The US Is Running Out of Money, Literally (Part I)
Having hit the debt ceiling back in August, the US is now in a race against time to secure money from the Treasury Department. Failure is not a valid option.
The US stands on a financial edge with a crisis that could bring the country to a “historic and catastrophic default.”
This description is not some poetic journalist’s rendition of the possible outcome of the situation, but rather that of US President Joe Biden’s who is facing one of the toughest challenges of his presidency so far.
Biden’s words might ring true on the 18th of October, 12 days from now. if the US Senate does not find a way to rectify or bypass the current debt ceiling, thus “running out of money.”
How come the US, the largest empire on Earth with hypothetically the most robust economy, finds itself in such a destructive pinch?
Congress decides the limit of governmental borrowing in order to finance and pay for its various affairs. Once that limit is reached; i.e. the ‘debt ceiling’, lawmakers have to pass another bill that either suspends or raises the ceiling, allowing the Treasury Department to issue more debt and funnel it to the government.
The origins of the crisis
In 2019, a deal was reached between the Democrats and Republicans, represented by House Speaker Nancy Pelosi and then-Treasury Secretary Steven Mnuchin, that eased a bipartisan vote to lift the debt ceiling.
This authorized further borrowing and spending by the government, which at the time reached the limit of $22 trillion.
On August 1st of this year, the debt ceiling was automatically reinstated after reaching the cap of $28.5 trillion. This left the government unable to further borrow from the Treasury Department, leaving it with no viable alternative to secure payments for federal workers, infrastructure plans, and other crucial spendings. Videlicet, the government will literally run out of cash.
This was recently confirmed by US Treasury Secretary Janet Yellen, who plainly explained that the government will be left financially vulnerable lest Congress raises the limit on federal debt.
In case of a government shutdown, the US will have to deal with temporary furloughs for some governmental workers, which could spell chaos, to say the least.
The ability of the government to further borrow money from the Treasury is now intricately linked to the Congress’ vote, and herein lies the crux of the issue.
With 100 members overall, Congress is split between Democrats and Republicans, 50 members each, with the Vice President casting the deciding vote in case of a tie. With Democrat VP Kamala Harris, the blue party constitutes the majority.
But raising the ceiling on federal debt is usually a bipartisan affair, as passing this exceptional measure requires a supermajority of 60 votes at least.
GOP members, led by minority leader Mitch McConnell, have expressed their unwillingness to cooperate on this matter. This decision is based on two factors: The first is the unfavorable electoral consequence due to mounting anger against additional massive spending, the second is their attempt at pressuring spending cuts in programs they oppose, notably the Biden social infrastructure plan estimated at a colossal $3.5 trillion.
Their obstruction comes with aim of preventing the passage of the infrastructure bill which formed one of the central promises of Biden’s campaign and is the basis upon which the progressive Democrats still support his policies. If it fails, he would have to face the wrath of both his constituents and his party members, signaling a steep decline of popularity for the incumbent president.
Additionally, Republicans are attempting to pressure Democrats into folding their infrastructure bill within the debt ceiling suspension bill instead of voting on it as a standalone. McConnell has repeatedly suggested that the Democrats take sole responsibility through a maneuver known as “budget reconciliation”, which allows the bill to be passed with 51 votes.
But this approach comes with a hefty price.
Attempts to circumvent the crisis
In order to perform a reconciliation maneuver, Democrats are attempting to invoke changes to one of the biggest hindrances to policymaking in Congress: The Filibuster.
Filibustering is an old political practice that allows senators to endlessly discuss the proposed bill until its deadline has passed, a tactic used all often by the Republicans in the previous three voting sessions.
But Biden stressed that changing or exempting the voting session from filibustering is “a real possibility,” which is something that has rarely occurred.
Though it seems unlikely given the requirements of the exemption - a perfect consensus by Democrats who have at least two swing votes - the suggestion itself showcases a large political rift akin to that incurred by the country ahead of the latest elections.
In fact, during Wednesday’s third voting session, Senator Joe Manchin blocked an attempt at circumventing the roadblock by rejecting potential changes to the filibuster.
Furthermore, Democrats have blamed the sorry economic state of the government on the massive tax cuts decreed under previous Republican presidents George W. Bush and Donald Trump, calling for a bipartisan stance in passing the bill as to depoliticize the process. Though interestingly enough, the deal that was struck in 2019 was mutually approved by both parties, leaving many wondering why Democrats did not pursue a more sustainable spending approach.
Yet with a refusal to budge, it seems highly unlikely that the GOP would positively respond to Biden’s team, thus leaving the US in a state of fear, uncertainty, and an ever-approaching default.
If the debt ceiling is not suspended or raised, the consequences could turn out to be quite dire. For starters, the US stock market has witnessed a steep drop on Monday for fear of a halt in payments on the 18th.
This parallels the tumbling of stocks that took place in 2011 when a similar impasse was about to take place before it was resolved at the last minute.
Additionally, rating agencies could take the US credit rating down given the zigzagging the economy could go through in case the stalemate persists, with the real GDP of the country declining by 4% at least, as well as cutting payments by more than 40%.
Yet perhaps the worst outcome is eliminating $15 trillion in household wealth, which directly affects the average citizen’s financial capacities, in tandem with a 9% surge in the unemployment rate and the tragic loss of roughly 6 million jobs. Another horrifying consequence could be ceasing the distribution of social security checks to 50 million seniors.
The snowball effect
The current crisis is not completely detached from the previous economic policies adopted by both ruling political parties in the US.
In fact, each of the last three presidents had had a hand in increasing the governmental budgetary deficit: $3.293 trillion under W. Bush, $6.781 trillion under Obama, and $6.6 trillion under Trump.
Oppositely, bipartisan deals approved spending gargantuan amounts on the military-industrial complex and augmenting the defensive capabilities of hostile entities such as “Israel”. In tandem, US citizens were denied basic healthcare.
To add insult to injury, the pandemic had a major impact on the US economy, disrupting supply chains and triggering an avalanche of issues from restaurants being unable to provide meals, drivers and teamsters being unable to deliver their packages and a severe drawback in car production, just to name a few.
Meanwhile, billionaires racked additional fortunes in contrast with the middle-class, further slipping into a state of financial despair.
The US government’s shortsighted handling of the pandemic and a number of previously accumulated issues only bolstered the cataclysmic possibility of running out of money. The lead-up, though, is a topic for an upcoming article.