Many scenarios are played out publicly and privately, but no one knows for sure. The possibilities ranging from kumbaya to economic chaos with many options in between.
So far, neither President Joe Biden nor House Speaker Kevin McCarthy, R-Calif Talks scheduled for Tuesday. Biden wants to raise the government’s $31.4 trillion legal borrowing limit to allow the federal government to continue paying its bills and remove the risk of a historic default. McCarthy and other GOP lawmakers want a deal that guarantees trillions of dollars in spending cuts before they sign off on raising the debt limit.
Time is of the essence: The Treasury Department is warning that the US could default as soon as June 1 if there is no deal.
A look at possible results:
LET’S AGREE
The President wants to disarm the whole debate by making Republicans publicly state that the US will not default. He would then be ready to discuss spending, taxes, and other budgetary issues.
He wants assurances from McCarthy that the US can continue to pay all of its bills by continuing to borrow. The president says he’s ready to hold a public debate with GOP lawmakers over the budget, just not if the world’s largest economy is being held “hostage.”
“Like I’ve been saying all along, we can have a discussion about where we’re saving, how much we’re spending, and how we can finally shift the tax system so everyone starts paying their fair share,” Biden said. “But not under threat of insolvency.”
It’s unclear how many GOP lawmakers share his definition of default. Some suggest a standard would apply only to unpaid debt, while the administration wants to include federal employee salaries, contractor repayments and others Help for the poor, veterans, schools and other.
Just before the House of Representatives narrowly passed legislation with $4.5 trillion in deficit cuts along the party line, McCarthy said the US would not default. But he still ties this issue directly to spending cuts in a way Biden wants to avoid.
“To address the debt, we need to come together, find common ground and cut spending,” McCarthy said last month. “Let me be clear: defaulting on payments is not an option, but neither is a future of higher taxes.”
REPUBLICANS HOLD UP
Republicans in Congress could stand firm, forcing Democrats to falter.
McCarthy has a narrow majority in the House of Representatives: 222 Republicans versus 213 Democrats.
His bill on the debt limit would reverse discretionary spending to 2022 levels and then cap future increases at 1%. The bill would also reverse Biden’s student-loan debt forgiveness, increased funding to the IRS, and tax incentives created in 2022 to encourage clean energy adoption. These cuts would extend the debt ceiling to March 31, 2024, or another $1.5 trillion.
GOP conservatives like South Carolina Rep. Ralph Norman and others say they will support nothing short of the bill that House Republicans passed by a 217 vote on April 27.
But Senate Majority Leader Chuck Schumer, DN.Y., will not let the Senate pass this bill. Neither does Biden. The question as the deadline nears is whether Republicans will stay united, and that’s causing Democrats to back down. There is also a risk that disagreements within the GOP faction could jeopardize McCarthy’s speakership, which could then make it even more difficult to reach an agreement.
The question is what kind of agreement might come through the House, Senate and Oval Office.
GET AN EXTENSION
Washington loves to procrastinate — the old “kick the can down the road” routine.
There is a possibility that lawmakers will agree to a short-term extension, pushing the debt limit expiration to September 30, if a federal budget also needs to be passed.
This would be in line with the GOP’s efforts to synchronize the budget debate with the debt ceiling while removing the immediate risk of default. It’s the option government officials are generally most optimistic about in private.
Still, Hakeem Jeffries, the leader of the House minority, tried to throw cold water on the idea in a Sunday interview with NBC News.
“I don’t think kicking the can out on the street is responsible,” Jeffries said, while prioritizing the importance of avoiding a default.
MARKETS GO CRAZY
Wall Street could save the day by suffering a meltdown.
Along with economists, Senate Budget Committee Chairman Sheldon Whitehouse, DR.I., has hinted that a hard market sell-off could force Republicans to retreat. Your donors would roar about the financial losses to come, giving every legislator an incentive to be the hero and save the jobs and pensions of millions of Americans.
Joe Brusuelas, chief economist at the consultancy RSM USA, said in an email Monday that talk of a potential default is already making it more expensive for investors to insure US Treasury bonds. But the panic has so far been largely contained by the broader stock market, which many voters and lawmakers are following.
14. MODIFICATION
Biden could play the constitution card.
The 14th Amendment became part of the Constitution after the Civil War. It states that the “validity of the United States public debt authorized by law … shall not be questioned.”
Laurence Tribe, a law professor emeritus at Harvard University, wrote in the New York Times on Sunday that Biden can argue that he has a constitutional duty to avoid defaulting on his debts and can therefore exceed the debt limit by those set by Congress to continue approved expenses. On Monday, a union of civil servants s Treasury Secretary sued Janet Yellen and Biden, arguing that they were constitutionally required to ignore the debt limit.
As a former senator, Biden likes to dodge Congress. But when he pushed to invoke the 14th Amendment last week, he kept his options open.
“I’m not ready yet,” he told MSNBC.
Sen. James Lankford, R-Okla., said Biden cannot act unilaterally. He told ABC News that the Constitution “is very clear that spending — all these details about spending and money actually have to get through Congress.”
MATCH A COIN
This is one of the many creative – and unlikely – solutions floating around the internet. The idea is that the government could coin a $1 trillion platinum coin and use it to avoid failure. There is basically a loophole in the law that could allow the US to mint a coin of any denomination if it is platinum.
That has at least one big problem: Yellen dismissed the idea in a January interview with the Wall Street Journal, calling it “something that’s a gimmick.”
DEFAULT
This is the scariest possibility.
If there is no agreement, the US government could reach its “X-date” – the moment when it can no longer pay all its bills. The Treasury would no longer be able to use accounting strategies to keep the government open. If the government could no longer borrow, unpaid bills would rise and the government would default.
But, but, but… not all presets are created equal.
The US could briefly miss some payments, and the risk of things getting worse could push lawmakers to reach a deal. But even a “brief” default would cost the economy 500,000 jobs, according to a White House analysis. A “prolonged” default would cost 8.3 million jobs, almost as many jobs were lost as during the 2008 financial crisis, the analysis said.
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