Government shutdown or treasury bankruptcy… What is the fate of the US debt ceiling crisis?

Government shutdown or treasury bankruptcy… What is the fate of the US debt ceiling crisis?
Government shutdown or treasury bankruptcy… What is the fate of the US debt ceiling crisis?
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A screen in New York showing the US public debt the moment it reached the permissible ceiling (Getty)

Partisan brinksmanship in the US Congress has made government shutdowns seem like a routine part of governance in the past decade, but the current standoff in Washington over raising the $31.4 trillion federal debt ceiling is more serious.

China is stepping in

China, the largest buyer of US bonds in the world, took advantage of the US policy in the US debt ceiling crisis, to respond to US Treasury Secretary Janet Yellen’s criticism of Beijing’s handling of debt issues in developing countries.

The response came from the Chinese embassy in Lusaka, Zambia, on Monday, which criticized the US over the “disastrous debt problem” and accused it of “sabotaging” other countries’ efforts to solve debt problems.

Noting that the Treasury Department has begun to take exceptional measures to fulfill its obligations after the US government reached the borrowing limit, the embassy said: “The biggest contribution that the United States can make to foreign debt issues is to work to follow responsible monetary policies, and to confront its own debt crisis.” and stop sabotaging the active efforts of other sovereign states to solve their debt problems.”

What does government shutdown mean?

Congress is supposed to pass detailed spending legislation for each fiscal year, beginning on October 1, or legislation allowing temporary additions to keep the government running.

If these bills are not passed, departments like the Department of Defense and the Internal Revenue Service don’t get the money they need to operate and must close or scale back.

This has happened three times in the past 10 years, with a healthcare spending battle resulting in a 16-day shutdown in October 2013, while disputes over immigration led to a three-day shutdown in January 2018 and a 35-day shutdown between December December 2018 and January 2019.

According to the US Congressional Budget Office, the 2018-2019 shutdown reduced economic activity by about $11 billion, but much of that lost growth was recovered when government activity resumed.

Overall, the shutdown has cost the economy about $3 billion, or 0.02% of GDP, according to budget office data.

What is the debt ceiling

Congress has another important fiscal function: ensuring that the government can pay its bills, including spending that lawmakers have already approved.

Unlike most countries, the United States has a strict limit on how much money it can borrow. As a result, Congress must raise this limit periodically because the government typically spends more money than it collects each year, adding to the public debt.

This is no easy task for lawmakers who do not want to approve more borrowing, but also do not want to cause default. Sometimes Congress simply raises the debt ceiling, as it did in August 2019, during the administration of Republican President Donald Trump, and sometimes it seizes the opportunity to engage in a rowdy debate about fiscal policy before raising the ceiling at the last possible moment, as it did in 2011, during the administration Democratic President Barack Obama.

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This year could see a repeat of 2011, when Republicans, who control the House of Representatives, say they will not raise the debt ceiling unless Democratic President Joe Biden agrees to limit spending.

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The White House said that the borrowing limit must be raised without conditions, as the Democrats consider that the Republicans “take the American economy hostage,” and there is an important American principle, which is not to negotiate with those who take hostages.

What happens if the debt ceiling is not raised?

Treasury Secretary Janet Yellen said on January 19 that the United States had reached its current borrowing limit of $31.4 trillion, but could continue to pay its bills through June, by resorting to the use of some “extraordinary measures”, which allow for some changes. In accounting systems, which is not affected by the American citizen.

But after those measures are exhausted, the Treasury will not have enough money from taxes collected to cover bond payments, worker salaries, Social Security checks, and other bills.

How does that affect the economy

Unlike a government shutdown, experts say it could be disastrous if the US government is unable to pay its bills.

Some Republicans have suggested that the Treasury cover some liabilities, such as Pentagon salaries and debt payments, and that some other expenses be deferred. But Yellen said this is not possible.

The failure of the United States to pay debt payments, for the first time in its history, sends a shock wave to global financial markets, as investors will lose confidence in the ability of the US Treasury to pay its bonds, which is seen as the safest borrower in dollar debt in the world, and that it It is the cornerstone of the global financial system.

The Treasury had some difficulty making timely debt payments to some small investors in 1979 due to computer problems, but analysts say this did not have a wide impact on financial markets, as many did not regard it as a true default.

The budget battle in 2011, which brought Washington close to default, led to a stock sell-off and a once-in-a-lifetime downgrade of the US’ top credit rating. Other economic indicators, such as consumer confidence and small business optimism, also declined during that period.

The US economy may face a sharp contraction this time if the 69 million people enrolled in Social Security do not receive monthly retirement and disability benefits, or if doctors and health workers are delayed in receiving their salaries, if health care programs are not available.

Reuters says that signs of concern have already begun to appear in the financial markets, which was evident in investors’ demand for higher returns on some US Treasury bonds.

(Reuters, The New Arab)

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