Business
Sr. inversorJanuary 7, 2023
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WASHINGTON — Representative Kevin McCarthy of California finally secured the House Speaker in a dramatic middle-of-the-night vote early Saturday, but his party’s dysfunction and the deal he struck to win over holdout Republicans have also increased the risks of a lingering political stalemate. that could destabilize the US financial system.
Economists, Wall Street analysts and political observers warn that the concessions he made to fiscal conservatives could make it very difficult for Mr McCarthy to muster the votes to raise the debt ceiling – or even put such a measure to a vote. This could prevent Congress from performing the basic tasks of keeping government open, paying the country’s bills, and avoid default on trillions of US dollars in debt.
The presidential battle that lasted more than four days and 15 ballots suggested that President Biden and Congress could be on the right track later this year for the most perilous debt ceiling debate since 2011, when former President Barack Obama and a new Republican majority in the House nearly defaulted on the country’s debt before reaching an 11-hour deal.
“If all we see is a symptom of a totally splintered House Republican conference that won’t be able to muster 218 votes on virtually any issue, that tells you that the odds of getting to the 11th hour or last minute or whatever is very high,” said Alec Phillips, chief political economist at Goldman Sachs Research, in an interview Friday.
The federal government spends far more money each year than it receives in revenue, producing a budget deficit that is expected to average over $1 trillion per year over the next decade. These deficits will add to a national debt that exceeded $31 trillion Last year.
Federal law limits the amount the government can borrow. But that does not oblige the government to balance its budget. This means that lawmakers must periodically pass laws to increase the borrowing limit to avoid a situation in which the government is unable to pay all of its bills, jeopardizing payments including military salaries, social security and debts to holders of government bonds. Goldman Sachs researchers estimate that Congress will likely need to raise the debt ceiling around August to avoid such a scenario.
Understanding the US Debt Ceiling
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What is the debt limit? The debt ceiling, also called the debt limit, is a cap on the total amount of money the federal government is allowed to borrow through US Treasury securities, such as bills and savings bonds, to meet its financial obligations. Because the United States has budget deficits, it has to borrow huge sums of money to pay its bills.
Why is there a limit on US borrowing? According to the Constitution, Congress must authorize borrowing. The debt limit was instituted at the turn of the 20th century so that the Treasury did not need to seek permission each time it needed to issue debt to pay bills.
What would happen if the debt limit was reached? Failure to meet the debt limit would result in a first-ever default for the United States, create financial chaos in the global economy. It would also force U.S. officials to choose between continued assistance like Social Security checks and paying interest on the country’s debt.
Raising the limit used to be routine, but has become more and more difficult over the past few decades, Republicans have used the cap as a cudgel to force through spending cuts. Their leverage stems from the potential damage to the economy if the limit is not increased. Lifting of the debt ceiling authorizes no new expenditure; it simply allows the United States to fund existing obligations. If this cap is not lifted, the government would be unable to pay all of its bills, which include military salaries and social security payments.
The exception to the debt limit drama was Donald J. Trump’s four-year presidency, when Republicans largely abandoned efforts to tie limit increases to federal spending cuts. In 2021, Senate Republicans clashed with Mr. Biden as the deadline approached to raise the limit, but those lawmakers ultimately helped Democrats pass legislation raising the cap.
Some Democrats lobbied to avoid that scenario last year, when it became clear their party would likely lose at least one chamber of Congress. They hoped to raise the limit again in the lame session of Congress after the November election that gave control of the House to Republicans, to avoid any risk of default before the 2024 presidential election. But the effort never gained ground.
As a result, the next round of the debt limit could be the toughest on record – as evidenced by the battle for the presidency. Conservative Republicans have already made it clear that they will not pass a debt ceiling increase without major spending cuts, likely including military spending cuts and domestic issues unrelated to national defense.
Their power stems from the fact that Republicans hold a narrower majority than they did after the 2010 midterm elections, which gave power to conservatives who opposed Mr McCarthy. Among the demands of this group were a push for drastic federal spending cuts and a balanced federal budget within a decade without raising taxes.
“Is he ready to shut down the government rather than raise the debt ceiling? Rep. Ralph Norman of South Carolina, who was one of 20 Republicans who originally voted against McCarthy in the House, told reporters last week. “It’s a non-negotiable item.”
