The X-Date – the day when the US Treasury will no longer be able to meet its obligations if Congress fails to raise the debt ceiling – is fast approaching. Washington has only a couple of weeks to increase the debt limit until hellfire and brimstone ostensibly sweep the national economy and global financial markets. So far, investors think it is almost certain that the country will avoid an apocalypse as White House and Republican officials have alluded to a deal in the coming days.
Debt Ceiling Negotiations
President Joe Biden and House Speaker Kevin McCarthy (R-CA) held an hour-long meeting in the Oval Office on May 16. Reports suggest that the two sides were far apart on the issue, but officials told reporters that progress had been made. One development is that there will be daily and direct one-on-one deliberations between Rep. Garret Graves (R-LA) and two White House aides (Office of Management and Budget head Shalanda Young and adviser Steve Ricchetti) as the president travels to Japan for the G-7 summit.
"There’s still work to do but I made it clear to the speaker and others that we’ll speak regularly over the next several days and the staffs’ going to continue meeting daily to make sure we do not default," Biden said. "There was an overwhelming consensus I think in today’s meeting with congressional leaders that defaulting on the debt is simply not an option."
McCarthy acknowledged the structure of negotiations had improved and has resulted in "a better process." The House Speaker gave credit to Biden because he "changed the scope" of talks. While this does not guarantee an agreement, McCarthy is hoping that the administration and House GOP can strike a deal in the coming days. “It is possible to get a deal by the end of the week. It’s not that difficult to get to an agreement,” McCarthy said.
House Democrats were not as amiable, with Minority Leader Hakeem Jeffries (D-NY) slamming one of the latest proposals to institute stricter work retirements for the Supplemental Nutrition Assistance Program (SNAP). Critics on the other side of the aisle say the Republican idea would only save $11 billion over ten years. Senate Majority Leader Chuck Schumer (D-NY) also demanded a clean debt-limit increase, arguing that a "default is just the worst, worst alternative.”
The End is Near?
Treasury Secretary Janet Yellen once again warned that a government default would potentially slip the US into a recession as millions of jobs would be lost, businesses closed, and Americans left without income payments. In addition, a default would possibly disrupt key federal government operations, such as border security, air traffic control, law enforcement, and national defense. The international financial markets would also be in disarray.
"A default would crack open the foundations upon which our financial system is built," Yellen told the Independent Community Bankers of America's 2023 Capital Summit on May 16. "It is very conceivable that we’d see a number of financial markets break – with worldwide panic triggering margin calls, runs, and fire sales."
In another letter to McCarthy on May 15, Yellen reiterated her estimate that the Treasury would likely exhaust its extraordinary measures and run out of money to cover the government's obligations as early as June 1. She noted that the department's borrowing costs have significantly increased for securities maturing in early June. "If Congress fails to increase the debt limit, it would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests," Yellen wrote.
(Photo by Anna Moneymaker/Getty Images)
There is a growing chorus of experts who have echoed Yellen's sentiment.
Neil Bradley, the chief policy officer at the US Chamber of Commerce, agrees with many of the policy proposals, such as rescinding unspent COVID spending, reforming the federal permitting process, and imposing discretionary spending caps. At the same time, according to Bradley, "it is impossible to overstate the sense of urgency and the negative consequences that would occur if the United States were to default on its debt.”
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, believes it is paramount that negotiators must move quickly to raise the debt ceiling as "even flirting with default is dangerous." MacGuineas agrees that caps on discretionary spending and debt limit reform need to be discussed, but the risk of default must be off the table.
Regardless of the circumstances, Rep. Byron Donalds (R-FL) thinks this is a frequent gambit from the administration's playbook. "Under Biden, issues are ignored until they reach crisis point. It's sad & shows a lack of leadership," he tweeted. The House Speaker shared this opinion, accusing the president of treating the debt ceiling as he treated the border: "He wanted to ignore the problem."
What Now?
A May Bank of America Global Fund Manager Survey found that 70% are confident the US debt ceiling would be raised by the X-date, down from 80% in April. Most investors are still confident over a predictable ending, but there remains a possibility of a swerve a la a WWE match. If the debt ceiling were not raised, it would be interesting to see the federal government only spend what it takes in as officials would be forced to operate this way. But this might never happen because Washington cannot fathom the idea of returning spending to 2022 levels, so politicians on both sides of the aisle will furrow their brows, order a cart of pizza boxes, shake hands, and tell the cameras that this is a good day for America.
