This is the multi-billion dollar question worrying investors around the world.
Will there be an agreement in the United States to raise the debt ceiling between the administration of Democratic President Joe Biden and the Republicans who control the House of Representatives?
Days pass and the same reluctance comes from Washington: There is no agreement yet. However, the two camps maintained that they would reach an agreement despite each accusing the other of making unacceptable demands.
Biden and House Speaker Kevin McCarthy will meet in person on May 22.
The problem is that time keeps ticking away, bringing the US one step closer to default. Without an agreement between Republicans and Democrats to raise the debt ceiling, the US could find itself in a horrific default as early as June 1, which Treasury Secretary Janet Yellen has warned could cause widespread “economic chaos.”
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There is no money to pay the bills
Yellin just sounded the alarm again. According to her, the United States may not be able to pay its bills if the debt ceiling is not raised by June 1st.
“Well, there’s always uncertainty about tax receipts and spending, and so it’s hard to be absolutely sure of that, but my estimate is that the odds of getting to June 15 while being able to pay All of our bills are very low.”
Taxes are expected to be paid in mid-June. Bills are the general expenditures of the federal government, including salaries of civil servants, social benefits, payment of creditors, etc.
“On June 15, large amounts of tax were paid,” Yellen continued. “But it’s early June, I interpret it as before, and it’s going to be very difficult to get to that date.”
If the standoff continues, Yellen said the federal government will have to make “hard choices” about the bills that won’t be paid if the debt ceiling is not raised.
She declared: “We are focused on raising the debt ceiling, and there will be difficult choices if that does not happen. There can be no acceptable outcomes if the debt ceiling is not raised, no matter what decisions we make.”
Raising the debt ceiling is necessary for the government to cover spending commitments approved by Congress and the president in order to prevent default. It does not allow for new spending, but House Republicans have said they will not raise the debt ceiling if there is no agreement on future spending cuts.
The Treasury has been using accounting tricks since the beginning of the year to delay the day when that threshold is crossed as much as possible but the room for maneuver is shrinking.
Biden vs. McCarthy
A Moody’s Analytics report found that default could result in more than 7 million Americans out of work and $10 trillion in household wealth evaporating.
To raise the debt ceiling, Republicans are demanding drastic budget cuts from the federal government, while cutting public spending by $130 billion. The proposals are “unacceptable” and “extreme,” according to President Joe Biden, who threatens to invoke the Fourteenth Amendment to the US Constitution to avoid default. This amendment states that “the validity of the public debt of the United States shall not be questioned (…)”.
But Yellen is skeptical of such a process. For her, the Fourteenth Amendment “cannot be used appropriately in these circumstances, given the legal uncertainty surrounding it and given the tight deadline in which we find ourselves.”
In a video released shortly before the G7 summit, Biden warned that a US debt default would be “catastrophic” and “devastating for America and, frankly, the entire world.”
McCarthy told reporters, on May 21, that he intended to speak to Biden “in the next hour,” adding that he was glad the president was back in the United States.
McCarthy said, “I think he should move away from the socialist wing of the Democratic Party and represent America. That means both sides have to have a middle ground. I’ve been there the whole time.”