Mr McCarthy appeared to agree to those demands, pledging not to raise the debt ceiling without major spending cuts – including efforts to cut spending on so-called mandatory programs, which include Social Security and insurance -disease – in a deal that has brought many holdouts, including Mr Norman, into its camp.
A speaker who violates this agreement could risk being ousted by the Republican caucus in the House. But Mr. Biden and his party’s leaders in the Democratic-controlled Senate have pledged to fight those cuts, especially to social safety net programs. It could mean a protracted stalemate that lasts so long that the government runs out of money to pay its bills.
Budget hawks in Washington have long argued that the United States must stop spending — and borrowing — so much money and that this nation cannot pay its long-term debt. They have pushed for various ways to reduce long-term spending growth, including cuts to health care for the poor and older Americans. And many have called for ending some tax breaks while ensuring the wealthiest and corporations pay more.
Yet many of these budget hawks have called the Republican spending demands reckless and likely to produce stalemates on key budget issues.
“Their specific demand to balance the budget in 10 years is simply totally unrealistic. It would take $11 trillion in savings,” said Maya MacGuineas, chair of the Committee for a Responsible Federal Budget in Washington, which has long pushed lawmakers to reduce future deficits through spending cuts and tax increases. .
“I want to save more money than a lot of people,” Ms. MacGuineas said. “But what they are asking for is simply not achievable.”
Rushing to a deadline to raise the debt ceiling would wreak havoc on financial markets, including for stocks and Treasuries, Phillips said. If Congress failed to raise the debt ceiling and the government became unable to borrow more money, Phillips said, America would suffer a sudden cut in federal spending equivalent to one-tenth of all daily economic activity.
“It doesn’t sound like a false alarm,” he said.
In 2011, Republicans and Mr. Obama agreed to a deal to raise the debt ceiling, which also placed future limits on increases in domestic spending. Ms. MacGuineas, Mr. Phillips and other analysts expressed skepticism that negotiations between Mr. Biden and House Republicans would do the same this time around, in part because the faction that blocked the rise of Mr. McCarthy this week does not seem willing to compromise for much more modest concessions. Democrats.
Administration officials gave no indication they would negotiate with Republicans to raise the debt ceiling — or that they were preparing for the possibility that a Speaker of the House would refuse to submit a ceiling increase. debt to a vote without major spending cuts.
Karine Jean-Pierre, the White House press secretary, told reporters at a press briefing on Friday that Mr. Biden expected Congress to raise the debt ceiling again with no strings attached. .
“We said we shouldn’t use the debt ceiling as a political tight-rope issue,” she said. “We have been very clear. If you look at what Republicans in Congress have done three times – three times under the Trump administration – they’ve been able to handle it in a responsible way, right? They voted three times, again, to lift the debt ceiling. And so Congress must once again be responsible.
Moderate lawmakers have already begun to offer possibilities for how the House might raise the limit. A long-term idea: a so-called discharge petition signed by a majority of the House to force a vote on a bill. A move like this would likely rely almost entirely on Democratic votes with a few Republicans on board. But this result is far from guaranteed; it would require extensive coordination from both sides and expose defecting Republicans to sanctions and primary challenges.
Still, Representative Brian Fitzpatrick, Republican of Pennsylvania, embraced the possibility of such a compromise this week in an interview with CNN. “There are a number of options to circumvent leadership,” he said. “There’s not a ton. But there are options available to us.
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FAQs
What is the current debt limit? ›
The amount is set by law and has been increased or suspended over the years to allow for the additional borrowing needed to finance the government's operations. On December 16, 2021, lawmakers raised the debt limit by $2.5 trillion to a total of $31.4 trillion.
How many times has the debt ceiling been raised? ›Congress has always acted when called upon to raise the debt limit. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents.
What is the 2023 deficit? ›In this report, the Congressional Budget Office describes its projections of the federal budget and the U.S. economy under current law for this year and the decade that follows. The deficit is projected to total $1.4 trillion in 2023; annual deficits average $2.0 trillion over the 2024–2033 period.
