Ice-cold calculation

The last major dispute over the US debt ceiling was in 2011. At that time the limit was 14.3 trillion dollars – now the 31.4 trillion mark is to fall. At the time, under Barack Obama, ten percent of federal civil servants were on unpaid leave. Their salaries were later paid back, it was paid special leave. However, the predicted collapse of the economy did not materialize.

On the contrary: In order to cause outrage at all, the White House organized chaos at the security checks at airports, which have the same importance for long-distance traffic in the USA as the ICE in Germany. Shortly after the debt ceiling was raised in 2011, rating agencies Egan-Jones and S&P downgraded their US credit risk rating from AAA to AA+ for the first time since 1860. In the statement, S&P specifically mentions the inability of the two major US parties to bridge their differences.

Republicans want to save, Democrats want to spend money

This time, too, both sides are insisting on extremes: the Republicans are calling for savings, while Joe Biden’s Treasury Secretary Janet Yellen wants to continue spending money without restrictions. Actually, the debt limit was already reached in January. Since then, the Treasury Department has been buying time with accounting tricks that would land private sector executives in jail.

Yellen’s current estimate puts June 1 as the “all tricks up” date because tax payments this year have come in lower than expected. In fact, the US is likely to remain solvent for longer. And in extreme cases, unpaid leave of absence for civil servants would remain as an emergency solution. The US would not be fully solvent either. Priorities should be set as to which payments are made and which are deferred.

Maturing government bonds could be refinanced through new issues, because that would not increase the debt level. Simply issuing additional securities to finance additional spending would be impossible. All expenses would have to be covered by income. It is unlikely that Yellen would actually take the risk of not repaying maturing bonds, but it is an effective threat in negotiations with the recalcitrant Republicans.

The Republicans have the upper hand

Biden could also resort to a controversial “constitutional trick”: the 14th Amendment of 1866 was supposed to force the Southern states to pay off the Civil War debts of the Northern states, but could now be “reinterpreted” to incur additional debt. Should the US President go down this path, the political circus surrounding the debt ceiling could turn into a serious constitutional crisis. The Republicans have the upper hand in the negotiations, because a five percent deficit in an economic boom is a sign of a lack of spending discipline.

For two years, the Democrats held majorities in the Senate and House of Representatives. If they were serious, this would have been the ideal time to abolish the debt ceiling. Even then it was foreseeable that Biden’s spending program would break through the limit before the elections.

But the political theater is ice-cold calculation and is now proving to be politically opportune: reports of payments recently made by Romanian letterbox companies to relatives of Biden during his vice presidency are being lost in the current scaremongering about a US national bankruptcy.

JF 21/23

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