US Treasury Secretary Janet Yellen warns against debt ceiling talks with ‘gun to the head of the American people’

[beijingwalker]

US Treasury Secretary Janet Yellen warns against debt ceiling talks with ‘gun to the head of the American people’​

May. 7 2023

WASHINGTON: US Treasury Secretary Janet Yellen on Sunday warned that a failure by Congress to act on the debt ceiling could trigger a “constitutional crisis,” with consequences for financial markets and interest rates.

Yellen in an interview on ABC News’s “This Week” said debt ceiling negotiations should not take place “with a gun to the head of the American people,” and reiterated a warning to lawmakers the government could pay its bills only through early June without increasing the limit, which the government hit in January.

Deputy Treasury Secretary Wally Adeyemo also sounded the alarm on Sunday about the risks of a default during an interview on MSNBC’s “The Sunday Show.”

“Default is catastrophic for the United States,” Adeyemo said. “If we were to default on our debt, it would have a terrible impact on interest rates.”

US President Joe Biden will meet at the White House on May 9 with Republican House Speaker Kevin McCarthy, Republican Senate Minority Leader Mitch McConnell and top Democrats, kicking off a frantic few weeks of negotiation before the US runs out of money to pay its bills as soon as June 1.

Yellen warns against debt ceiling talks with ‘gun to the head of the American people’

WASHINGTON: US Treasury Secretary Janet Yellen on Sunday warned that a failure by Congress to act on the debt...

www.brecorder.com

 

[Menthol]

USA government had been studying the case of Japan.

The simple way is to ignore the debt, whether it's 100% of GDP, 200%, or 1000%.

It's just a debt on the book, and life goes on.

 

[beijingwalker]

U.S. Debt Rises Irrespective of Who Is in the White House​

DEBT CEILING​

by Katharina Buchholz,
May 8, 2023

U.S. national debt surpassed $31 trillion for the first time October 2022, according to the Treasury Department. A whopping $8 trillion were added since the start of the coronavirus pandemic in early 2020.

The U.S. has seen three Republican and three Democratic administrations since the 1980s, but no matter who is in the White House, U.S. debt has been rising steadily throughout the years, also expanding the debt ceiling in the process. Despite Democrats and Republicans equally expanding debt while in office, the necessary raising of the debt ceiling is routinely causing a fair share of debate - often stretching until the last minute of the country's solvency.

On December 16, 2021, Congress last raised of the debt ceiling to $31.38 trillion. The debt ceiling says that the Treasury Department is not allowed to go into debt beyond a certain limit unless explicitly authorized by lawmakers. However, the amount stipulated in late 2021 has been exceeded since January 19. While the debt ceiling was not suspended this year, financial maneuvering - also referred to as extraordinary measures - has been keeping the U.S. from defaulting on its debt. Secretary of the Treasure Janet Yellen has most recently said that this could keep the country open until approximately June 1.

Infographic: U.S. Debt Rises Irrespective of Who Is in the White House

This chart shows the debt ceiling in the United States from 1981 to 2023 (in trillion U.S. dollars).

www.statista.com

 

[Communism]

USA government had been studying the case of Japan.

The simple way is to ignore the debt, whether it's 100% of GDP, 200%, or 1000%.

It's just a debt on the book, and life goes on.

Japan gets by by looting the massive savings of their population.


The U.S. doesn't have that option, as shown by the massive global inflation caused simply from the current rate of debt accumulation.

 

[renhai]

London
CNN
—
The global economy has been hit by two huge shocks in three years. It might be about to suffer a third in the shape of a US debt crisis.

After the Covid pandemic, and the first major war in Europe since 1945, the specter of the American government being unable to pay its bills is now stalking financial markets.

For most, it’s unthinkable, perhaps because the consequences are so terrifying. And it may never happen — there were signs Friday that negotiations in Washington to increase the amount the US government can borrow were gaining momentum. But if it does, it could make the 2008 global financial crisis feel like a walk in the park.

The fallout from a default would be “a million” times worse, said Danny Blanchflower, an economics professor at Dartmouth University and former interest rate-setter at the Bank of England. “What happens if the greatest economic monolith in the world can’t pay its bills? The consequences are frightful.”

