Will there be a happy ending?
On January 19, it was recorded that the U.S. government's borrowing limit is exhausted. America has long been living in debt. Debts of companies and banks, citizens and the government are growing. The federal budget is chronically unbalanced, with expenditures exceeding revenues. The budget deficit is being covered by borrowing (mostly with loans in the form of U.S. Treasury bonds). The national debt is growing.
At the beginning of the twentieth century the national debt of the United States was measured in billions of dollars. In 1910, for example, it was $2.7 billion; in 1920 it was $26.0 billion. In 1981, the debt surpassed $1 trillion for the first time. As of December 31, 2020, the national debt reached $26 trillion, and on January 19, the debt reached $31.4 trillion and hit the ceiling.
The debt ceiling refers to the cap on the amount of public debt determined by the U.S. Congress. The U.S. Congress has considered the debt ceiling issue more than a hundred times. According to the U.S. Treasury Department, it has been reconsidered 79 times since 1960 alone.
For four months now, passions have been raging in the U.S. over the debt ceiling and the need to raise it. The essence of heated discussions is simple: the Democrats demand an automatic increase of the ceiling, and the Republicans set their own conditions for the increase. The most important demand is the establishment of some kind of limits on budget expenditures.
Many observers have begun to perceive the discussions in the U.S. Congress on the debt ceiling as a spectacle. They have stopped worrying as much as they did in, say, the 2000s, realizing that the show will surely have a happy ending. Treasury Secretary Janet Yellen said that the show should end on June 1.
Today, the majority in the lower house of Congress is Republican. As usual, they are trying to get their Democratic opponents to support them on the issue of setting budget spending limits. This time, however, they failed to reach a consensus. President Joe Biden got involved in the issue. The White House held talks with congressional Republicans on May 19, but they also failed. Kevin McCarthy, the Republican speaker of the House of Representatives, said it was time to put negotiations on pause, and the White House acknowledged that there were "real differences."
Most experts are inclined to believe that Congress will decide to raise the debt ceiling after all. And it may happen on the last day of May. This scenario has a 90% chance of happening. And the remaining 10% could mean a sovereign default. The most serious consequence for America as a great power then would be a plummeting U.S. dollar.
However, there is another scenario within the 10 percent. On May 9, Biden said he was studying the possibility of preventing a default without congressional approval. According to some experts, the 14th Amendment to the U.S. Constitution allows this to be done. However, such a move could lead to lengthy litigation. "It would be a constitutional crisis," Janet Yellen said in response to a question about whether Biden could raise the national debt ceiling by unilateral decision. But of two evils, a default is probably scarier than a constitutional crisis. "Defaulting on U.S. obligations would lead to economic and financial disaster," the Treasury chief stressed.
So three possible scenarios loom ahead: 1) there is an American sovereign default because no decision will be made to raise the debt ceiling; 2) there is no sovereign default, the president himself will decide on the ceiling, but in this case there will be a constitutional crisis; 3) there is no sovereign debt because Congress does decide to raise the ceiling.
The third option is a happy ending. Can this be considered the happy end of the show? It turns out that it can't. The consequences for America will be very sensitive.
On May 19, many American media started talking about these consequences. And almost all of them referred to the assessment by Ari Bergmann, American expert and founder of Penso Advisors, a strategic management and risk management consulting firm. Let me explain in simple terms what he is saying. The U.S. Treasury Department's bank accounts have all zeroed out, or "dried up." Once eligible to issue new tranches of Treasury securities, the ravenous Treasury would throw up to $1 trillion worth of bonds on the market. At the current key rate of the Federal Reserve, the interest on Treasury securities will be very attractive, and the demand for new tranches of securities will also be high. To buy the securities would require a large amount of dollar cash, which would be pumped from various sectors of the U.S. economy into U.S. Treasury bank accounts (primarily those opened at the Federal Reserve). The effect of such operations may well be called "quantitative tightening". The Federal Reserve has taken dollars out of the U.S. economy before, but in small portions. And after the debt ceiling is raised, the withdrawal will be very large-scale.
Many U.S. media outlets quote Bergmann as saying: "What worries me most is that when the debt ceiling issue is resolved - and I think it will be - you will face a very, very deep and sudden liquidity drain ... And we've already seen that this drop in liquidity has a really negative impact on high-risk markets like equity and credit markets."
The U.S. economy is on the verge of a serious downturn. Any event could trigger it. And raising the national debt ceiling could be the trigger that triggers an economic crisis in the U.S. For example, in late June or July.
By Valentin KATASONOV.
Professor, Doctor of Economics, Chairman of the S.F. Sharapov Russian Economic Society
