This text is taken from Courrier de l’économie. Click here to subscribe.
Is the debt ceiling in the United States the current debt of the state? Is this country repaying at least part of its debt? Why does this ceiling have an impact on the payment of the salary of civil servants and on the few American social programs?
Our reader Andrée Bérubé asked us these questions a few months ago. Since then, the political and economic drama surrounding the level of the US federal government’s debt has only escalated, and the time for its unraveling is fast approaching…or not. And only until next time.
In other countries, this kind of debate takes place when the budget is adopted, after which the government simply borrows the money necessary to finance it. But that would be too simple. In the United States, Congress sets a ceiling on the level of debt. When this ceiling is reached, the government no longer has the means to pay its expenses, even if they have already been approved. At least until that ceiling is raised again, suspended or its definition changed.
On December 16, 2021, Congress set the cap at US$31.381 billion. Last January, US Treasury Secretary Janet Yellen advised Republican House Majority Leader Kevin McCarthy that the cap had been reached.
This kind of business has long been a mere formality. Since 1960, the debt ceiling has been revised 78 times, 49 times under Republican presidents and 29 times under Democratic presidents. But in recent years, the formality has turned into an opportunity for Congress to hold government policies hostage when the president is on the opposing side to force him to make concessions.
Highs and lows
As a proportion of the size of the economy, US federal government debt has had its ups and downs since the late 1960s, but has essentially increased since the 2000s, from around 54% of GDP to a peak of 135% during the pandemic, before falling back to 120% at the end of last year.
This time, the elected Republicans say that we have lost control of the debt, when they agreed to raise its ceiling three times during the Trump presidency to finance, in particular, its significant tax cuts. They would demand, among other things, from his Democratic successor, Joe Biden, cuts in his discretionary spending and a tightening of the rules of his new measures to fight against poverty.
The affair forced the American president on Sunday to make a hasty return from the G7 to Asia to resume negotiations with the Republican camp. Joe Biden and Kevin McCarthy said they had a “productive” meeting on Monday, but failed to overcome their “philosophical differences”.
Since January, Janet Yellen has been shifting, postponing and delaying all the expenses that can be to continue to operate the government with its available revenues. This little game is likely to have reached its limit on 1er June, she warned. Even its officials and experts admit that if one is lucky, one may be able to extend this for another month. After which, the American state will have to choose between paying the salaries of its employees, sending the pension and welfare checks to the Americans or paying what it owes to its creditors.
Like the last times the United States came very close to this precipice, in 2011 and 2013, pundits are coming up with all sorts of unorthodox solutions. It is particularly a question of relying on an obscure passage of the American Constitution where it is said that elected officials have the duty to honor the debts of the nation, to issue a new kind of debt, or even to use the power of the government to mint commemorative coins to issue one that would be valued at, say, $1 trillion and deposited with the US Federal Reserve in exchange for cold hard cash.
All of this is just “schemes” that would fail to hide the reality, that is to say that the world’s largest economy has reached the point of no longer being able to honor its financial obligations, answered Janet Yellen. However, a default by the United States on its debt would “trigger a global collapse”, she told Japan to her G7 counterparts two weeks ago.
But they didn’t need to be reminded. In the world of finance, the debt issued by the US Treasury is seen as the safest thing, so it is found in all banks, associated with all major transactions and considered everywhere as the best policy. insurance.
So everyone is watching what’s happening in Washington, crossing their fingers and holding their breath.