks said on a Bloomberg podcast.
The experts unanimously say that the butt will continue until the end. This is also indicated by the experience of previous similar crises.
The United States has never defaulted, but has faced the current situation a few times where the debt ceiling has been reached and Congress has refused to increase it. Each time, the ceiling was raised or suspended even before the Ministry of Finance had no more money to pay 100% of the bills.
But still not without consequences. In 2011, the fight between Democratic President Barack Obama and the Democratic Senate against the Republicans in the House of Representatives dragged on. The threat of default was so real that the markets panicked and the US credit rating was downgraded.
Default is a much bigger problem than the second well-known type of US budget crisis, the so-called “shutdown”. In this case, Congress simply does not allocate money to finance state employees, and the bureaucracy is partially reduced.
However, the closure only affects public administration costs, which do not exceed 25% of all budget expenditures. Neither social payments nor the ability to issue and refinance debt are limited.
There have already been two dozen shutdowns, and most have gone unnoticed or lasted no more than one business day.
“The economic consequences of the shutdowns are only a pale shadow of what would happen if the government defaulted due to the national debt ceiling,” the White House warned.
Source: delfi
