Countdown to bankruptcy – economy

The topic has been haunting the American media for days, even weeks, and now it’s getting serious. Very serious, the case affects at least the medium term except the USA also the rest of the world, because it is about the largest economy on earth. How does the United States finance itself when the debt limit set by politicians is reached, but politicians are enormously divided on this matter, among other things?

The officially allowed debt limit alias debt ceiling currently stands at $31.4 trillion, and the country came perilously close to that roof on Thursday. It is the highest level of liability the US government can afford, set with the approval of Congress. If the sum is no longer sufficient to continue to cover the running costs, then it would either have to be increased with the necessary majority – or the current administration of President Joe Biden would be de facto insolvent.

The clock has been ticking loudly since Thursday

Despite the clock ticking particularly loudly since January 19, things haven’t got that far yet. The US Treasury Department wants to implement extraordinary measures immediately so that the debt limit is not exceeded and no default is imminent, as US media reports. The scenario certainly has what it takes to unsettle the markets and do considerable harm to America.

Treasury Secretary Janet Yellen has been trying to calm tempers appropriately since the debate finally turned hot air overnight. She had already informed MPs to set new priorities so that the US would remain creditworthy. It should mainly be about technical maneuvers. That includes loud Wall Street Journalthat certain investments will be suspended to meet obligations to creditors, Social Security recipients and others until at least early June.

That would give President Biden and the legislature in the Capitol about five months to decide whether to raise or suspend the debt limit. It’s a breather that’s sorely needed, because rarely has the House of Representatives been so divided. Both parties are almost enemies, which is currently being ensured not least by hardliners from Donald Trump’s supporters.

In the midterms in November, the Republicans regained a narrow majority in the House of Representatives. But even within this faction, trench warfare is escalating, which is why it recently took four days and 15 rounds to choose the speaker. The federal budget is one of the great levers used by the Republican right to hurt Biden and the Democrats and position Trump or someone like Ron DeSantis for 2024.

At the same time, Biden and the Democrats must see that they continue to placate their left wing and, most importantly, make no concessions on social spending. The only way Republicans would agree to an increase in debt is if costs are reduced, for example on Social Security and Medicare, both of which programs enjoy some public support. Some of Biden’s challengers would like to cut the multi-billion dollar aid for Ukraine.

It will be an uphill battle on Capitol Hill to try to reach an agreement before the deadline if possible. The US has never suspended its commitments, but it was close to doing so. Americans are not the only ones who remember with horror how Barack Obama only managed to reach a last-minute compromise in 2011 to default and thus avert global chaos. It was the result of a duel that lasted several months, causing international panic and spending restrictions. The Democrats have long considered this to be harmful, especially since there is a lot to be done on roads, schools and hospitals.

Biden and his team got through programs worth billions before the parliamentary reshuffle, his poll numbers rose, so did interest rates, and inflation fell. Now he has unpleasant weeks ahead of him, probably even harder than eleven years ago. He was vice president at the time when his boss Obama met radicalized Republicans on the same issue. At that time, the staunchly conservative Tea Party movement emerged – it seems comparatively harmless when you see how the so-called Freedom Caucus and other Trump confidants act today.

The debt limit was introduced more than a century ago. Since World War II alone, it has been changed more than a hundred times, under both Democratic and Republican leadership. He doesn’t see why the behavior of the past should be continued, says the new speaker in the representative, the Republican Kevin McCarthy. Biden’s spokeswoman Karine Jean-Pierre, on the other hand, says that the debt ceiling “should not be used as a political toy” and that there had been cross-party cooperation in the past. The government is trying to reach an unconditional agreement, “we should not take hostage the full trust and credit of our country”.

It’s not just economists and Wall Street who are nervous. Treasury Secretary Yellen warns that a default would “irreparably damage the US economy, the livelihoods of all Americans and global financial stability.”

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