Why are US lawmakers arguing about the debt ceiling again?

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U.S. lawmakers only had a few weeks to lift the restrictions Federal borrowing If the government can no longer fulfill its obligations, it may face the risk of financial disaster.

After a two-year suspension, the debt ceiling has become the center of a high-risk political struggle, which will only intensify as the trading window begins to close.

The following is a guide on what is happening, why it is important, and how to avoid the US sovereign debt crisis.

What is the debt ceiling and why is it a problem?

The debt ceiling limits the amount that the Treasury Department can borrow to pay for government commitments that Congress has approved.

Once the cap is reached, U.S. lawmakers must increase or suspend it to allow the agency to issue new bonds and raise the necessary cash to pay its bills-they have done so nearly 100 times since the end of World War II.

The last time it was suspended in 2019 during the Trump administration, it was restored to approximately US$28.5 trillion on August 1, including all debts incurred since the last suspension.

Once a routine matter, adjusting debt limits is now often used by Republicans as a political tool to make concessions on federal spending. The stalemate that brought the United States dangerously close to default in the past always ended in a solution.

But as the deadline for the debt ceiling conflicted with Joe Biden’s efforts through him, tensions on Capitol Hill increased again. Trillion-dollar economic agenda Through Congress, rekindled fears that lawmakers will once again push negotiations to the fringe.

How long is Congress left?

US Treasury Secretary Janet Yellen warned last week that the Treasury Department may run out of cash next month. At the same time, the bipartisan policy center has planned from mid-October to mid-November, which depends largely on the highly uncertain trajectory of federal spending and revenues caused by the pandemic.

Shai Akabas, director of economic policy at a Washington think tank, said the Treasury Department has exhausted most of the “unconventional measures” or accounting operations that can be used to buy time. These include the suspension of investment in certain federal retirement and health funds. The Treasury Department still has approximately US$400 billion in cash on hand.

Once these resources are used up, it will no longer be able to fulfill obligations such as medical insurance-related dues and veteran benefits. Interest payments on US government bonds held by investors may also be interrupted.

If the debt ceiling is not adjusted, what are the stakes?

The economic, financial, and political consequences of the U.S. default cannot be overemphasized. Yellen warned that corporate and consumer confidence will be hit immediately, and rising borrowing costs may trigger a global crisis and once again hit the country’s credit rating, which was downgraded in 2011 due to the previous debt ceiling conflict.

“The U.S. default on its sovereign debt will really force people to think twice about the existing world economic order,” said James Lucille, managing director of Capital Alpha Partners in Washington. “The United States is not Argentina… This is not a question of ability to pay, but a question of willingness to pay.”

Libby Cantrill, Pimco’s head of public policy, said that the stakes are so high that no political faction dares to risk breaching the contract.

“The shortcomings are so great that conventional wisdom [suggests] Congress will not impose such self-inflicted harm on the US economy, especially during a pandemic. ”

How did the financial market react?

So far, Wall Street has not worried about the looming deadline.

TCW’s portfolio manager, Bret Barker, said: “It feels like a movie we’ve all seen before, and it’s already very old.” Acting skills and political posture.”

Treasury bills The bonds maturing in late October and early November offered only minor concessions, indicating that fund managers have made very small changes to prevent the government from missing payments.

In 2011 and 2013, the reaction was much more intense. Fed economists wrote in a 2017 paper that the yields of all U.S. Treasury bonds rose by 0.04 to 0.08 percentage points before the two debt ceiling deadlocks, and then came to an end at the time of the resolution.

However, they pointed out that by 2013, fund managers had “learned a lesson from the debt limit deadlock in 2011 and its final solution”. By that year, the short-term bill market had the biggest action, and this dynamic may repeat itself as the deadline approaches.

Wall Street has also been distracted by other issues, including slowing economic growth and potential policy changes by the U.S. Central Bank.

Ashish Shah, co-chief investment officer of fixed income at Goldman Sachs Asset Management, said: “This is another thing to worry about.” But he added that “the market will go beyond this.”

“In any case, this is a period of great uncertainty, and the liquidity is so strong, the market should not take it too seriously as a risk.”

How can this be solved?

Negotiations in Washington are at a standstill, and if any, the rift has widened.

Republicans, led by Senate leader Mitch McConnell, said their lawmakers have no intention of raising the debt ceiling because it amounts to an endorsement of Biden’s spending plan. Republicans said that Democrats should simply increase the debt ceiling in their huge social safety net investment plan, worth up to 3.5 trillion U.S. dollars, which can only be passed if the Democrats vote.

But Nancy Pelosi, the Democratic Speaker of the House of Representatives, insisted that raising the debt ceiling should be supported by both parties because it reflects the trillions of debt accumulated by measures approved by the Republicans over the years.

Democrats are pushing Republicans to consider approving debt ceiling increases in other legislation that must be passed, including a possible natural disaster relief bill and aid to Afghan refugees, and a plan to continue to provide the government after October 1. “Continuing resolution” of funding.

If it fails to reach an agreement on government funding, the United States may face the closure of federal operations at the same time as the debt ceiling crisis, which intensifies damage and destruction to the economy and the market.

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