This should have been taken care of during the lame duck session:
The new Republican majority in the House of Representatives has Washington and Wall Street bracing for a revival of brinkmanship over the nation’s statutory debt limit, raising fears that the fragile U.S. economy could be rattled by a calamitous self-inflicted wound.
For years, Republicans have sought to tie spending cuts or other concessions from Democrats to their votes to lift the borrowing cap, even if it means eroding the world’s faith that the United States will always pay its bills. Now, back in control of a chamber of Congress, Republicans are poised once again to leverage the debt limit to make fiscal demands of President Biden.
The fight over the debt limit is renewing debates about what the actual consequences would be if the United States were unable to borrow money to pay its bills, including what it owes to the bondholders who own U.S. Treasury debt and essentially provide a line of credit to the government.
Some Republicans argue that the ramifications of breaching the debt limit and defaulting are overblown. Democrats and the White House — along with a variety of economists and forecasters — warn of dire scenarios that include a shutdown of basic government functions, a hobbled public health system and a deep and painful financial crisis.
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Speaker Kevin McCarthy signaled this week that he and his fellow Republicans would seek to use the debt limit standoff to enact spending cuts and reduce the national debt. He said that lawmakers likely have until summertime to find a solution before the United States runs out of cash, a threshold that is known as “X-date.”
“One of the greatest threats we have to this nation is our debt,” Mr. McCarthy said on Fox News on Tuesday evening, adding, “We don’t want to just have this runaway spending.”
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Mr. Biden has repeatedly said he will refuse to negotiate over the debt limit, and that Congress must vote to raise it with no strings attached.
That has introduced the very real likelihood of a debt limit breach. “Fiscal deadlines will pose a greater risk this year than they have for a decade,” Goldman Sachs economists wrote in a note.
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Here’s a look at what the debt limit is and why it matters.
Analysts at Goldman Sachs expect the date to arrive around August. The Bipartisan Policy Center, which closely tracks the debt limit deadline, projected last summer that the X-date would likely arrive no sooner than the third quarter of 2023. But those estimates have been thrown into flux by uncertainty over the Treasury Department’s cash flow, which could change depending on the trajectory of the economy and the fate of certain policies.
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Shai Akabas, the director of economic policy at the Bipartisan Policy Center, said that the “the situation has deteriorated somewhat” from last June and that the actual X-date could now be “sometime around the middle of the year.”
Stock prices plunged — and volatility in the market spiked — as lawmakers approached a debt limit breach. They did not recover for half a year. The cost of borrowing for corporations, which fluctuates with the level of risk that investors perceive in the economy, jumped dramatically. That made it more expensive for companies to borrow to make new investments. Mortgage rates spiked similarly, hampering prospective home buyers. The credit agency S&P downgraded America’s credit rating for the first time.
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Consumer confidence and small-business optimism both plunged during the crisis, as well.
An actual breach would be far worse, economists warn.
If the Treasury Department were unable to make payments to lenders who hold federal debt — what is known as a default — investors would demand much higher interest rates in the future to loan the government money. It would be similar to what happens when borrowers miss credit card payments — their credit ratings go down, and the interest rate they pay often goes up.
Such a scenario would add dramatically to the government’s interest payments, which the White House projects will cost the equivalent of 2.6 percent of the total American economy over the next decade, further squeezing the federal budget. It would also threaten to destabilize bond markets globally because U.S. Treasury bonds are largely seen as one of the safest investments in the world.
That spiral would likely occur even if the government maintains its payments to bondholders but is unable to pay other bills, like salaries for federal workers.
The new Republican majority in the House of Representatives has Washington and Wall Street bracing for a revival of brinkmanship over the nation’s statutory debt limit, raising fears that the fragile U.S. economy could be rattled by a calamitous self-inflicted wound.
For years, Republicans have sought to tie spending cuts or other concessions from Democrats to their votes to lift the borrowing cap, even if it means eroding the world’s faith that the United States will always pay its bills. Now, back in control of a chamber of Congress, Republicans are poised once again to leverage the debt limit to make fiscal demands of President Biden.
The fight over the debt limit is renewing debates about what the actual consequences would be if the United States were unable to borrow money to pay its bills, including what it owes to the bondholders who own U.S. Treasury debt and essentially provide a line of credit to the government.