The belief that America’s government will pay its creditors on time underpins the smooth functioning of the global financial system. It makes the dollar the world’s reserve currency and US Treasury securities the bedrock of bond markets worldwide.

“If the credibility of the Treasury’s commitment to pay comes into question, it can wreak havoc across a range of global markets,” said Maurice Obstfeld, non-resident senior fellow at the Peterson Institute for International Economics, a think tank in Washington.

During the 2011 standoff over raising the US debt ceiling, the S&P 500 index of leading US shares plunged more than 15%. The index kept falling even after a deal was reached, which happened just hours before the government ran out of funds.

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Markets

DOW 33,093.34 1.00%
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‘The mother of all crises.’ A US debt default would ricochet around the world
Analysis by Hanna Ziady, CNN
Updated 4:51 PM EDT, Fri May 26, 2023

What happens if the U.S. runs out of money?
03:40 - Source: CNN
London
CNN
—
The global economy has been hit by two huge shocks in three years. It might be about to suffer a third in the shape of a US debt crisis.

After the Covid pandemic, and the first major war in Europe since 1945, the specter of the American government being unable to pay its bills is now stalking financial markets.

For most, it’s unthinkable, perhaps because the consequences are so terrifying. And it may never happen — there were signs Friday that negotiations in Washington to increase the amount the US government can borrow were gaining momentum. But if it does, it could make the 2008 global financial crisis feel like a walk in the park.

The fallout from a default would be “a million” times worse, said Danny Blanchflower, an economics professor at Dartmouth University and former interest rate-setter at the Bank of England. “What happens if the greatest economic monolith in the world can’t pay its bills? The consequences are frightful.”

The belief that America’s government will pay its creditors on time underpins the smooth functioning of the global financial system. It makes the dollar the world’s reserve currency and US Treasury securities the bedrock of bond markets worldwide.

“If the credibility of the Treasury’s commitment to pay comes into question, it can wreak havoc across a range of global markets,” said Maurice Obstfeld, non-resident senior fellow at the Peterson Institute for International Economics, a think tank in Washington.

During the 2011 standoff over raising the US debt ceiling, the S&P 500 index of leading US shares plunged more than 15%. The index kept falling even after a deal was reached, which happened just hours before the government ran out of funds.



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Stock markets have largely shrugged off a possible default so far, even as the so-called X-date of June 5 draws nearer. That’s when the government, unable to borrow more, could run out of money, according to Treasury Secretary Janet Yellen, who provided an updated timeline Friday afternoon. Yellen still believes a deal will be reached in time.

“One of the concerns I have is that even in the run-up to an agreement — when one does occur j— there can be substantial financial market distress,” she said Wednesday.

Fitch has already placed America’s triple-A credit rating, its highest score, on watch for a possible downgrade because of the political brinkmanship.

The move brought back memories of 2011, when S&P downgraded the United States from “AAA” to “AA+.” S&P has still not reinstated that perfect credit rating more than a decade later.

Any downgrade, however small, affects the pricing of trillions of dollars of US government debt and causes future borrowing costs to rise. Yields on short-dated Treasury bills have already ticked up and US mortgage rates have jumped amid the uncertainty.

From bad to worse
There’s no historical precedent for a US default, making it impossible to predict how it would unfold and difficult for institutions to prepare.

This was highlighted in comment this week by the head of one of the world’s biggest lenders. World Bank President David Malpass told CNN’s Julia Chatterley that the institution didn’t have “a special war room” to manage the threat. “I don’t expect a default,” he added.

Such a “war room” does exist at JPMorgan Chase. CEO Jamie Dimon told Bloomberg earlier this month that the bank was holding weekly meetings to prepare for a possible US default and that by May 21 he expected to meet every day.

For Carsten Brzeski, global head of macroeconomic research at Dutch bank ING, there can be no “automatic reaction” to that catastrophe.

In one scenario sketched out by Brzeski, the United States could avoid a technical default for a few weeks by continuing to pay bondholders at the expense of other budget items, such as spending on social security benefits and healthcare. That would be what Moody’s Analytics calls a “breach” of the debt ceiling. A breach is not as serious as a default, which would only occur if the Treasury failed to make a debt payment on time.


