From the BBC:
“A simple guide to debt ceiling, and what the 14th amendment
has to do with it”
The US government could start to run out of money within
weeks unless it allows itself to borrow more. So how did we get to this point? There
are dire predictions of global financial chaos if US Congress can't agree on a
deal to raise what is known as the debt ceiling. If the politicians fail to
reach an agreement, the US could default on its debt.
So, what is the debt ceiling? Also known as the debt limit, this is
a law that limits the total amount of money the government can borrow to pay
its bills. This includes paying for federal employees, the military,
Social Security and Medicare, as well as interest on the national debt and tax
refunds. Every so often US Congress votes to raise or suspend the
ceiling so it can borrow more. The cap currently stands at roughly
$31.4tn (£25.2tn). That limit was breached in January, but the Treasury
Department used "extraordinary measures" to provide the government
with more cash while it figured out what to do.
How US debt ceiling became game of political chicken Usually it's a formality for Congress
to raise the limit as needed but this time it can't seem to agree on the terms.
Treasury Secretary Janet Yellen has warned that without more borrowing, the
US will not have enough money to meet all of its financial obligations as soon
as 1 June.
What happens if the debt ceiling isn't raised? This has never happened before so it
is not entirely clear, but it would cause major economic damage. The
government would no longer be able to pay the salaries of federal and military
employees, or pensions. National parks and other agencies might not
completely shut down, but staff would go unpaid while companies and charities
that count on government funds would be in peril. Weather forecasts
could be affected since so many rely on data from the government-funded
National Weather Service.
What does the 14th amendment have to do with it? Absent a deal, some people have urged
the president to bypass Congress by invoking the 14th amendment of the
constitution, which states that the "validity of the public debt of the
United States... shall not be questioned". That section was passed
after the US Civil War in 1866 to ensure that slave-holding states in the south
paid war debts incurred by the north, and that the government would not be on
the hook for reparations to slave-holders and others in the south. President
Joe Biden said he was considering it, but using the clause to challenge the
debt limit law would almost certainly spark a legal battle - limiting its
usefulness in the current crisis. Treasury Secretary Janet Yellen has
also downplayed the possibility, saying any attempt to invoke it would spark a
constitutional crisis.
What happens if the US defaults on its debt? If the government stops making
interest payments on its debt, that would also put the country into default.
The US briefly entered default in 1979, which the Treasury blamed on an
accidental cheque processing issue, but an intentional default would shock the
financial system where more than $500bn in US debt gets traded every day. Moody's
Analytics predicts that in a prolonged stand-off, stock prices would fall by
almost a fifth and the economy would contract more than 4%, leading to the loss
of more than seven million jobs. Over the long term, if investors start
to see US debt as risky they will charge the US more to borrow money. And since
government borrowing helps determine interest rates more widely, the impact
would trickle out to the rest of the economy, making borrowing money for a home
or a car more expensive for everyone. There are debates about whether
the government could prioritise interest payments to avoid a debt default. But
honouring commitments to the owners of US debt, which include financial firms,
pension funds and foreign investors, while retirees and others go unpaid is
seen as a difficult one to sell politically.
What's on the table now? Last month, Republicans put forward a deal to suspend
the debt limit by $1.5tn or until 31 March. In exchange, they would keep
spending for key agencies at 2022 levels during the next financial year- and
limit growth to 1% annually over the next decade - moves that could lead to
$4.8tn in savings. The proposal would repeal key priorities of the Biden
administration, such as student loan forgiveness and tax incentives for
electric vehicles. The White House has said the deal forces "middle
class and working families to bear the burden of tax cuts for the
wealthiest" and has "no chance" of becoming law.
How can Congress reach a deal? Many analysts expect a short-term
extension to give Congress more time to reach a deal. In 2011, the last
time the US was seen as at serious risk of a default, talks went down to the
wire, before a compromise deal including $900bn in spending cuts over 10 years
was announced hours before the deadline. But even delays have
consequences. The 2011 stand-off prompted a downgrade in the US credit
rating, sent the stock market plunging - and is estimated to have cost the
public at least $1.3bn in higher borrowing costs that year alone.
Why is the debt limit so divisive? The debt limit debate highlights one
of the fundamental ideological differences between the two major US political
parties. The Republicans view government spending sceptically. To them,
rising national debt is evidence of out-of-control government.
Can House Speaker Kevin McCarthy, a Republican, and President
Joe Biden reach a deal? While debt-limit brinksmanship is a relatively new strategy for the
party, many Republicans believe it is necessary because the nation's current
course will ultimately lead to economic and social ruin. Democrats, on
the whole, view national government power as a force for good - a means to
improve American lives and right historical wrongs. They see raising the
debt limit when necessary as housekeeping necessary to maintain the operation
of the government. The national debt, in their view, is simply a means
to fund legislative programmes that have already been discussed and approved.
The debate dimmed with Donald Trump, a Republican, was in the White House
and Congress raised the limit three times without major debate. It re-ignited
when Joe Biden became president.
^ In a couple of weeks (June 1st) if Congress and the
President don't raise the Debt Ceiling the following will happen in the US:
- Members of the US Military won't be paid, but will still
have to defend us.
- US Federal Government Employees won’t be paid, but will still
have to work.
- Social Security Benefits (for Medicare and Medicaid) won’t
be paid forcing many Elderly and Disabled to go to Food Banks and possibly lose
their homes.
- It would likely cause a Recession in the US (and in most
parts of the World.)
- An estimated 8.3 Million Americans would lose their jobs.
- The Credit Rating of the US would be downgraded (which in
turn would hurt Americans trying to borrow money: for small businesses, to buy
a house, on credit cards, etc.)
- The US Dollar would decrease in value (and hurt both
Americans and Foreigners.)
- Interest Rates would rise.
- The price of everything imported (Food, Cars, TVs, Cell
Phones, etc.) into the US would increase.
- The United States would lose its standing as the Sole Super
Power around the World. ^
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