Answered Questions The keys to the debate on the 'debt ceiling' and the fear of US default

In the United States, the General State Budgets are not tested in Congress in one go, as in most of the world, but 'little by little'

Answered Questions The keys to the debate on the 'debt ceiling' and the fear of US default

In the United States, the General State Budgets are not tested in Congress in one go, as in most of the world, but 'little by little'. On top of that, for 106 years there has been a system under which Congress has to set the maximum debt ceiling. What at first was a measure that made the budget process more flexible in the middle of the First World War has ended up becoming a political show as the Republican Party has been using it, since the Obama Presidency, to wear down presidents politically democrats.

It is, basically, taking the economy hostage to demand that the Democrats make spending adjustments that Republican presidents never do. Now we are in one of those situations, but with an unexpected twist: Republicans are so divided that it is not clear that the agreement they themselves have reached with Joe Biden will pass today. Meanwhile, the two main candidates of that party in the 2024 elections, Donald Trump and Ron DeSantis, defend the most intransigent thesis: voting "no", even if that means leading the United States - and, with it, the world - to the abyss. economic.

Nobody knows it for sure. Republicans have 222 seats; Democrats, 213. That means only eight Republicans can vote against the Biden-McCarthy deal, assuming all Democrats show up and all vote against the plan. Last night, about a dozen Republican representatives continued to publicly maintain their opposition. But McCarthy insisted that he had the necessary backing.

Are you a masochist? Why are you asking those questions? A US default would be a crisis of colossal proportions. The world economy would collapse, because the US Treasury bond market is the deepest and most liquid in the world, to the point that in practice it is like holding dollars.

And, furthermore, there would be a huge legal mess about who Washington would stop paying first (bondholders? retirees? soldiers? civil servants? the unemployed? state contractors?). In principle, Washington would give priority to payments to bondholders, more than anything to avoid the total and utter collapse of the United States and, with it, the world, but that would mean that more and more internal programs - from the surveillance of the national parks to pensions - would be progressively suspended.

And, if the US finally defaulted on its bonds, there would be a positive: we would stop having to worry about inflation and, possibly, even work, because the Earth's economy would collapse. It would be, yes, the peace of (economic) cemeteries. Carl Honoré would have achieved his dream.

Yes. But that would not please the 'Freedom Caucus' at all.

At first, swallow your pride. And then ask for McCarthy's head with a vote of confidence against him. There it is possible that he was successful. The result would be chaos, because it seems unlikely that any other Republican could have the necessary votes from his co-religionists to have the Presidency of the House. In practice, the United States Legislature would be paralyzed by the internal Republican war.

There are 50 Democratic senators and 50 Republicans, with the vice president, the Democrat Kamala Harris, exercising the vote in the event of a tie. But there is a considerable group of Republicans - starting with the leader of that party in that chamber, Mitch McConnell - who support the agreement.

Choosing the winner between Biden and McCarthy is more complicated, but what is clear is that the 'Freedom Caucus' has lost. His proposal to freeze spending that is not defense or programs that are indexed to inflation -basically Health and pensions- for ten years is not going anywhere. The same has happened with his project to allow the debt to rise only until March 2024, in which case Biden was going to find himself with a new negotiation on the same matter but this time in the middle of the electoral campaign for his re-election.

For Biden, the defeat is that he had said that he was not going to negotiate. And in the end he has done it. The contraction of spending in pre-election and electoral years is also a problem, because it can slow down the economy although, in exchange, it may stop the escalation of inflation.

If you look at the fine print, the loser is McCarthy. The spending cuts are not only symbolic, but many are also tricky. The Treasury budget slowdown, for example, may start to be undone by Biden in 2024. Many of the provisions will expire in 2030, literally another geological era for the times of politics. Even between 2024 and 2030 there will be infinite occasions to change everything that has been signed.

Because the president is a Democrat and the Republicans control one chamber of the Senate. George W. Bush raised the debt ceiling six times in his eight-year term. On three of those occasions, the Democratic Party controlled both houses of Congress, but voted in favor without preconditions. Obama did it four times; in three of them, the Republicans came close to forcing a default. Under Trump, the debt ceiling was raised three times; again, Democrats did not object. Now, with Biden, it has returned to the Obama situation.

These are the main points:

1) The debt limit is suspended until January 2025. It does not say when, which will be a mess then, since it is not the same on January 1, when the Congress that has come out of the elections has not yet been constituted November 2024, nor has the winner of the presidential elections been sworn in, that on the 21st, when the Chambers and the new president - or Biden, if he is re-elected - have already been sworn in.

2) Public spending grows 0% in fiscal year 2024, which begins next October 1, and only 1% in the following year. In practice, discounting inflation, this means a fairly considerable reduction in spending by the federal State, around 4% this year and 2% or 3% next year.

3) In 2024, defense spending grows as requested by Biden, to a total of 886,000 million dollars (828,000 million euros).

4) In the US, one in six citizens needs help from the federal State to eat, in the form of coupons. The agreement slightly toughens the requirements to access this aid in the case of people between 49 and 54 years of age who do not have dependents. But it also relaxes them for young people, the 'homeless' and war veterans.

5) Joe Biden manages to keep his proposal to increase health care for the 18 million war veterans in the US intact, despite the initial rejection of the Republicans.

6) The US Treasury, which was going to have an increase of 80,000 million dollars in 10 years to fight tax fraud, which is very high in the country, will have to settle for a 60,000 million increase in its budget.

7) Some 30,000 million dollars of aid against Covid-19 that had not been spent will be allocated to other items, which will allow spending to be reduced.

8) The moratorium in place since the beginning of the Covid-19 on the payment of the debt contracted to pay for university studies will end in August, and will not be extended ad calendas graecas, as Biden wanted. It must be borne in mind that in the US the average graduate finishes his degree with a debt of $30,000 (28,000 euros). In fact, there are thousands of retirees who are deducted each month for the portion of student loans they still owe and who, literally, have been paying their entire lives.

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