Why China and Japan are praying the US won't default
Markets would still be roiled in such a scenario but it would not trigger “the mother of all crises,” Brzeski said. If a Treasury security went into default, however, that would spark “immediate market panic,” noted Obstfeld of the Peterson Institute.

Economists at Moody’s Analytics think that even in the event of a breach lasting no more than a week, US gross domestic product (GDP) would decline by 0.7 percentage points and 1.5 million jobs would be lost. Writing in a paper this month, they assigned a 10% probability to a breach, adding that it is most likely to be a short one.

If the political impasse drags on through the summer, with Treasury prioritizing debt payments over other bills, “the blow to the [US] economy would be cataclysmic,” they wrote. GDP would plunge 4.6%, costing 7.8 million jobs. Stock prices would collapse, wiping $10 trillion off household wealth, and borrowing costs would spike.

A deep recession in the United States, caused by a prolonged breach or a US default, would sink the global economy too.

In either of those scenarios, if interest rates were to spike on US Treasuries — which are used to price countless financial products and transactions around the world — then borrowing costs would soar everywhere. The financial panic would cause credit markets to freeze up and stock markets to plunge.

Investors, who traditionally buy up Treasuries in times of crisis, could dump them and turn to cash instead. The last time that happened, when the coronavirus pandemic was unfolding in March 2020, the Federal Reserve had to take extraordinary measures to avoid a full-blown liquidity crisis.

It slashed interest rates, went on a multi-billion-dollar bond buying spree, offered huge cash injections to lenders and opened credit lines for foreign central banks in order to keep dollars flowing through the global financial system

Live TV
Markets

DOW 33,093.34 1.00%
S&P 500 4,205.45 1.30%
NASDAQ 12,975.69 2.19%
Fear & Greed Index
67
‘The mother of all crises.’ A US debt default would ricochet around the world
Analysis by Hanna Ziady, CNN
Updated 4:51 PM EDT, Fri May 26, 2023

What happens if the U.S. runs out of money?
03:40 - Source: CNN
London
CNN
—
The global economy has been hit by two huge shocks in three years. It might be about to suffer a third in the shape of a US debt crisis.

After the Covid pandemic, and the first major war in Europe since 1945, the specter of the American government being unable to pay its bills is now stalking financial markets.

For most, it’s unthinkable, perhaps because the consequences are so terrifying. And it may never happen — there were signs Friday that negotiations in Washington to increase the amount the US government can borrow were gaining momentum. But if it does, it could make the 2008 global financial crisis feel like a walk in the park.

The fallout from a default would be “a million” times worse, said Danny Blanchflower, an economics professor at Dartmouth University and former interest rate-setter at the Bank of England. “What happens if the greatest economic monolith in the world can’t pay its bills? The consequences are frightful.”

The belief that America’s government will pay its creditors on time underpins the smooth functioning of the global financial system. It makes the dollar the world’s reserve currency and US Treasury securities the bedrock of bond markets worldwide.

“If the credibility of the Treasury’s commitment to pay comes into question, it can wreak havoc across a range of global markets,” said Maurice Obstfeld, non-resident senior fellow at the Peterson Institute for International Economics, a think tank in Washington.

During the 2011 standoff over raising the US debt ceiling, the S&P 500 index of leading US shares plunged more than 15%. The index kept falling even after a deal was reached, which happened just hours before the government ran out of funds.



ADVERTISEMENT


Stock markets have largely shrugged off a possible default so far, even as the so-called X-date of June 5 draws nearer. That’s when the government, unable to borrow more, could run out of money, according to Treasury Secretary Janet Yellen, who provided an updated timeline Friday afternoon. Yellen still believes a deal will be reached in time.

“One of the concerns I have is that even in the run-up to an agreement — when one does occur j— there can be substantial financial market distress,” she said Wednesday.

Fitch has already placed America’s triple-A credit rating, its highest score, on watch for a possible downgrade because of the political brinkmanship.

The move brought back memories of 2011, when S&P downgraded the United States from “AAA” to “AA+.” S&P has still not reinstated that perfect credit rating more than a decade later.

Any downgrade, however small, affects the pricing of trillions of dollars of US government debt and causes future borrowing costs to rise. Yields on short-dated Treasury bills have already ticked up and US mortgage rates have jumped amid the uncertainty.

