The US government has never been insolvent. But it could be so far shortly. Because Democrats and Republicans are playing poker to suspend the $ 28.5 trillion debt ceiling. ntv.de has the answers to the most important questions.
What is it about?
In the US there is – once again – a dispute about raising the debt ceiling. If the Congress (that is the Senate and the House of Representatives) does not decide to take this step by tomorrow, a “Government Shutdown” threatens on Friday. Hundreds of thousands of federal employees would then be sent on unpaid compulsory leave, and numerous public institutions would have to close. The government can for a limited time through “extraordinary measures” (translation: accounting tricks) prevent the worst: the default of the USA. But that would be inevitable in October.
What is the state of affairs?
The Democrats around US President Joe Biden want the debt limit to be suspended by December next year, while the Republicans reject it. To improve their negotiating position, the Democrats are combining the request with $ 28.6 billion in emergency aid for victims of natural disasters in the United States and $ 6.3 billion in support of evacuated Afghan citizens after the Taliban came to power. The House of Representatives passed a corresponding law with the votes of the Democrats, but in the Senate it failed due to the unified resistance of the Republicans. The clock is ticking.
How is the balance of power?
The Democrats control the House of Representatives, but in the Senate they rely on Republican support. Both parties each have 50 senators in this chamber. It is true that the Democrats have a wafer-thin majority, because Vice President Kamala Harris, in her office as Senate President, is decisive in stalemate situations. But every senator can prevent a legislative text from being debated through a procedural trick called “filibuster”. A majority of 60 votes is necessary to prevent a “filibuster”.
What is the debt limit?
In principle this is a technocratic mechanism, it was introduced at the beginning of the 20th century. The debt limit determines how much money the US government can borrow to meet its financial obligations. If the upper limit is not increased, the state will not be able to meet all of these obligations and will not be able to pay old debts that become due.
It is currently at $ 28.5 trillion, which is the limit. It has been raised or suspended nearly 80 times since 1960. For decades this was just a formality. But during the presidency of the Democrat Barack Obama the Republicans discovered the upper limit as a political weapon, since then there has been a partisan battle when the limit is reached. The approaching insolvency is used as leverage by one side to force concessions from the other side.
Why is there the debt limit?
The constitution requires Congress to authorize the taking on of debt. The general debt limit is designed to prevent the government from having to ask Congress for permission every time the Treasury Department puts a bond on the market.
When was the limit last changed or suspended?
2019 during Donald Trump’s presidency. At that time, Republicans and Democrats agreed to suspend the limit for two years. The regulation expired on August 1st of this year. That means: Now the upper limit of 22 trillion dollars applies again, to which the debt incurred since then of around 6.5 trillion dollars is added – a total of 28.5 trillion dollars.
When would the US run out of money?
Treasury Secretary Janet Yellen announced that her department would run out of funds on October 18. The Independent Budget Office of Congress (CBO) also expects that will be the case in October.
What are the consequences?
Insolvency would be without a historical example in the US. If the government is unable to service its debt in October, the US economy is threatened with a recession and a global financial crisis, warns Yellen. It would be “irresponsible” to jeopardize the US creditworthiness. The Finance Minister is not alone in making this assessment. As with any debt poker game in the US, economists and analysts warn of the global consequences. They assume that if the US defaults, interest rates will skyrocket.
Then why is the limit not being raised?
This time, too, the background is a dispute between the Democrats and the Republicans. As usual, it is not just about debt, but also about projects on the other side. This time the Republicans are using the limit to torpedo a $ 3.5 trillion package from President Biden. Biden wants to put more money into education and childcare, support families more and give them tax relief and take money into the fight against the climate crisis – spread over several years. It is to be financed through tax increases for top earners and the more consistent collection of due taxes. The Republicans accuse the Democrats of irresponsible budgetary policies.
That’s all?
No. The Democrats are desperate for a bipartisan solution, arguing that debt has accumulated under both Democratic and Republican presidents in recent years. In the face of the polarized political landscape in the USA, you want to avoid being portrayed by the Republicans as a debt maker. The Republicans argue that given the majority situation, the Democrats do not need their help and can use another means for this – the so-called reconciliation process, with which the “filibuster” is not possible. However, this is a very complicated parliamentary procedure and it is questionable whether there will be enough time for it. In addition, it can only be used if the legislation concerned reduces the public deficit. So it would force the Democrats to cut spending.
In the opposition, the Republicans usually claim to be responsible for fiscal policy and therefore reject higher national debts and deficits. However, this did not prevent them from massively increasing both the budget deficit and the debt during the Trump presidency through tax cuts and economic stimulus programs.
Will there be a default?
This is currently – still – very unlikely. So far, Republicans and Democrats have always reached a compromise in light of the looming consequences. However, that does not mean that the poker will end well this time around.