GOP debt ceiling battle could lead to historic financial crisis in 2023

  • Republicans are using the debt ceiling as leverage to drive spending cuts on Democratic priorities.
  • But failing to raise the debt ceiling by the summer could lead to the US defaulting on its debt.
  • The consequences of default are dire, and Biden has urged the GOP not to trade under the debt cap.

Republican lawmakers could torpedo the economy if they don’t act soon.

Drama has been seeping into the halls of Congress in recent weeks. Due to wrangling among the GOP, it took a few nights – and 15 ballots – to elect Kevin McCarthy as Speaker of the House. But it looks like that was the easy part, as Republicans now face a bigger and much riskier challenge: raising the debt ceiling and keeping the United States on top of paying its bills.

Treasury Secretary Janet Yellen has warned that the debt limit is approaching, with the US projected to officially hit the statutory borrowing limit on Jan. 19. pension plans – until you are funded again or you run out of options and become unable to pay your bills.

“Failure to fulfill government obligations would cause irreparable damage to the United States economy, the livelihoods of all Americans, and global financial stability,” Yellen wrote in a letter to McCarthy.

These “extraordinary measures” are expected to end sometime this summer, at which point the US could find itself in dire economic straits. The country – and the world – could be plunged into a financial crisis, destabilizing global markets and leaving millions of Americans unemployed.

What’s different this time

This is not a new dilemma for lawmakers. Raising the debt ceiling means raising the legal amount of debt the federal government can allocate to continue paying for programs already mandated by Congress, and it’s something Republicans have managed to do three times under former President Donald Trump.

But with a Democratic White House, this time is different because the Republicans are planning to use the debt ceiling as leverage to pursue their own policy priorities — broadly significant spending cuts on things like Medicare and Social Security. The White House and Democratic lawmakers have criticized the Republican Party using the debt limit as a bargaining chip.

“Failure to raise the debt limit will not reduce our debt, but it would destroy the economy if it led to a default. Unfortunately, many Republicans seem determined to find out how catastrophic a default would be through experience,” Representative Don Beyer, a Virginia Democrat, said in a statement to Insider.

He added: “Republicans have granted President Trump clean bipartisan debt limit increases to cover the debt costs many of them voted to incur, and there is no reason they would refuse to do the same under President Biden, other than partisan politics. pure.”

“In exchange for not crashing the US economy, you get nothing,” Hawaii Senator Brian Schatz previously told The Daily Beast. “You don’t get a cookie. You can’t be treated like you’re LBJ’s second coming. You’re just a person doing the bare minimum to not intentionally harm your constituents for insane reasons.”

Michael Strain, director of economic policy studies at the American Enterprise Institute, a center-right think tank, wrote that the Biden administration and Democrats need to come to terms with the reality that “House firebrands” are not bluffing about not reaching a deal. Agreement.

“All responsible politicians must get to work immediately with a view to raising the roof this winter,” Strain wrote. “The closer we get to the as-yet-unknown day this summer when the government runs out of borrowing power, the worse the market reaction will be.”

This is not the first time the debt ceiling has been caught in political crosshairs.

If the challenge of raising the debt ceiling sounds familiar, it’s because Congress was in a very similar situation two years ago.

Senate Minority Leader Mitch McConnell initially declined to help Democrats raise the cap in 2021, bringing the US perilously close to defaulting on its debt before agreeing to a short-term deal that raised the debt ceiling to its current level.

This obstruction dates back to 2011, when delays in raising the cap amid negotiations between the Obama administration and Republicans resulted in $1.3 billion more in borrowing costs and a downgrade of the US S&P credit rating. In 1995, a standoff between President Bill Clinton and Republicans over spending cuts led to a government shutdown and Moody’s said it would potentially downgrade Treasuries – prompting Republicans to agree.

This time may be different, however, as the new GOP majority seems particularly insistent on playing hardball. “I think in the past the assumption or the strategy was that we wanted the Republicans to cave,” said Rohan Gray, an assistant professor at the Willamette University School of Law. “We want to play cowardice with them because we don’t think they want to be responsible for blowing up the whole economy.”

But, Gray said, while Mitch McConnell finally blinked, this group of Republicans is a “fundamentally different group of people.”

Alec Phillips of Goldman Sachs wrote in a January 9 analysis that the debt limit is now “a greater risk than at any time since 1995 or 2011” when the government closed or nearly closed to avoid a lack of payments.

Phillips explained that passing a bill to raise the debt limit, along with the spending cuts McCarthy conceded to, would be difficult to implement because the cuts “would primarily impact seniors, a Republican-leaning demographic.”

“This may be the most economically irresponsible backroom deal in republican history (even conservative economists are warning that the consequences could include a stock market spiral and significant job losses),” Robert Reich, secretary of labor during the government crisis. debt ceiling of 1995, wrote in an article about the current situation.

Zachary D. Carter, author of “The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes,” told Insider that a moratorium on the national debt would send the country back to some of the worst days after the Great Recession in 2008 , he said, but with even more serious risks.

The US Treasury bond “is the basic unit of global finance,” Carter said. “We’re talking about every financial institution in the world suddenly having to reprice a basic asset that is used to settle balances every day.”

“We would just be triggering a global financial crisis. What happens after that? Nobody knows,” he added.

Biden and Janet Yellen

US Treasury Secretary Janet Yellen

Chip Somodevilla/Getty Images

Biden May Cross Debt Ceiling Without Congress

If Biden finally decides he wants to avoid risky Congressional debate, another solution is waiting for him in the form of a $1 trillion platinum coin. Through a process known as “minting the coin,” Biden could bypass Congress by depositing a $1 trillion platinum coin in the Federal Reserve, keeping the US afloat without having to formally issue any new debt.

The coin concept comes from a loophole in the type of coins the Treasury Department can mint. The Department has jurisdiction to mint “platinum gold coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time”. Under that wording, the platinum coin can have any value — so theoretically, Treasury Secretary Janet Yellen could mint a platinum coin, say it’s worth a trillion dollars, and use that to solve the problem.

“When you talk about the trillion dollar platinum coin, it sounds really silly – and it really is!” Carter said. “But a silly thing is much better than a catastrophic thing.”

Obama even considered the idea, saying in 2017 that “there were all kinds of crazy ideas about how you could have this huge coin”. (The coin doesn’t have to be physically big, it’s only worth a trillion dollars.)

While it may seem like a radical solution, “the really radical thing about this is the Treasury Secretary and others saying, let’s ignore our Constitutional responsibilities to spend the amount that Congress has told us to spend — because we don’t like the tools they’ve given us to do that,” Gray said, referring to the contradiction between appropriations mandated by Congress and the debt ceiling.

But at this point, Biden has rejected going that route and his administration says Congress must act to ensure the US continues to pay its bills, and that shouldn’t be a matter of negotiation.

“This is just another attempt by Congressional Republicans to force unpopular cuts to critical programs for seniors, middle class and working families,” White House Press Secretary Karine Jean-Pierre said on Tuesday. “Congress needs to act and act quickly. There is no excuse for political audacity.”

In addition, the Washington Post reported last week that McCarthy and House Republicans are preparing a “payments prioritization” plan that would tell the Treasury what to do if Congress fails to raise the debt ceiling. Jean-Pierre called the plan “a recipe for economic catastrophe”.

Widespread job losses, along with a turbulent global economy, could ensue if Congress fails to act.

“We would see a financial crisis and huge job losses without help from the federal government to deal with it,” Carter said. “You would see material difficulties very serious, very widespread, very quickly.”

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