From bad to worse
There’s no historical precedent for a US default, making it impossible to predict how it would unfold and difficult for institutions to prepare.

This was highlighted in comment this week by the head of one of the world’s biggest lenders. World Bank President David Malpass told CNN’s Julia Chatterley that the institution didn’t have “a special war room” to manage the threat. “I don’t expect a default,” he added.

Such a “war room” does exist at JPMorgan Chase. CEO Jamie Dimon told Bloomberg earlier this month that the bank was holding weekly meetings to prepare for a possible US default and that by May 21 he expected to meet every day.

For Carsten Brzeski, global head of macroeconomic research at Dutch bank ING, there can be no “automatic reaction” to that catastrophe.

In one scenario sketched out by Brzeski, the United States could avoid a technical default for a few weeks by continuing to pay bondholders at the expense of other budget items, such as spending on social security benefits and healthcare. That would be what Moody’s Analytics calls a “breach” of the debt ceiling. A breach is not as serious as a default, which would only occur if the Treasury failed to make a debt payment on time.


Why China and Japan are praying the US won't default
Markets would still be roiled in such a scenario but it would not trigger “the mother of all crises,” Brzeski said. If a Treasury security went into default, however, that would spark “immediate market panic,” noted Obstfeld of the Peterson Institute.

Economists at Moody’s Analytics think that even in the event of a breach lasting no more than a week, US gross domestic product (GDP) would decline by 0.7 percentage points and 1.5 million jobs would be lost. Writing in a paper this month, they assigned a 10% probability to a breach, adding that it is most likely to be a short one.

If the political impasse drags on through the summer, with Treasury prioritizing debt payments over other bills, “the blow to the [US] economy would be cataclysmic,” they wrote. GDP would plunge 4.6%, costing 7.8 million jobs. Stock prices would collapse, wiping $10 trillion off household wealth, and borrowing costs would spike.

A deep recession in the United States, caused by a prolonged breach or a US default, would sink the global economy too.

In either of those scenarios, if interest rates were to spike on US Treasuries — which are used to price countless financial products and transactions around the world — then borrowing costs would soar everywhere. The financial panic would cause credit markets to freeze up and stock markets to plunge.

Investors, who traditionally buy up Treasuries in times of crisis, could dump them and turn to cash instead. The last time that happened, when the coronavirus pandemic was unfolding in March 2020, the Federal Reserve had to take extraordinary measures to avoid a full-blown liquidity crisis.

It slashed interest rates, went on a multi-billion-dollar bond buying spree, offered huge cash injections to lenders and opened credit lines for foreign central banks in order to keep dollars flowing through the global financial system.


The US Treasury building in Washington, DC
Ken Cedeno/Sipa USA/AP
But the same measures may fall short if the creditworthiness of the US government is in question.

“It’s unclear in a Treasury default crisis whether the Fed could do enough even with the types of efforts it deployed in March 2020,” Obstfeld said. “It would require a much bigger effort to stabilize the market, and that effort could well be only partially successful… or not very successful at all.”

Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, is even more pessimistic. The Fed does not “have the ability to protect the US economy against the downside of a default,” he told CNN’s Poppy Harlow this week. “A default would be a message to investors all around the world of eroding confidence in America,” he added.

The dollar’s special power
Even if confidence in the United States evaporates, the damage to the dollar could be limited. In 2011, the currency strengthened as the shock of the S&P downgrade spurred investors to rush into safe assets, such as US dollars.

The pre-eminent role of the currency in the global economy leaves investors with few alternatives in a crisis — even when that crisis stems from within the United States.

Between 1999 and 2019, the dollar accounted for 96% of trade invoicing in the Americas, 74% in the Asia-Pacific region and 79% in the rest of the world, according to the Fed.

Greenbacks made up 60% of disclosed foreign reserves globally in 2021, the bulk of which are held in the form of US Treasuries. The dollar is also the dominant currency in international banking.


Denmark has a debt ceiling, too. It's never been a problem
“The argument in favor of [the dollar] is there’s really no other place to go… It’s not clear exactly where people run to,” said Randy Kroszner, a former Fed governor and now economics professor at the University of Chicago Booth School of Business.

Ultimately, the same argument could help prop up the $24 trillion US Treasury market, which is an order of magnitude larger than any government bond market of similar creditworthiness.