Some Republicans argue that the ramifications of breaching the debt limit and defaulting are overblown. Democrats and the White House — along with a variety of economists and forecasters — warn of dire scenarios that include a shutdown of basic government functions, a hobbled public health system and a deep and painful financial crisis.
Advertisement
Continue reading the main story
Speaker Kevin McCarthy signaled this week that he and his fellow Republicans would seek to use the debt limit standoff to enact spending cuts and reduce the national debt. He said that lawmakers likely have until summertime to find a solution before the United States runs out of cash, a threshold that is known as “X-date.”
“One of the greatest threats we have to this nation is our debt,” Mr. McCarthy said on Fox News on Tuesday evening, adding, “We don’t want to just have this runaway spending.”
Image
Mr. Biden has repeatedly said he will refuse to negotiate over the debt limit, and that Congress must vote to raise it with no strings attached.
That has introduced the very real likelihood of a debt limit breach. “Fiscal deadlines will pose a greater risk this year than they have for a decade,” Goldman Sachs economists wrote in a note.
Advertisement
Continue reading the main story
Here’s a look at what the debt limit is and why it matters.
What is the debt limit?
The debt limit is a cap on the total amount of money that the federal government is authorized to borrow to fulfill its financial obligations. Because the United States runs budget deficits — meaning it spends more than it brings in through taxes and other revenue — it must borrow huge sums of money to pay its bills. That includes funding for social safety net programs, interest on the national debt and salaries for troops. While the debt ceiling debate often elicits calls by lawmakers to cut back on government spending, lifting the debt limit does not authorize any new spending and in fact simply allows the United States to finance existing obligations. In other words, it allows the government to pay the bills it has already incurred.
When will we hit the borrowing cap?
The date that the federal government can no longer fully meet its obligations on time is a moving target, but there are signs that it is approaching sooner than previously thought.Analysts at Goldman Sachs expect the date to arrive around August. The Bipartisan Policy Center, which closely tracks the debt limit deadline, projected last summer that the X-date would likely arrive no sooner than the third quarter of 2023. But those estimates have been thrown into flux by uncertainty over the Treasury Department’s cash flow, which could change depending on the trajectory of the economy and the fate of certain policies.
Image
Shai Akabas, the director of economic policy at the Bipartisan Policy Center, said that the “the situation has deteriorated somewhat” from last June and that the actual X-date could now be “sometime around the middle of the year.”
What happens if we actually go over that cliff?
Just approaching a breach of the debt limit can hurt the economy. In 2011, congressional Republicans and former President Barack Obama engaged in a standoff over spending and debt that was resolved just in time to avoid hitting the limit. That brinkmanship rattled investors, consumers and business owners, with concrete consequences.Stock prices plunged — and volatility in the market spiked — as lawmakers approached a debt limit breach. They did not recover for half a year. The cost of borrowing for corporations, which fluctuates with the level of risk that investors perceive in the economy, jumped dramatically. That made it more expensive for companies to borrow to make new investments. Mortgage rates spiked similarly, hampering prospective home buyers. The credit agency S&P downgraded America’s credit rating for the first time.
Advertisement
Continue reading the main story
Consumer confidence and small-business optimism both plunged during the crisis, as well.
An actual breach would be far worse, economists warn.
If the Treasury Department were unable to make payments to lenders who hold federal debt — what is known as a default — investors would demand much higher interest rates in the future to loan the government money. It would be similar to what happens when borrowers miss credit card payments — their credit ratings go down, and the interest rate they pay often goes up.
Such a scenario would add dramatically to the government’s interest payments, which the White House projects will cost the equivalent of 2.6 percent of the total American economy over the next decade, further squeezing the federal budget. It would also threaten to destabilize bond markets globally because U.S. Treasury bonds are largely seen as one of the safest investments in the world.
That spiral would likely occur even if the government maintains its payments to bondholders but is unable to pay other bills, like salaries for federal workers.
The U.S. May Finally Breach the Debt Ceiling. Here’s Why That Would Be Very Bad.
If Congress fails to increase the government’s borrowing limit in time, the result would be a shock to the economy and financial markets.
www.nytimes.com