What were the dates of the 2011 debt ceiling crisis? ›These measures were implemented on May 16, 2011, when Geithner declared a "debt issuance suspension period". According to his letter to Congress, this period could "last until August 2, 2011, when the Department of the Treasury projects that the borrowing authority of the United States will be exhausted".
How much does the U.S. owe China? ›2021, China owns $1.095 trillion of the total $28 trillion U.S. national debt.
Who owns the most US debt? ›1. Japan. Japan held $1.08 trillion in Treasury securities as of November 2022, beating out China as the largest foreign holder of U.S. debt.3 The low and negative yield market in Japan makes holding U.S. debt attractive. Japan holds 14.87% of foreign-owned U.S. debt.
Can the U.S. pay off its debt? ›Can the U.S. Pay Off its Debt? As budget deficits are one of the factors that contribute to the national debt, the U.S. can take measures to pay off its debt through budget surpluses.
Has the U.S. government failed to raise the debt ceiling? ›The U.S. Treasury nearly hit the debt ceiling in fall 1953, plus the Senate refused to raise it until summer 1954, but the federal government managed to avoid reaching it through using various measures, such as monetizing leftover gold.
Has the United States always been in debt? ›The U.S. has had debt since its inception. Our records show that debts incurred during the American Revolutionary War amounted to $75,463,476.52 by January 1, 1791. Over the following 45 years, the debt grew. Notably, the public debt actually shrank to zero by January 1835, under President Andrew Jackson.
How much is the federal budget for 2023? ›The budget total is $5.8 trillion for fiscal 2023, including $1.6 trillion in discretionary spending. The budget also projects a $1.2 trillion deficit in fiscal 2023 – a significant drop from the last two years.
Why does the federal government have to borrow money? ›
If revenues are greater than spending, the result is a budget surplus. And if government spending is greater than the revenue it brings in, the result is a budget deficit, which means the federal government must borrow money to cover its expenses.
What will happen to the national debt in the future? ›At 79 percent of GDP, our federal debt is at its highest point since just after World War II. Unfortunately, the even more depressing fiscal fact is that our debt is projected to nearly triple over the next 30 years to more than twice the size of the U.S. economy. These levels have no precedent in American history.
When did the debt crisis start? ›It started with a subprime mortgage lending crisis in 2007 and expanded into a global banking crisis with the failure of investment bank Lehman Brothers in September 2008. Huge bailouts and other measures meant to limit the spread of the damage failed and the global economy fell into recession. 9. COVID19 Pandemic.
What period did the debt crisis begin? ›The global financial crisis (GFC) refers to the period of extreme stress in global financial markets and banking systems between mid 2007 and early 2009.
What caused the 2008 debt crisis? ›Deregulation in the financial industry was the primary cause of the 2008 financial crash. It allowed speculation on derivatives backed by cheap, wantonly-issued mortgages, available to even those with questionable creditworthiness.
What countries owe the US money? ›...
Debts and Debtors of the US Government.
| Country Name | Value of Holdings (Billions of $) |
|---|---|
| Ireland | 288.2 |
| Cayman Islands | 263.5 |
| Brazil | 259.2 |
| Switzerland | 229.3 |
Two Types of National Debt. The U.S. national debt reached the debt ceiling of $31.41 trillion in January 2023.1 The U.S. Treasury manages the U.S. national debt through its Bureau of Public Debt. The bureau classifies that amount into two broad types: intragovernmental holdings and debt held by the public.
Who owns U.S. debt by country? ›| Characteristic | Securities in billion U.S. dollars |
|---|---|
| Japan | 1,082.2 |
| China, Mainland | 870 |
| United Kingdom | 645.8 |
| Belgium | 332.9 |
United States. The United States boasts both the world's biggest national debt in terms of dollar amount and its largest economy, which resolves to a debt-to GDP ratio of approximately 128.13%.
What are the biggest debts in the US? ›Mortgage balances, the largest source of debt for most Americans, rose 5.9 percent between 2020 and 2021. The average mortgage balance is $220,380, according to Experian. Auto loan balances reportedly rose 6.5 percent year-over-year in 2021, and the average auto loan balance is $20,987.
Who is the most in debt person on earth? ›
Jerome Kerviel, The Most Indebted Person In The World, Owes $6.3 Billion To Former Employer, Societe Generale. In a hyper-competitive world where everyone strives to be the biggest, boldest and most famous, no one covets Jerome Kerviel record-breaking achievement. He is the most indebted person in the world.