“There simply are not enough safe assets available for investors to move off of Treasuries,” said Josh Lipsky, senior director of the Atlantic Council’s GeoEconomics Center.

But even if the dollar and Treasuries enjoy some protection by virtue of their outsized role in international trade and finance, that doesn’t mean the fallout from a US default won’t be severe.

“The bottom line,” Lipsky said, “is that in a default, even if US Treasuries have a short-term win, everyone — including the US — will still lose.”

— Robert North contributed reporting.

https://edition.cnn.com/2023/05/26/economy/us-debt-default-global-impact/index.html



 

[renhai]

As the U.S. government grapples with another deadline to increase its debt ceiling in 2023, economists warn that a possible default could have disastrous economic consequences.

Storm clouds hover above the U.S. Capitol. Jim Watson/AFP/Getty Images

Summary
As the national debt has soared, the U.S. Treasury Department has had to borrow more money to pay for government spending. The legislative curb on this borrowing is known as the debt ceiling.
When the Treasury Department spends the maximum amount authorized under the ceiling, Congress must vote to suspend or raise the limit on borrowing.
Economists warn of dire consequences, including default, if Congress cannot reach an agreement on the ceiling.
Introduction
Congress has authorized trillions of dollars in spending over the last decade, causing the United States’ debt to nearly triple since 2009. Over that period, the Treasury Department’s ability to borrow money to make payments on that debt has repeatedly run into a congressionally mandated limit on borrowing known as the debt ceiling.

Efforts to raise or abolish the ceiling have become a topic of heated debate among policymakers; some lawmakers who decry government debt have used negotiations on altering the limit to try to force spending cuts. The congressional brinkmanship over the issue has increasingly led to disruption, including government shutdowns, and the specter of default that has threatened to push the economy into crisis. With the issue again on the table in 2023 under President Joe Biden and a Republican-controlled House of Representatives, economists are warning of catastrophic consequences if the Treasury Department can no longer pay the nation’s debts.

What is the debt ceiling?
Created by Congress in 1917, the debt limit, or ceiling, sets the maximum amount of outstanding federal debt the U.S. government can incur. In January 2023, the total national debt and the debt ceiling both stood at $31.4 trillion. The U.S. government has run a deficit averaging nearly $1 trillion every year since 2001, meaning it spends that much more money than it receives in taxes and other revenue. To make up the difference, it has to borrow to continue to finance payments that Congress has already authorized.

Congressional action to raise the debt ceiling does not increase the nation’s financial commitments, as decisions to spend money are legislated separately. Any change to the debt ceiling requires majority approval by both chambers of Congress.

Renewing America
The Issues Facing U.S. Trade and Finance
How often has it been raised?

Raising or suspending the debt ceiling becomes necessary when the government needs to borrow money to pay its debts. For much of the past century, raising the ceiling has been a relatively routine procedure for Congress. Whenever the Treasury Department could no longer pay the government’s bills, Congress has acted quickly [PDF] and sometimes unanimously to increase the limit on what it could borrow. Since 1960, Congress has increased the ceiling seventy-eight times, most recently in 2021. Forty-nine of these increases were implemented under Republican presidents, and twenty-nine were under Democratic presidents.

Congress can also choose to suspend the debt ceiling, or temporarily allow the Treasury to supersede the debt limit, rather than raise it by a specific amount. While this move was rare during the first ninety years of the ceiling’s existence, Congress has suspended the debt limit seven times since 2013.

A new chapter of debate over the debt ceiling began in 2011, when sparring over spending between President Barack Obama and congressional Republicans resulted in a protracted deadlock. Congress eventually reached a deal to raise the ceiling just two days before the date that the Treasury estimated it would run out of money. However, the brinkmanship triggered the most volatile week for U.S. stocks since the 2008 financial crisis, and the credit rating agency S&P Global downgraded the United States’ creditworthiness for the first and only time ever. The Government Accountability Office, which serves as the federal auditor, estimated that the delay in reaching a deal increased U.S. borrowing costs by $1.3 billion [PDF] that year alone. In May 2023, ratings agency Fitch put U.S. debt on negative watch, a step that typically precedes a downgrade.


