In a week, a default may begin in the US: what is happening - ForumDaily
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In a week, a default may begin in the US: what is happening

The White House and Republican representatives have made some progress in negotiations to raise the $31,4 trillion debt ceiling. This was stated by the main Republican in Congress Kevin McCarthy. What is a debt limit and why is this agreement so important? to Reuters.

Photo: IStock

The Treasury Department warned that the government may not have enough funds to cover all costs as early as June 1, which without a deal could trigger a potential economic catastrophic default.

US President Joe Biden and Speaker of the House McCarthy are at odds over spending, taxes and requirements for anti-poverty programs. But both sides believe they can find common ground after many hours of discussions by their negotiating groups on May 24, which they described as productive.

“We finished well past midnight yesterday,” McCarthy said. “I think we have made some progress. There are still a few unresolved issues, and I have directed our team to work XNUMX/XNUMX to try to resolve this issue.”

But he didn't rule out the possibility of allowing lawmakers to leave Washington, D.C. for a week-long break on the condition that they must be ready to return to vote.

There is little time left. The Treasury Department says the United States could run out of money to pay its bills as early as June 1, seven days from now - unless the national debt limit is raised. A US default could flip global financial markets and push the United States into recession.

But the Treasury Department's forecast is not ironclad, and some private-sector analysts believe the government can go another week without a default, which has led some Republicans to reject the June 1 deadline.

On the subject: Hundreds of thousands from each taxpayer: the real US national debt is catastrophically higher than the official one

Asked if the Treasury could meet its debt obligations after June 1 without raising the debt ceiling, McCarthy said: “There's always money coming in. But I leave that up to the staff of the Department of Finance. I think the deadline is June 1."

Ratings agency Fitch, citing growing political disputes over the country's debt limit, placed the US credit rating at "negative". The last time Fitch placed the US "negative" was in October 2013.

"The fight over the debt limit, the inability of the US authorities to meaningfully address medium-term fiscal problems, and the growing debt burden signal risks to the deterioration of US creditworthiness," Fitch said in a statement.

Three days

It will take Congress several days to get any deal through the Republican-controlled House of Representatives and the Democratic-controlled Senate. Legislators regularly have to raise the debt limit to cover spending and tax cuts they have already approved.

Representative Steve Scalise, Republican No. 2 in the House of Representatives, said lawmakers in that House will have three days to read any debt limit bill before they have to vote on it. In the Senate, any of its members may delay an action for a few days.

The House of Representatives left Washington on May 25 for a week-long break in honor of Memorial Day, although Scalise warned lawmakers that they should be prepared to be called back to Washington to vote if necessary.

McCarthy insisted that any deal must cut discretionary spending next year and limit spending growth in subsequent years to slow the growth of US debt, which is now equal to the economy's annual output.

Biden recommends freezing spending at current levels next year and has proposed several tax hikes to help curb debt.

Ratings agency Moody's said it could revise its US government rating if lawmakers fail to reach an agreement. A previous standoff with the debt ceiling in 2011 prompted rival ratings agency S&P Global to downgrade.

Deputies of both parties do not want to compromise. Republicans are pushing for Biden to agree to drastic spending cuts. Some Democrats accuse Republicans of holding the economy hostage to advance an agenda that would otherwise fail.

"They want to waste time, play games and make sure we don't live up to our commitments because they think it will be a political advantage in some way," Democratic Party spokesman Ilhan Omar said.

The last time the federal government was this close to default was in 2011, when the same division of power emerged in Washington: a Democratic president and a majority in the Senate, and a Republican-controlled House of Representatives.

What is a debt limit and how does it affect the economy

Congress limits the amount of money the government can borrow, and once the limit is reached, legislators must raise or suspend it before the Treasury Department can issue additional bonds.

That is, the national debt is the amount that the government borrows to pay all the necessary expenses or to replenish the budget deficit. In other words, this is the difference between how much the government spent and how much money it actually has. Present Tense.

Usually the state owes its own citizens. For example, the Pension Fund (or funds) accumulates payers' money. Since the department does not give all this money at once, it accumulates more than it needs. With the surplus, the fund buys bonds from the government. In response, the government pays only interest on bonds, and can use the money itself at its discretion. In addition to its citizens, the government can borrow money from other states or world organizations. For example, the World Monetary Fund.

Some economists fear that the United States will be stuck in a "debt trap" where high levels of debt hold back growth, which in itself leads to more debt.

Others, including those who subscribe to the so-called modern monetary theory, say the country can afford to print more money.

And some believe debt servicing can divert investment away from vital areas such as infrastructure, education and climate change. There are also fears that it could undermine US global leadership, leaving less money for military, diplomatic and humanitarian operations around the world.

Experts are concerned that large debts can become a brake on the economy or provoke a financial crisis. They argue that there is a tipping point after which large accumulations of public debt begin to slow growth.

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In such a scenario, investors could lose confidence in Washington's ability to fix its fiscal system and be reluctant to finance US borrowing without much higher interest rates. This is fraught with more deficits and more borrowing, or what is sometimes called a debt spiral.

A financial crisis of this nature may require sudden and economically painful spending cuts or tax increases.

However, some economists argue that these fears are exaggerated and suggest that Washington still has decades to resolve this problem. They point out that the cost of financing debt (in terms of interest payments as a percentage of GDP) has been relatively low over the past two decades, although it will increase over time. Moreover, they argued that the United States should take advantage of the current low interest rates to invest in infrastructure, climate action and social safety nets.

When such disputes arose around the state debt in 2021, ForumDaily then described in detail its essence, gathered expert opinions and found out what could be done. If you are interested, go to link.

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Miscellanea In the U.S. Congress default The White house The national debt
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