Groundhog day

Since 1960 Congress has no less than 78 times permanently raised, temporarily extended or revised the definition of the debt limit. Opinion is divided over whether the US can safely sustain high levels of debt, or that it will eventually have to face the consequences. America’s national debt is now rapidly approaching a shocking $32 trillion. The current borrowing limit of $31.4 trillion was hit in January this year; Janet Yellen, the US Treasury Secretary, then warned Congress then that “extraordinary measures” would be necessary; but these sticking plasters will quickly be exhausted. Last year interest payments on this amounted to about 8% of the federal budget. Within a decade, if nothing changes, the interest costs will exceed what the US spends on defense. China has a relatively small amount of this debt; the US owes China almost one trillion Dollars. To avoid a debt default Congress needs to unite and agree to raising the debt ceiling; yet bi-partisan cooperation has rarely been so scarce.

Is anyone ready to blink?

The last time that a default seemed possible was in 2011, when the mere possibility of it triggered a downgrade of US Treasury Bonds by Standard & Poor’s. There is always a bit of shoving and backroom dealing before this unanimity is achieved but this year Congress is more divided than usual. The House of Representatives – with its Republican majority – is in no mood for compromise. The House Speaker, Kevin McCarthy, has proposed to the White House that the debt ceiling can be raised but only if the Democrat government agrees to cut federal spending; McCarthy’s proposal stipulates that the government budgets be limited to the 2022 fiscal year and only grow by 1%/year for the next decade. It also calls for repealing portions of the Inflation Reduction Act (oddly named, as this Act which is so close to President Biden’s heart proposes spending $369 billion on renewable energy measures), and a block against the President’s plan to cancel up to $20,000 in student debt. At the New York Stock Exchange McCarthy recently said: “Without exaggeration, America’s debt is a ticking time bomb that will detonate unless we take serious, responsible action… Yet rather than working with Republicans to find a reasonable agreement to tame inflation and provide certainty to the economy, President Biden is demanding that Congress make room for new debt without a single, sensible change to how government spends your hard-earned money”. President Biden denounced the Republican proposals. He said: “It’s not about fiscal discipline. It’s about cutting benefits for folks that… they don’t seem to care much about”.

This fight inevitably must be placed in the context of the upcoming 2024 Presidential election. President Biden is 80 years. Despite this advanced age he has said he intends running for President again in 2024. Biden’s decision will deter any Democratic challenge. Against an aging incumbent the Republicans could well field Donald Trump, who despite his current legal problems still remains streaks ahead in polls of Republican Party voters, scoring 53% against his closest rival Ron DeSantis’s 24%. Even if he is convicted of the charges against him and jailed, that probably would not prevent Trump from running. If the debt crisis plunges into outright default, a piece of madness with unpredictable global consequences, will that strengthen the hand of Trump or Biden in next year’s election?

Other solutions

Are there any solutions to prevent a default? Some, and they range from the sensible – scrap the need for a debt ceiling limit to be approved – to the ludicrous, such as minting a multi-trillion Dollar platinum coin. Since 1996 legislation the US Mint has the authority to mint platinum coins. The theory is that, as the government makes its money, it can create this magnificent coin. Said coin would be deposited at the Federal Reserve to pay off some of the national debt and – hey presto! – the government now has sufficient funds to pay government salaries, Social Security benefits and whatever else it needs. As for scrapping the debt ceiling, Biden has said he has no intention of doing that.

It’s important to realize that an agreement to raise the debt ceiling is not a lasting solution to America’s debt crisis – it just kicks the can down the road. America spends and plans to spend much more than it produces and a crisis point could be closer than imagined; weak tax collections in the US in April “suggest an increased probability that the debt limit deadline will be reached in the first half of June” says Goldman Sachs. As we get closer to the time when the US is unable to pay its bills without borrowing more, people will start to get more nervous. Volatility in all kinds of markets will increase. The US is not just divided, it is radically polarised. One side or the other needs to compromise to resolve what one commentator calls:

“The inane, moronic, irrational, exploding human appendix sh*t show that is the debt ceiling”.