With U.S. political polarization deepening over the last decade, votes to raise the debt ceiling have remained contentious, with congressional budget hawks increasingly demanding spending cuts in return for their support. When the debt ceiling was set to expire in 2013, debate over the limit forced the government into a shutdown, and in 2021, the issue again came down to the wire. As policymakers once more deliberate over the debt ceiling in 2023, President Biden and senior Republicans in the House of Representatives are negotiating an increase in exchange for reductions in federal spending.

“If you gave your child a credit card and they kept hitting the limit, you wouldn’t just keep increasing it. You would sit down with them to identify where they are overspending and where they can change their behavior,” House Majority Leader Kevin McCarthy wrote on Twitter. “It’s time for the federal government to do the same thing.”

As of May 2023, the negotiations center on Republican proposals to impose work requirements for some recipients of federal benefits, put lasting caps on federal spending, and loosen permitting rules for fossil fuel energy projects.

What would be the consequences if the United States breaches the debt ceiling?
The debate over the debt ceiling has caused economists such as CFR’s Roger Ferguson to consider the once unthinkable prospect of a U.S. default—that is, Washington declaring that it can no longer pay its debts. Some experts say that would herald chaos for the U.S. and global economies. Even short of default, hitting the debt ceiling would hamstring the government’s ability to finance its operations, including providing for the national defense or funding entitlements such as Medicare or Social Security.

Potential repercussions of reaching the ceiling include a downgrade by credit rating agencies, increased borrowing costs for businesses and homeowners alike, and a dropoff in consumer confidence that could shock the United States’ financial market and tip its economy—and the world’s—into immediate recession.

“I think it’s pretty safe to say that if we were to default, it makes the odds of a recession almost certain,” former Treasury Secretary Jacob Lew said at a CFR event in April 2023.

Goldman Sachs economists have estimated that a breach of the debt ceiling would immediately halt about one-tenth of U.S. economic activity. According to center-left think tank Third Way, a breach that leads to default could cause the loss of three million jobs, add $130,000 to the cost of an average thirty-year mortgage, and raise interest rates enough to increase the national debt by $850 billion. In addition, higher interest rates could divert future taxpayer money away from much-needed federal investments in such areas as infrastructure, education, and health care.

“Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans and global financial stability,” Treasury Secretary and former Federal Reserve Chair Janet Yellen wrote to Congress [PDF] in January 2023.

Could breaching the U.S. debt ceiling bring down other markets?
Experts say a U.S. default could wreak havoc on global financial markets. The creditworthiness of U.S. treasury securities has long bolstered demand for U.S. dollars, contributing to their value and status as the world’s reserve currency. Any hit to confidence in the U.S. economy, whether from default or the uncertainty surrounding it, could cause investors to sell U.S. treasury bonds and potentially weaken the dollar.

Over half of the world’s foreign currency reserves are held in U.S. dollars, so a sudden decrease in the currency’s value could ripple through the market for treasuries as the value of these reserves drops. As heavily indebted low-income countries struggle to make interest payments on their sovereign debts, a weaker dollar could make debts denominated in other currencies relatively more expensive and threaten to tip some emerging economies into debt or political crises.

Many U.S. exporters could benefit from dollar depreciation because it would increase foreign demand for their goods by effectively making them cheaper. Yet, the same firms would also bear higher borrowing costs from rising interest rates. Dollar instability could also benefit aspiring great-power rivals such as China. Though Beijing has long sought to position its renminbi as a global reserve, the currency accounts for 3 percent of the world’s allocated foreign reserves.

“For a Congress that is obsessed with America’s standing vis-a-vis China, the notion that it would commit an own goal and hand China such an opportunity seems incomprehensible,” writes Marcus Noland, the executive vice president and director of studies at the Peterson Institute for International Economics, a nonpartisan think tank.

Does the government have any options if the ceiling is not raised?
If congressional negotiations over the debt ceiling are not resolved before the ceiling is reached, the Treasury can stave off a default for several months with a series of temporary actions it calls “extraordinary measures.” These include suspending payments to some government employee savings programs, underinvesting in certain government funds, and delaying auctions of securities.

