United States: Debt Duel

It is directly in the house that you need to be careful not to leave the street. On the morning of Friday, May 19, as America prepared for a nice May weekend, the mood was optimistic. Negotiations proceeded rapidly, between Republicans and Democrats, amid cheers in the opposite camp, composed of “extraordinarily intelligent” people for whom one could only have “the greatest respect”. The stock market, serene, continued to climb. And then, at the stroke of eleven o’clock, there comes the crash: cold shower. A “pause” was decided by Republicans in the talks, in light of requests deemed “unreasonable”, before resuming discussions later in the day. Another episode, another cold sweat in a psychodrama that would be hilarious if not terrifying: debt ceiling soap opera.

If this was a Banana Republic, the world wouldn’t care. But it is no less the fate of the planet’s great treasurer that is at stake, and the planet can no longer ignore the tragic vaudeville unfolding in Washington. All of this may have subsided as Joe Biden, who was present at the G7 in Hiroshima, had to leave before the end of Friday’s first dinner for heads of state and government to return to the talks. More embarrassing: He will cut short his trip to the Pacific, skipping planned visits to Australia and Papua New Guinea, to return to Washington on Sunday.

How to sum up this mess and make sense of a 12-cushion political billiard game? Start by remembering the facts. Around June 1, perhaps a few days later, the US Treasury will no longer be able to meet its deadline. 1^er In June, for example, $12 billion is to be paid to pay for military and civilian pensions, while another $12 billion will go to veterans’ benefits. And so on. Normally, there is no problem: because these are expenditures already approved by Congress, once the tax resources are spent, only borrowing is required.

1917 law

There are treasury bills for this, they are the first source of funding for the government, as well as the largest debt market on the planet: $24 trillion Treasury bondsOf which $7.6 trillion, or about a third, is held by foreign investors and governments. More than half of the world’s foreign exchange reserves are in US dollars, and many countries are big consumers of Treasury bills – which explains their nervousness in the ongoing tussle in Washington.

Why would the US government refrain from dipping into this almost never-ending mine of dollars? Due to a law passed by Congress in 1917 that set limits on the amount of debt that the United States could contract. The funniest thing, if we may say so, is that this ceiling was invented not to prevent but to easy to Treasury Borrower Activity: It can freely issue loans up to certain limits, whereas previously Congress had to authorize it to borrow in small installments.

The only other country in the world to have such a limit is Denmark, and then: it is set at a stratospheric level, so Denmark only came close to it once, after the 2008 financial crisis, when parliament quickly decided to raise it. . And in the United States, raising the roof remained a formality for decades. Since 1960, it has been amended 78 times, including 49 times with a Republican president in the White House. But for the past fifteen years, the Republican Party has used it as a weapon of war – or rather, pure and simple blackmail – against Democratic administrations, in the mode: You cut spending, or I don’t limit the debt. Increases and America goes into default. By the way, note that Republicans refrain from using their blackmail when the President is a Republican! In 2017, 2018 and 2019, the limits were raised without great difficulty, allowing the public debt to increase to $7.8 trillion during the Trump years – enough to pay, notably, the wealthy their taxes. Gift.

During the first real “debt duel,” which dates back to 2011, a certain Joe Biden led the Democratic side’s negotiations. “Now we’re getting down to business: I’ll trade my bike for your golf clubs,” he said in the heat of conversation. In 2011 and 2013, America and the world played each other a game of intimidation — a little. In 2011, the ratings agency Standard & Poor’s downgraded the United States’ triple A credit rating for the first time in its history; In two weeks, the S&P index had fallen 17%. Two years later, in another controversy, the US government shut down the budget for 16 days until Congress passed a bill to fund the government and raise the debt ceiling.

a planetary cataclysm

This time the threat is more serious, for one reason and one reason only: Republicans on the right wing are even crazier. They are twenty, grouped into the “Freedom Caucus”, and hold the party hostage, which has only a small minority in the House. They are the ones who determined the content of a law passed last month, which makes it possible to increase the borrowing limit to $1.500 billion, enough to last only until March 2024 and to replace…4.800 billion in spending has decreased. dollars over ten years! For Kevin McCarthy, speaker This was a maximalist, unrealistic but very useful starting position for the House to start negotiating with the White House. For the upbeat Freedom Caucus, by contrast, this legislation that would demolish all the reforms passed by Joe Biden is merely an appetizer, a stage. His ultra-partisan extremism partly explains his strident radicalism. To this has been added, among many others, the idea that it is necessary to lock in a straight federal state, which has never voted for a balanced budget since 2001.

As a result, the possibility of default is no longer entirely intangible. And among serious people, everyone agrees: It would be a planetary cataclysm. In the United States, a “puncture” of the debt ceiling lasting only one week would be enough to cause the loss of 1.5 million jobs and reduce the unemployment rate from 3.4% to 5%, d ‘after the Moody’s Analytics report was published in March. According to White House economists, a prolonged standoff would eliminate more than 8 million jobs and cause “severe” economic damage. The ratings of Treasury securities will be affected, as well as the credibility of the dollar in international markets. It is easy to imagine the widespread effects of contaminating the planet.

It’s the magnitude of the crisis, basically, that suggests that a deal is more likely to happen, despite the growing number of lunatics in the Republican Party and Congress. in the end, reducing some spending over the next two years and possibly introducing work obligations for some beneficiaries of social programs. But with a Trump who apparently claims default isn’t a problem, it sure isn’t. Especially since on the left, many elected officials are watching Biden like milk on fire, fearing he’ll make too many concessions. According to him, the president should refuse blackmail and invoke the 14th Amendment to the Constitution, Article 4 of which clearly states: “The validity of the public debt of the United States, authorized by law (…), won’t be in question” problem, which explains Biden’s refusal to go down this path: If he invokes this 14th Amendment refusal to look at debt capped, the matter will go to the Supreme Court and’ There will be downside risk in the market while waiting for the ‘decision’.

The most likely remains that the current “settlement of scores on the OK Corral” will end in an inconclusive, even a crisis. But America and the rest of the world have taken note: The dysfunction of American democracy has grown to such an extent that they have forgotten Joe Biden’s dogged efforts to take his country seriously again since his election.