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In the US, why the debt ceiling raises fears of a global economic crisis

In the US, why the debt ceiling raises fears of a global economic crisis

DREW ANGER/Getty Images via AFP WASHINGTON, DC – MAY 22: US President Joe Biden meets with Speaker of the House Kevin McCarthy (R-CA) in the Oval Office of the White House on May 22, 2023 in Washington. Biden and McCarthy discussed raising the debt ceiling in an effort to avoid the federal government’s debt. True Anchorer/Getty Images/AFP (Photo by True Anchorer/Getty Images North America/AFP via Getty Images)

DREW ANGER/Getty Images via AFP

A new meeting between House of Representatives Speaker Kevin McCarthy and US President Joe Biden on Monday, May 22, stalled the debt ceiling file.

United States – Are we headed for a global economic crisis? With ten days left to reach an agreement on the US debt ceiling, a meeting between House Republican Leader Kevin McCarthy and President Joe Biden ended in deadlock on Monday, May 22.

“We don’t have a deal yet.”Kevin McCarthy has left the White House. “But I found our discussion more useful than our previous discussions.”, he added. Same story on Joe Biden’s side, he called the meeting “Production”. However, he admitted it “Controversies” Lasting.

Officially, the ceiling was reached on January 19. The government has received a reprieve from exceptional measures, but unless the debt ceiling is raised, the risk of default is inexorably close. From June 1, unless a solution is found, it may not be able to borrow more to pay its expenses.

What is the loan ceiling? Why are there sanctions and what are the consequences of non-payment? ? The HuffPost Make the point.

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• What is the US debt ceiling?

This mechanism was created in 1917 when the United States entered World War I. At the time, the U.S. Treasury (equivalent to the Treasury Department) had to go through Congress every time it issued a loan, which meant borrowing money to finance the country’s expenditures. With war and its astronomical costs, this situation has become untenable.

The debt ceiling was created so that the government could first pay the debt to finance the war and then pay the salaries of government employees, social benefits or repay its creditors, but only up to a certain amount.

• Why does it get stuck?

This ceiling can be raised by congressional agreement. Since 1960, it has increased 78 times, most recently to $31.4 trillion in 2021. But raising the maximum debt ceiling, often a routine practice, can sometimes be the subject of a political battle.

This is the case this year in the Republican-dominated House of Representatives. While the White House insists that raising the debt ceiling be voted on without conditions or negotiations, the opposition refuses to vote on it unless Joe Biden accepts significant budget cuts.

• What happens if the blockage persists?

In early January, Treasury Secretary Janet Yellen warned: “A default would cause irreparable damage to the American economy, the daily lives of all Americans, and the overall financial situation.” More recently, he asserted: “We will enter a recession that will be devastating. » However, it is difficult to say precisely what will happen, as such a situation would be unprecedented.

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Experts questioned in the US media fear that there will be an impact on ratings of the US public debt by financial rating agencies, or even a fall in household confidence, as was the case in 2011. Today resulted in almost default. An agreement was reached two days before the deadline, but the uncertainty was already taking its toll.

According to Think Tank Council on Foreign Relations (CFR), economists at Coleman Sachs have calculated that one-tenth of the economy would be crippled in the event of a default. Think tank Third Way fears interest rates will rise for its share and estimates three million jobs could be at risk.

• And internationally?

“A US debt default would have very serious consequences not only for the US but also for the global economy.”IMF communications director Julie Kozak warned in mid-May, days after a similar warning from Janet Yellen.

why The CFR explains that America’s creditworthiness has boosted demand for the dollar, contributing to its value in the market and its place as the world’s leading reserve currency. Therefore, any blow to the US economy would cause investors to sell their Treasuries or bonds, weakening not only the dollar but the entire global economy that relies on that currency.

• Are there alternative solutions?

If an agreement isn’t reached soon, Congress could suspend the debt ceiling. The solution is temporary and requires fresh negotiations to take place again later, but it has been used seven times since 2013.

More radical, economists propose eliminating the debt ceiling. “ I think it is very destructive to leave the President and myself as Secretary of the Treasury unable to pay the bills that are the result of past decisions.In 2021, Janet Yellen was particularly apprehensive, praising the option.

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For his part, Joe Biden recently floated the idea of ​​invoking the 14th Amendment to the Constitution. “The validity of the public debt of the United States authorized by law shall not be questioned”. Translation: Bypassing Congress and continuing to issue bonds. This controversial political tool, on the other hand, could plunge America into another crisis, this time constitutional.

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