What happens if the U.S. becomes debt free? ›If the U.S. paid off its debt there would be no more U.S. Treasury bonds in the world. "It was a huge issue ... for not just the U.S. economy, but the global economy," says Diane Lim Rogers, an economist in the Clinton administration. The U.S. borrows money by selling bonds.
What happens if I leave the U.S. with debt? ›While debt technically won't follow you abroad, you may suffer several consequences for trying to flee from it: you may be sued and have your wages garnished; your credit score will suffer; you may have to pay taxes on your debt. These are just a few consequences of leaving the country with unpaid debt.
What happens if the U.S. defaults on national debt? ›The U.S. defaulting on its debt would threaten the value of bonds, equities, and the U.S. dollar, which would unfurl in the global market already saddled with high inflation and interest, potential recession, and multiple geopolitical crises.
How much debt does the U.S. have? ›At its peak in April 2022, the Fed held more than $6.25 trillion in U.S. government debt, more than double its holdings just before the pandemic hit the U.S. in March 2020.
Why is the US debt so high? ›Since the government almost always spends more than it takes in via taxes and other revenue, the national debt continues to rise. To finance federal budget deficits, the U.S. government issues government bonds, known as Treasuries.
Will federal employees get a raise in 2023? ›Late last month, President Biden issued an executive order formalizing an average 4.6% pay increase for civilian federal workers in 2023. The raise is split between a 4.1% across-the-board increase in basic pay and a 0.5% boost to locality pay.
What's in the 2023 omnibus bill? ›Monday released the $1.7 trillion fiscal year 2023 Omnibus Appropriations bill. The omnibus includes $772.5 billion for non-defense discretionary programs, including $118.7 billion – a 22 percent increase – for VA medical care, and $858 billion in defense funding.
Why is the government shutting down? ›In the United States, government shutdowns occur when there is a failure to enact funding legislation to finance the government for its next fiscal year or a temporary funding measure.
Is China in a debt crisis? ›The size of China's debt problem is truly staggering. At last measure, debt of all sorts – public and private and in all sectors of the economy — amounted to the equivalent of $51.9 trillion, almost three times the size of China's economy as measured by the country's gross domestic product.
How to pay off national debt? ›
Raising taxes and cutting spending are two of the most popular solutions for reducing debt, but politicians may be hesitant to do both. Diverting spending from the military to other sectors may boost job growth, which could spur consumer spending and help the economy.
Does the U.S. Constitution allow the government to borrow money? ›Article I, Section 8, Clause 2: [The Congress shall have Power . . . ] To borrow Money on the credit of the United States; . . .
How can we solve this debt crisis? ›Debt Crisis Solution
The solution to the debt crisis is economically easy but politically difficult. First, agree to cut spending, and raise taxes to an equal amount. Each action will reduce the deficit equally, although they have different impacts on economic growth and job creation.
In reality, high and growing debt levels will hinder long-term economic growth. In particular, CBO explains that "higher debt crowds out investment in capital goods and thereby reduces output relative to what would otherwise occur." In other words, high debt harms economic growth.
Why is it important for people to pay off debt? ›Improve Credit Scores
And the lower your credit card balance, the lower your credit utilization. So paying off credit card debt consistently and on time can help your credit scores. And as your credit scores improve, it can make it easier to qualify for better interest rates and other loans, such as mortgages.
A country can enter into a debt crisis when the tax revenues of its government are less than its expenditures for a prolonged period. In any country, the government finances its expenditures primarily by raising money through taxation.
What is the oldest U.S. debt? ›On January 1, 1790, the United States' public debt stood at $52,788,722.03 (Bayley 31). It consisted of the debt of the Continental Congress and $191,608.81 borrowed by Secretary of the Treasury Alexander Hamilton in the spring of 1789 from New York banks to meet the new government's first payroll (Bayley 108).
What was the worst debt crisis? ›In 2007 the global financial crisis began with a crisis in the subprime mortgage market in the United States, and developed into a full-blown international banking crisis with the collapse of the investment bank Lehman Brothers on 15 September 2008.
