Carl Johan von Seth: Can the American meltdown be stopped in time?

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What is the debt ceiling?

The debt ceiling is basically a simple principle. A maximum limit, simply, for how much the US government can borrow. The ceiling is set at 31,400 billion dollars according to a previous decision in Congress.

When does the state cross that line?

Strictly speaking, the state hit the debt ceiling already in January this year. It has been possible to get ahead anyway, with the help of extra money in the coffers and incoming tax revenue.

But since the federal budget is set with a fairly large deficit, the emergency solutions only work for a time. They talk about an “x-date”, the time when the balance will be completely down to zero.

That date is hard to predict. Tax payments are sometimes uncertain. But according to Treasury Secretary Janet Yellen, the money could run out as early as the end of next week. Which in practice can mean state bankruptcy. Unless Congress raises the debt ceiling, which it threatens not to do.

How did you end up in this situation?

There are technical and political reasons for the crisis.

The technicality is that the framework around American economic policy contains several contradictions. The debt ceiling exists and must be respected. But Congress has actually already decided on an underfunded budget. All expenses and taxes are fixed, according to law.

To complicate matters further, the US Constitution states that “the validity of the public debt obligations of the United States shall never be questioned”.

To summarize: President Joe Biden must follow the Congressional budget, but does not have permission from Congress to do so fully. And if he doesn’t do that and suspends government payments, he’s also violating the constitution.

This point 22 is usually resolved, more or less painlessly, by raising the debt ceiling. But since the election last fall, the Republican Party has a majority in the House of Representatives. And that majority is on the warpath, which is the political reason for the crisis.

Haven’t we seen this story play out before?

In connection with deadlocks in budget negotiations, the American state has had to close federal functions several times. But it is a different kind of crisis. It should not be confused with a crash against the debt ceiling, which has never happened before.

The US government has also come close to hitting the debt ceiling in the past, triggering political crisis and negotiations, but perhaps never this close. And the political deadlocks are probably worse than before.

What happens if the debt ceiling is not raised?

The state must stop paying pensions, healthcare benefits, salaries to the military and border police, bills to various suppliers and a lot of other things. It is legally uncertain whether the state can prioritize the interest payments on the national debt. If you stop them too, the US ends up in true state bankruptcy.

It must be borne in mind that there is no larger and more systemically important economic actor in the entire world than the American state. The dollar, and US government bonds, are the closest we have to a world currency.

The consequences if the US government suspends its payments are therefore enormous. In an analysis, the credit rating institute Moody’s calls the impending chaos in the global economy “crushing”.

Since it has never happened before, no one knows exactly what the consequences will be. But even a short-term bankruptcy will mean a rapid decline in the American economy. White House economists expect a slightly more protracted bankruptcy could result in eight million lost jobs and a deep economic crisis.

It will, in turn, spread quickly in the world economy. And it is not even certain that the United States will suffer the worst. Small, internationally oriented economies like the Swedish one are at a disadvantage.

On Thursday, the New York Times reported that negotiations between the White House and Republicans in Congress are moving forward. But with perhaps only a week left until the x-day, nothing is yet clear.



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