This Wednesday, the newly elected Speaker of the US House of Representatives, Kevin McCarthy, is set to sit down with President Joe Biden to resolve what could become a global problem.
It involves the much-hyped deadlock between the White House proposing that Congress raise America’s debt celling one more time while the Republican-controlled Congress seems determined to push Biden into accepting major cuts on spending in his proposed budget.
The US Treasury indeed already hit this debt limit on January 19 and has since invoked extraordinary measures to cover its expenses, which could push actual default on debt repayments to June 5, 2023. It is nevertheless important that the debt limit is either raised by that time or at least suspended to allow both sides time for negotiations.
As already clarified by Kevin McCarthy in a media interview this week, the soft sectors of social security and medical care are not up for discussion. His indirect comments allude to Biden’s proposed defense budget of $858 billion being a possible target for cuts, but in the midst of the Ukraine war that remains a difficult option as well.
In the worst case, if no resolution is clinched by end of May or so, the US government may have to resort to another extreme step of ensuring its debt repayments to its major creditor nations by defaulting of government pensions and salaries and so on.
Lessons of 2011
This of course is not the first time such a deadlock has created anxieties for markets, yet recent years have witnessed increasing intensity and frequency of such standoffs between the presidency and Congress.
The last major standoff triggering a similar crisis occurred in 2011 when Joe Biden was vice-president and the US had suffered its first ever credit downgrade, sending shivers through the markets and power elites as stocks took a major hit. President Barack Obama had to accede to $2 trillion in spending cuts, and this “grand bargain” embedded the Republicans, who today wish to repeat it with Joe Biden.
The year 2021 witnessed another credit downgrade for the United States. History of course is replete with examples of Congress relenting and only a few times managing to win a showdown with the presidency. The US Congress, for example, has suspended or raised debt ceilings 93 times during last 70 years, and the highest number was five times during 1963.
Indeed, until 1917, Congress used to approve specific debt proposals to raise borrowings from home or abroad. It was in the wake of economic disruptions of the World War I that Congress decided to set an overall ceiling granting the presidency full freedom to raise debt from multiple sources and on varying schedules of payments.
During more recent times this debt ceiling was raised to $6 trillion under Bill Clinton (1997), to $11 trillion under George W Bush (2008), $18 trillion under Barrack Obama (2015) and $22 trillion under Donald Trump (2019).
During the Covid-19 pandemic, Congress suspended the debt ceiling to allow the presidency to spend without any restraint, and the debt rose to $27 trillion, making Congress finally set the debt ceiling at $31.4 trillion in 2021. It is this ceiling that currently stands breached, as the debt today stands way above the total size of US economy of $25.66 trillion for last year.
The recent period has also witnessed an increasing mismatch between the growth of US debt and its gross domestic product as well as a growing mismatch of who have become its major creditors. The US debt today is 10 times what it was in 1990. This means that the US government had to spend a record $213 billion in mere interest payments on its debt for just the fourth quarter of last year.
Whom the US owes
Other than the exponentially growing size of the US debt, the list of countries to which the US owes this debt makes it equally intriguing puzzle with serious implications for US global leadership in coming times. As of last October, the top three owners of US debt were Japan ($1.1 trillion), China ($980 billion) and the United Kingdom ($870 billion).
Of these, both Japan and the UK are close US allies, but they have already committed a big chunk of their GDP to US Treasury bonds. So Japan with a GDP of $5 trillion and the United Kingdom with a GDP of $3.1 trillion may not hold much promise to supply any more cash to the US.
This leaves China, with its rapidly growing GDP reaching $18 trillion for 2022, which could become an increasingly attractive source for more US borrowing.
What makes this logic convincing is that compared with the economies of both Japan and the United Kingdom, which have witnessed negative growth rates of minus-0.3% on a three-year average, China’s growth rate has been projected between 4.8% and 5.2%.
The only difficulty is that a whole range of the US policy reports have described China as their main competitor and challenge. This should make the Biden presidency cautious about milking this low-hanging opportunity any further.
Indeed, given their complicated equations, the last few years have seen China downsizing on US Treasuries, and it could potentially decide to sell off its holdings. This would have a disastrous effect for US economy, which is already bracing for a global recession. With the US manufacturing sector already in recession, the housing market slumped and the tech sector witnessing large layoffs, President Biden’s choices remain complicated.
In such difficult times, the private sector could emerge as another source, but recourse to its intervention will have its own vulnerabilities as well. Apple, for instance, has become a $3 trillion company and could be potentially staking claims to finding innovative means to redeem the US economy. Germany, Europe’s strongest economic powerhouse, could be another new source to supply money to support US efforts in the Ukraine war.
Global implications
The most serious consequence, according to experts, of this continuing deadlock could be implications way beyond the United States. In the worst case, it could mean a collapse of the US dollar and its replacement as global trade’s unit of account.
China has already been staking claims for the yuan to become a global currency for trade and transections. This would without doubt have implications for US pre-eminence and power but would further disrupt the US-led liberal global order.
The US Treasury bond market remains a bedrock for the global financial system and backbone for central banks and global investors. But Kevin McCarthy, who endured 15 rounds of voting to be elected as House Speaker, is a tough negotiator, while President Biden seems to have limited space to maneuver. This makes speculating on outcomes of their first meeting rather difficult.
What gives hope is that never in history has Congress pushed the executive off the cliff; never has the US ended up with a debt default so far. It is hoped that both leaders will keep in mind how a US debt default could further accelerate ongoing layoffs and further weaken US efforts in bracing for the onset of global recession.
There is perhaps too much at stake for egos or ideologies to ignore.
Swaran Singh is visiting professor at the University of British Columbia, fellow of Canadian the Global Affairs Institute and professor of diplomacy and disarmament, School of International Studies, Jawaharlal Nehru University, New Delhi.
Follow Swaran Singh on Twitter @SwaranSinghJNU.