The entrenched U.S. debt problem has once again drawn global attention, as U.S. Treasury Secretary Janet Yellen recently warned that the U.S. government could default as soon as June 1 if the debt ceiling isn’t addressed.
Without timely action by the Congress — currently at an impasse amid partisan fight, the U.S. government would be unable to pay its bills, which would potentially cripple the U.S. economy and threaten global financial stability.
RISK OF RECESSION DEEPENS
In January, the country already hit its 31.4-trillion-dollar debt limit, prompting the Treasury Department to use accounting maneuvers known as “extraordinary measures” to keep the government paying its bills, such as curbing certain government investments.
Being entangled in a bitter fight over the issue for months, Democrats and Republicans have made little progress toward reaching an agreement. Republicans are proposing spending cuts in exchange for raising the borrowing limit, while Democrats and White House are urging the Congress to pass a stand-alone increase in the debt limit.
In the latest reminder of the precarious debt situation, Yellen warned on Monday that the U.S. government could become unable to pay its bills on time as soon as June 1 if Congress doesn’t raise the debt limit, escalating pressure on Capitol Hill to avoid a catastrophic default.
Soon after, President Joe Biden invited the top Republicans and Democrats on Capitol Hill to meet next week to discuss the urgent issue.
“We need to raise the debt limit as soon as possible, without drama and without serious risk of default. To threaten default or drag one’s feet is the height of irresponsibility,” said Maya MacGuineas, president of budget watch group the Committee for a Responsible Federal Budget.
“Lawmakers should stop approaching this as though they are on two different teams, and work together as the leaders of one country,” said MacGuineas.
Lawmakers are heading for what The New York Times called “the messiest fight in at least a decade” over whether to raise or suspend the nation’s debt limit — a cap on the total amount of money that the U.S. federal government is authorized to borrow via Treasury securities — to fulfill its financial obligations.
The advantage of lower interest rate on Treasury securities translates into interest savings for the federal government of roughly 50 billion U.S. dollars next year and more than 750 billion dollars over the next decade, according to a recent analysis published by the Brookings Institution, which estimated that even the loss of a portion of this advantage would lead to “significant increase” in the cost to taxpayers.
Moreover, Wendy Edelberg and Louise Sheiner, co-authors of the analysis and senior fellows at the Brookings Institution, said that an extended impasse in the Congress is likely to cause “significant damage” to the U.S. economy, as the country is facing headwinds amid still high inflation and banking turmoil.
“If the debt ceiling binds, and the U.S. Treasury does not have the ability to pay its obligations, the negative economic effects would quickly mount and risk triggering a deep recession,” they said.
GLOBAL FINANCIAL SYSTEM THREATENED
Risks could go far beyond. Economists and analysts have warned that a U.S. debt default would be economically devastating, and could drag the entire world into a financial crisis, inflicting heavy losses on the global economy, which — according to some economists — is already heading into a decade of sluggish growth.
Noting that U.S. government debt is a safe-haven asset around the world and a bedrock part of the financial system, The Wall Street Journal said in a report that doubts that the United States could pay back buyers of its securities could have “wide-ranging, dangerous financial and economic consequences.”
Even the U.S. treasury secretary herself warned in January that the effects of U.S. debt default could be as broad as a global financial crisis.
Budget watch groups, as well as deficit hawks such as hedge fund investor Stanley Druckenmiller, have long criticized the U.S. government for its reckless spending, calling for timely actions to bring the ballooning federal debt under control.
“The fiscal recklessness of the last decade has been like watching a horror movie unfold,” Druckenmiller said in a speech Monday, adding that the situation today looks much worse than he had imagined 10 years ago.
MacGuineas, president of the Committee for a Responsible Federal Budget, previously argued that for decades, U.S. lawmakers have chosen to “pass politically easy policies” rather than face the challenges of true governing.
“Our nation faces significant fiscal challenges in the near term. Medicare is only six years from insolvency, and Social Security insolvency is only 12 years away. Yet policymakers have put forth no plan to put either program on strong fiscal footing,” MacGuineas said in October, when the U.S. national debt surpassed 31 trillion dollars for the first time.