While the Treasury has used these measures when previous negotiations stalled—including in 2011 and 2013—Congress has never failed to raise the ceiling before the measures have been depleted. If Congress does not act to raise the debt limit despite such emergency measures, federal spending would have to plummet or taxes would have to rise significantly (or a combination of the two). In 2023, the debt ceiling was reached without a deal on January 19; Treasury Secretary Yellen has warned that extraordinary measures could be exhausted by June 1. Experts have viewed both reducing federal spending and increasing tax revenue enough to cover the needed payments as processes that could take over a decade.

As that date neared without a deal to raise or suspend the limit, some experts proposed alternatives that would not require congressional approval. These include invoking the Fourteenth Amendment of the U.S. Constitution, which states that “the validity of the public debt of the United States… shall not be questioned,” to issue more debt; others include selling U.S. gold and minting a platinum coin worth $1 trillion. Biden has publicly called these measures untenable. The Treasury Department could also defer payments on military salaries or to Social Security and Medicare recipients. It has the option of prioritizing debt payments, although in March 2023, Yellen dismissed that idea as “default by another name.”

Despite the cushion of extraordinary measures, long impasses over the debt ceiling can be enough to shake investor confidence. In May 2023, interest rates on four-week U.S. Treasury bills, long considered the safest asset in the financial system, reached a record high.

Do other countries have similar policies?
Few countries maintain debt ceilings, and nowhere else do the limits regularly threaten serious economic disruption. Denmark has one, but it is so much higher than the country’s spending that it has not posed a problem. In 2021, Denmark’s central government debt was about 14 percent [PDF] of its ceiling. Australia introduced a debt limit in 2007 with the goal of legislatively mandating fiscal responsibility amid large budget deficits. The ceiling was raised several times before being repealed in 2013. Poland’s constitution caps spending at 60 percent of gross domestic product (GDP), but it does not limit borrowing.

Should the debt ceiling be revoked?
Some analysts contend that by requiring legislative consent, the debt limit affords Congress some oversight authority and engenders fiscal accountability. The original 1917 legislation was meant to give the Treasury some autonomy over borrowing by allowing it to issue debt up to the ceiling without congressional approval for each issuance; prior to 1917, Congress authorized the Treasury to borrow in smaller increments. But in recent years, opposition parties have often used debt limit negotiations as leverage to influence policies not related to the ceiling itself.

“It is time for the United States to leave behind this antiquated mechanism that brings the country to the precipice of default every few years.”
Roger Ferguson, CFR Senior Fellow
Some economists say that the debt ceiling still serves a useful purpose by creating a credible commitment to limit spending. They point out that previous debates over the debt ceiling led to concessions that curtailed spending. In 2023, many congressional Republicans have taken heed, tying debt ceiling negotiations to their concerns that growing budget deficits threaten the U.S. economy.

But many other economists and policymakers contend that the federal debt ceiling is anathema to sound fiscal policy, calling it unwise to inhibit the government’s ability to meet already legislated financial obligations. In 2013, 97 percent of U.S. economic experts convened by the University of Chicago agreed that the U.S. mechanism for raising the debt ceiling can lead to worse fiscal outcomes. Yellen falls into that camp, having argued that the debt ceiling is inherently harmful to the U.S. economy, because it functions primarily to restrict borrowing that finances previous commitments.

CFR’s Ferguson agrees. “Congress should eliminate the debt ceiling completely, or at least tie it to spending such that the debt limit increases automatically whenever a spending bill passes,” he writes. “It is time for the United States to leave behind this antiquated mechanism that brings the country to the precipice of default every few years.”

What Happens When the U.S. Hits Its Debt Ceiling?

U.S. lawmakers have increasingly used the debt ceiling to re-litigate congressional spending, risking default and sparking debate over whether to abolish the ceiling.

www.cfr.org

 

[renhai]

CNN
—
A deadlocked Washington that has taken America to the brink of default could jeopardize the United States’ perfect credit rating, Fitch said in a stern warning Wednesday.

The credit ratings agency placed top-ranked US credit on rating watch negative, reflecting the uncertainty surrounding the current debt ceiling debate and the possibility of a first-ever default.

The move comes as as Republican and Democratic politicians negotiate to raise the US debt limit, though no deal has yet been reached. With Treasury Secretary Janet Yellen saying the US may be unable to pay its bills as soon as June 1, the country faces the possibility of an unprecedented default, which could have disastrous effects both in the United States and all over the world.

