The keys to the debate on the ‘debt ceiling’ and the fear of US suspension of payments

by time news

2023-05-31 09:15:44

In USA, the General State Budgets are not tested in Congress in one go, as in most of the world, but ‘little by little’. On top of that, for 106 years there has been a system under which Congress has to set the maximum debt ceiling. What at first was a measure that made the budgetary process more flexible in the middle of the First World War has ended up becoming a political show as the Republican Party has been using it, since the Obama Presidency, to politically wear down Democratic presidents.

It is, basically, taking the economy hostage to demand from the Democrats spending adjustments that Republican presidents never do. Now we are in one of those situations, but with an unexpected twist: Republicans are so divided that it is not clear that the agreement they themselves have reached with Joe Biden be approved today. Meanwhile, the two main candidates of that party in the 2024 elections, Donald Trump y Ron DeSantisdefend the most intransigent thesis: voting “no”, even if that means leading the United States – and, with it, the world – to the economic abyss.

What will happen in today’s vote?

Nobody knows it for sure. Republicans have 222 seats; Democrats, 213. That means only eight Republicans can vote against the agreement between Biden and McCarthy, assuming all Democrats attend the session and all vote against the plan. Last night, about a dozen Republican representatives continued to publicly maintain their opposition. But McCarthy insisted that he had the necessary backing.

What would happen if no agreement was ever reached and on Monday the United States defaulted?

Are you a masochist? Why do you ask those questions? A US default would be a crisis of colossal proportions. The world economy will collapsebecause the US Treasury bond market is the deepest and most liquid in the world, to the point that in practice it is like having dollars.

And, furthermore, there would be a huge legal issue as to who Washington would stop paying first (bondholders? retirees? soldiers? civil servants? the unemployed? state contractors?). In principle, Washington will give priority to payment to bondholdersmore than anything to avoid the total and utter collapse of the United States and, with it, the world, but that would mean that more and more internal programs – from the surveillance of national parks to pensions – would be progressively suspended.

And, if the US finally defaulted on its bonds, there would be a positive: we would stop having to worry about inflation and, possibly, even work, because the Earth’s economy would collapse. It would be, yes, the peace of (economic) cemeteries. Carl Honor would have achieved his dream.

So it is likely that some centrist Democrats would vote for the plan to save the day?

Yes. But the ‘Freedom Caucus’ wouldn’t like that at all.

And what can the ‘Freedom Caucus’ do?

At first, swallow your pride. And then ask for McCarthy’s head with a vote of confidence against him. Ah, it is possible that she succeeded. The result will be chaos, because it seems unlikely that any other Republican could have the necessary votes from his co-religionists to have the House Presidency. In practice, The United States Legislature will be paralyzed by the internal Republican war.

What happens in the Senate?

There are 50 Democratic senators and 50 Republicans, with the vice president, the Democrat Kamala Harris, exercising the vote in case of a tie. But there is a sizeable group of Republicans – starting with the leader of that faction in that chamber, Mitch McConnell– who support the agreement.

But, politically, who has won with the agreement? Biden, McCarthy, or the ‘Freedom Caucus’?

Choosing the winner between Biden and McCarthy is more complicated, but what is clear is that the ‘Freedom Caucus’ has lost. His proposal to freeze spending that is not defense or programs that are indexed to inflation -basically Health and pensions- for ten years is not going anywhere. The same has happened with his project to allow the debt to rise only until March 2024, in which case Biden was going to find himself with a new negotiation on the same issue but this time in the middle of the electoral campaign for his re-election.

For Biden, the defeat is that he had said that he was not going to negotiate. And in the end she has done it. The contraction of spending in pre-election and electoral years is also a problem, because it can slow down the economy although, in exchange, it may stop the escalation of inflation.

If you look at the fine print, the loser is McCarthy. The spending cuts are not only symbolic, but many are tricky as well. The Treasury budget slowdown, for example, may begin to be dismantled by Biden in 2024. Many of the provisions will expire in 2030, literally another geological era for political times. Even between 2024 and 2030 there will be infinite occasions to change everything that has been signed.

Why is there now this problem with the US public debt?

Because the president is a Democrat and the Republicans control a chamber of the Senate. George W. Bush raised the debt ceiling six times in his eight years in office. On three of those occasions, the Democratic Party controlled both houses of Congress, but voted in favor without preconditions. Obama did it four times; in three of them, the Republicans came close to forcing a suspension of payments. With Trump, the debt ceiling was raised three times; again, the Democrats did not object. Now, with Biden, it has returned to the Obama situation.

What is the agreement?

These are the main points:

1) The debt limit is suspended until January 2025. It does not say when, which will be a mess then, since it is not the same on January 1, when the Congress that has come out of the November 2024 elections has not yet been constituted nor has the winner of the elections been sworn in. presidential elections, than on the 21st, when the Chambers and the new president – or Biden, if he is re-elected – have already been sworn in.

2) Public spending grows 0% in fiscal year 2024, which begins next October 1, and only 1% in the following year. In practice, discounting inflation, this means a fairly considerable reduction in spending by the federal State, around 4% this year and 2% or 3% next year.

3) In 2024, defense spending grows as requested by Bidenup to a total of 886,000 million dollars (828,000 million euros).

4) In the US, one in six citizens needs help from the federal State to eat, in the form of coupons. The agreement slightly toughens the requirements to access this aid in the case of people between 49 and 54 years of age who do not have dependents. But it also relaxes them for the young, the ‘homeless’ and war veterans.

5) Joe Biden manages to get his proposal for increase healthcare to 18 million veterans of war in the US remains intact, despite the initial rejection of the Republicans.

6) The US Treasury, which was going to have an increase of 80,000 million dollars in 10 years to fight against tax fraud, which is very high in the country, will have to settle for a 60,000 million increase in its budget.

7) Some 30,000 million dollars in aid against Covid-19 that had not been spent will be allocated to other items, which will allow spending to be reduced.

8) The moratorium in place since the beginning of the Covid-19 in the payment of the debt contracted to pay for university studies will end in August, and will not be extended On the Greek, as Biden wanted. It must be taken into account that In the US, the average graduate finishes his degree with a debt of $30,000. (28,000 euros). In fact, there are thousands of retirees who are deducted each month for the portion of student loans they still owe and who, literally, have been paying their entire lives.

According to the criteria of

The Trust Project

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