What was the main reason for the debt crisis of the 1980s? ›The origins of the 1980s Debt Crisis can be traced back to the acute shocks to the international monetary system in the 1970s: the collapse of the Bretton Wood system; the major oil prices hikes; and the substantial liberalization of international finance.
What was the main cause of debt during the 1920s? ›The Depression led more banks into the field when business lending fell sharply and it became clear that, even in the greatest downturn the nation had ever experienced, most consumers faithfully paid their debts. Interestingly, after a falloff following the Crash of 1929, consumer borrowing rose through the Depression.
What are the effects of a debt crisis? ›
There are at least four separate consequences of rising debt that can adversely affect the current and subsequent performance of an economy. These include transfers, financial distress, bezzle (or fictional wealth), and additional spillover adjustment costs termed hysteresis.
Is a recession coming in 2023? ›In a recent poll of economists, the World Economic Forum found that nearly two-thirds of the respondents believe there will be a recession in 2023. But here's the good news: Many analysts expect a relatively mild and short recession, or what is sometimes referred to as recession with a small r.
How to become a millionaire during a recession? ›- Invest as much as you can. The easiest way to get rich during a recession is to invest as much money into the stock market as you can. ...
- Protect your income. Stable income is a key part of personal finance success, including building wealth. ...
- Cut back on expenses.
How Was the Financial Crisis of 2007–2008 Resolved? In September 2008, Congress approved the “Bailout Bill,” which provided $700 billion to add emergency liquidity to the markets.
Has the U.S. ever hit the debt limit? ›That month, Congress voted to increase it by $2.5 trillion, which President Biden signed into effect on December 16, 2021. At that point, it was set at about $31.4 trillion. On January 19, 2023, the United States again reached the debt ceiling.
Could the U.S. ever get out of debt? ›In modern history, the U.S. has never defaulted on its debt. The debt ceiling is the self-imposed limit on how much debt Congress allows the federal government to have. If Congress does not raise or suspend the debt ceiling, the U.S. could default on its debt, which would also impact financial markets and the economy.
Is there a limit to U.S. national debt? ›What is the debt limit? The debt limit is a ceiling imposed by Congress on the amount of debt that the U.S. Federal government can have outstanding. This limit has been set at $28.4 trillion since August 1st, 2021.
What would happen if the U.S. paid off its debt? ›The country's net economic power would increase as more money was spent on goods and non-financial services—production rather than monetary intermediaries. We would be back to being able to consume what our country's economic capacity could produce.
Has the U.S. ever had no debt? ›The U.S. has had debt since its inception. Our records show that debts incurred during the American Revolutionary War amounted to $75,463,476.52 by January 1, 1791. Over the following 45 years, the debt grew. Notably, the public debt actually shrank to zero by January 1835, under President Andrew Jackson.
How can we fix US debt? ›Raising taxes and cutting spending are two of the most popular solutions for reducing debt, but politicians may be hesitant to do both.
Who is the United States in debt to? ›
That includes corporations, domestic individual investors, local or state governments, Federal Reserve banks, foreign investors, foreign governments and other entities. About a third of the debt held by the public is held by foreign holders.
What percentage of the U.S. has no debt? ›What percentage of America is debt-free? According to that same Experian study, less than 25% of American households are debt-free. This figure may be small for a variety of reasons, particularly because of the high number of home mortgages and auto loans many Americans have.
What countries owe the U.S. money? ›...
Debts and Debtors of the US Government.
| Country Name | Value of Holdings (Billions of $) |
|---|---|
| Ireland | 288.2 |
| Cayman Islands | 263.5 |
| Brazil | 259.2 |
| Switzerland | 229.3 |
Japan has the highest percentage of national debt in the world at 259.43% of its annual GDP.
Who pays back the US debt? ›Revenues generated by taxes are used to pay the bonds that come to maturity. Investors, including banks, foreign governments and individuals, can cash in on these bonds when they reach maturity. The debt ceiling is the cap that is set on what the Treasury Department can issue.
Why can't the U.S. make money to pay off debt? ›Unless there is an increase in economic activity commensurate with the amount of money that is created, printing money to pay off the debt would make inflation worse. This would be, as the saying goes, "too much money chasing too few goods."