Fitch, one of the top three credit rating agencies along with Moody’s and S&P, placed the US “AAA” on “rating watch negative,” signaling that it could downgrade US debt if lawmakers do not agree on a bill that raises US Treasury’s debt limit.

“The Rating Watch Negative reflects increased political partisanship that is hindering reaching a resolution to raise or suspend the debt limit despite the fast-approaching x date (when the U.S. Treasury exhausts its cash position and capacity for extraordinary measures without incurring new debt),” the company said in a statement.

However, Fitch added that it still believed lawmakers would pass a resolution before the “X-date.”

The White House on Wednesday pointed to Fitch Ratings’ move as cause for urgency on raising the debt ceiling.

“This is one more piece of evidence that default is not an option and all responsible lawmakers understand that. It reinforces the need for Congress to quickly pass a reasonable, bipartisan agreement to prevent default,” a White House spokesperson said in a statement.

The Treasury Department on Wednesday night also emphasized that, and said a potential downgrade shows why Congress must immediately address the debt ceiling.

“As Secretary Yellen has warned for months, brinkmanship over the debt limit does serious harm to businesses and American families, raises short-term borrowing costs for taxpayers, and threatens the credit rating of the United States,” Treasury spokesperson Lily Adams said in a statement.

“Tonight’s warning underscores the need for swift bipartisan action by Congress to raise or suspend the debt limit and avoid a manufactured crisis for our economy,” Adams said

In 2011, S&P gave its first-ever credit downgrade to the US, cutting its rating to AA+. More than a decade later, that agency has still not restored its rating.

A US default could send shockwaves throughout the global economy and potentially cause a recession, according to experts. That could mean higher borrowing costs for the government and Americans themselves and a massive drag to economic growth.

Dow futures fell more than 85 points on Wednesday night amid Fitch’s warning, but the S&P 500 and Nasdaq traded in positive territory.

https://edition.cnn.com/2023/05/24/business/fitch-places-us-on-rating-watch-negative/index.html

 

[renhai]

 

[MH.Yang]

The GOP will not let its debt default, and they are also unwilling to take over a mess in 2024.

But they will not allow the DP to use the debt issue to gain more support, and they also have conditions that require the DP to make concessions.

So I think the GOP and DP will reach an agreement at the last minute to solve the debt problem together.

 

[renhai]

The GOP will not let its debt default, and they are also unwilling to take over a mess in 2024.

But they will not allow the DP to use the debt issue to gain more support, and they also have conditions that require the DP to make concessions.

So I think the GOP and DP will reach an agreement at the last minute to solve the debt problem together.

No wonder Americans are showing schizophrenia in PDF now.

 

[MH.Yang]

No wonder Americans are showing schizophrenia in PDF now.

GOP wants DP to reduce all expenses except military expenses, including technology, welfare, education, and so on. I think DP will make concessions at the last minute, and then both parties will reach a consensus to solve the debt problem together.

 

[renhai]

GOP wants DP to reduce all expenses except military expenses, including technology, welfare, education, and so on. I think DP will make concessions at the last minute, and then both parties will reach a consensus to solve the debt problem together.

I don't think the US debt crisis will be solved easily.

Maybe US will be worse than 2008.

 

[Hamartia Antidote]

So I think the GOP and DP will reach an agreement at the last minute to solve the debt problem together.

Like they do every year...every year at this time there are threads created saying the sky is falling.

Mods can we merge the four new threads @renhai has started in the last day for the debt ceiling.

 

[KAL-EL]

So I think the GOP and DP will reach an agreement at the last minute to solve the debt problem together.

That's exactly what's going to happen.

I do however find it rather interesting that Republicans only seem to care about the debt ceiling when a Democrat is president.

 

[MH.Yang]

I don't think the US debt crisis will be solved easily.

Maybe US will be worse than 2008.

This year, two popular American program hosts, Tucker Carlson and Don Lemon, were fired.

Two television stations from both parties would rather suffer huge losses than dismiss them. This indicates that the struggle between the two parties in the USA is still controllable, and they still have a certain consensus.

They will cooperate to clean up members who are too extreme. Similarly, they will cooperate to salvage the crisis.