The U.S. sovereign debt crisis is over, for now
The U.S. sovereign debt issue has been resolved, with the usual drama. The House of Representatives approved the agreement between President Joe Biden’s administration and Republican negotiators by 314 votes to 117. The agreement was bipartisan and its opposition was bipartisan. Seventy-one Republicans opposed it, as did forty-six Democrats. In the upper chamber 36 senators were against: four Democrats and Bernie Sanders, an independent; 31 Republicans were the main opposition, though for different reasons.
Republicans can now challenge Kevin McCarthy’s leadership 71 times, because in the ordeal of his election as House Speaker they agreed that a single Republican who opposed such a negotiation could ask for his resignation.
Asking for it, yes, but getting it is another matter. The no-confidence vote concerns all representatives, both Republicans and Democrats, but I don’t think any Democrat who supported the deal last Wednesday will vote with the most recalcitrant Republicans to remove McCarthy.
Biden, as he said, did not compromise on limiting the debt. Republican spokesman and negotiator Patrick MacHenry declared that the deal reached was the best that could be obtained.
As a result of this bipartisan negotiation, the debt ceiling disappeared for 18 months. That is to say, the federal government can spend what it needs until January 2025, with the rickety limitations that the Republicans introduced in the agreement: budget savings, estimated at US$ 136 billion over the next 18 months, which are equivalent to a kind of rounding up of the public debt limit of US$ 31.4 trillion, already exceeded since the beginning of the year.
The US public debt ceiling was established in 1917 as a measure of economic discipline, but since 2001 it has been an increasingly acrimonious point of political debate. In 2001, with the terrorist attack on the Twin Towers and the subsequent wars in Afghanistan and Iraq, the amount of debt increased, reaching US$ 10.63 trillion at the start of Barack Obama’s presidency in 2009, when Bill Clinton’s presidency had left it at US$ 5.73 trillion. And it has continued to grow. In September 2021, under Donald Trump, the US debt and its ceiling rose to almost US$ 28 trillion. It now stands at US$ 31.4 trillion. The bipartisan agreement allows the debt ceiling to rise for 18 months, i.e. until 2025.
The U.S. public debt is the amount of money the federal government owes to all its creditors. Domestic and foreign. Foreign debt is about one-third of all public debt. The debt ceiling is a legal limit set by the U.S. Congress on the total amount of money the federal government can borrow.
If Congress does not authorize a new debt ceiling, the government cannot borrow more, but this gets more complicated all the time because any government, Democrat or Republican, spends more and more to satisfy its economic and social positions. It is important to remember this: the debt ceiling does not set the amount of money the government has to spend, but rather the increase needed to pay the debts the government has already incurred according to its interests. Since government spending and revenues are determined by separate laws, the debt grows and grows until the ceiling is reached, and has to be increased, thus leading to entertaining political fights.
The ratio of public debt to Gross Domestic Product (GDP) is a commonly used measure to understand how dangerous a country’s debt is. Up to the year 2022, the debt constituted 124% of the GDP, with US$ 30.93 trillion. Several specialists consider that the debt-to-GDP ratio is only one measure, and does not give a complete picture of the “dangerousness” of such debt. In January of this year, the current debt limit was exceeded, accumulating US$ 31.47 trillion as of May 25. In other words, we owe more than we produce.
The issue is very complex to understand what is happening in the country’s economy and what the dangers really are. And not only for us, humble tax payers, but also for the specialists, because as in almost everything, there are totally opposite opinions.
Perhaps a simple phrase explains it: in the United States, we live beyond our means. But in the meantime, we are entertained by partisan struggles.
Who is being hurt by financial instability?
Our children and grandchildren in America may face higher taxes or reduced public services. And already today, those most in need will suffer with these recent agreements that limit various social programs, without having accepted in the agreement a tax increase on the wealthiest in the country. Nor limits on military spending.
The current international situation is important when considering the sword of Damocles in the current scenario of the growing U.S. debt. A war in Ukraine bleeding money from all parties to the conflict, including the U.S. The explicit position of Russia and China advocating a multilateral world, not just led by the U.S., because of the challenge to its global economic dominance, with the real threat of BRICS to the value of the dollar as the current international currency of exchange.
What will happen in the next 18 months? This is something that Republicans and Democrats will have to address at home and abroad, before engaging in a new chapter on the national public debt. It will undoubtedly be a major argument in the 2024 presidential election, but it cannot and should not be reduced to that alone.