Why the U.S. debt ceiling fiasco epitomizes the country's political dysfunction

Source: Xinhua| 2021-10-09 21:20:49|Editor: huaxia

-- The U.S. Senate has approved a bill to extend the debt ceiling through early December after Democrats and Republicans reached a deal to stave off economic disaster.

-- But with an extension lasting mere weeks, the debt ceiling drama is expected to resume at a later date.

-- Experts say the United States still faces the real possibility of defaulting, which could drag the country into another recession and send shock waves through global financial markets.

by Xinhua writers Xiong Maoling, Gao Pan

WASHINGTON, Oct. 9 (Xinhua) -- After weeks of trading blames and playing a game of chicken, U.S. lawmakers have agreed to increase the nation's borrowing limit in the short term to avert a looming debt default. An economic catastrophe seems to have been avoided, for now.

But with an extension lasting mere weeks, the debt ceiling drama is expected to resume at a later date. Experts say the United States still faces the real possibility of defaulting, which could drag the country into another recession and send shock waves through global financial markets.


The U.S. Senate on Thursday night approved a bill to extend the debt ceiling through early December, after Democrats and Republicans reached a deal to stave off economic disaster, following weeks of partisan fighting over the issue.

The agreement came as the Congress faces an Oct. 18 deadline to take action. U.S. Treasury Secretary Janet Yellen recently warned that lawmakers have until this date to raise or suspend the debt limit before the federal government will likely run out of cash and extraordinary measures and the United States is expected to default on the national debt.

U.S. Treasury Secretary Janet Yellen testifies during a Senate Banking, Housing, and Urban Affairs Committee hearing in Washington, D.C., the United States, Sept. 28, 2021. (Matt McClain/Pool via Xinhua)

"The Senate has passed an extension of the debt limit avoiding a first-ever, Republican-manufactured default on the national debt," Senate Majority Leader Chuck Schumer said in a tweet.

Senate Minority Leader Mitch McConnell, however, said in a letter to President Joe Biden that he will not provide "such assistance" again if his "all-Democrat government" drifts into another "avoidable crisis," adding that the Democrats had three months' notice to handle the issue.

McConnell has repeatedly argued that Democrats should deal with the debt limit crisis on their own, since they control both chambers of Congress and the White House, while complaining about Democrats' lack of bipartisanship in crafting major spending bills.

"If they want to tax, borrow, and spend historic sums of money without our input, they will have to raise the debt limit without our help," McConnell said earlier.

Democrats, however, noted that raising the debt limit does not authorize new federal spending, but only allows the Treasury Department to borrow additional funds to cover expenditures that have already been approved by Congress, including COVID-19 relief bills and the tax cuts rolled out during the previous administration of President Donald Trump.

Photo taken on Sept. 22, 2021 shows the U.S. Federal Reserve in Washington, D.C., the United States. (Xinhua/Liu Jie)

Earlier this week, Biden lashed out at Republicans for threatening to use a procedural power called the filibuster to block Democrats' efforts, calling it "hypocritical, dangerous, and disgraceful."

McConnell, meanwhile, accused Democrats of choosing to pursue "staggering," "transformational" spending through an unprecedented use of the party-line reconciliation process, which only requires a simple majority in the 50-50 split Senate to pass legislation, instead of the usual 60 votes, meaning they can approve a measure without Republican support.

The Republican leader had proposed that Democrats should use the reconciliation process to raise the debt limit, but Democrats dismissed the choice given that this approach takes time and could be risky.

"The threat of a U.S. default has always made Congress ultimately agree on a deal to raise the debt limit. However, increasing political polarization and consequent brinkmanship have made a default a very real possibility in recent years," Roger W. Ferguson Jr., a distinguished fellow for international economics at the Council on Foreign Relations, wrote in a recent article.

Maya MacGuineas, president of the watchdog Committee for a Responsible Federal Budget, argued that paying the nation's bills should not be a partisan issue, urging Congress to address the debt ceiling as soon as possible.

"Both parties are responsible for our rising debt, which has grown more than 6.4 trillion (U.S.) dollars over the last two years," MacGuineas said. "Neither party can credibly claim the debt is solely the other party's fault or the other party's responsibility."

"You don't play chicken with the full faith and credit of the U.S. government; not now, not ever," she said.


As lawmakers hold debt ceiling increases hostage for political gain, investors are struggling to measure the risks amid prolonged uncertainty.

Economists have warned that a U.S. debt default would set off dire consequences both at home and abroad, and could even induce a global financial crisis and recession.

A trader works at the trading floor in the New York Stock Exchange in New York, the United States, Sept. 20, 2021. (Xinhua)

"Because the United States has never defaulted on its obligations, the scope of the negative repercussions of not satisfying all federal obligations due to the debt limit are unknown; it is expected to be widespread and catastrophic for the U.S. (and global) economy," economists at the White House Council of Economic Advisers said in a blog post earlier this week.

"GDP (gross domestic product) would fall, unemployment would rise, and everyday households would be affected in a number of ways -- from not receiving important social program payments like Social Security or housing assistance, to seeing increased interest rates on mortgages and credit card debt," the economists said.

If the impasse over the debt limit lasts through all of November, the Treasury will have no choice but to eliminate a cash deficit of approximately 200 billion dollars by slashing government spending, equal to more than 10 percent of GDP, a recent analysis by the Moody's Analytics showed, cautioning that the downturn would be "comparable" to that seen during the financial crisis.

That means real GDP would decline almost 4 percent peak to trough, nearly 6 million jobs would be lost, and the unemployment rate would surge back to close to 9 percent, according to the simulations. Stock prices would be cut almost in one-third at the worst of the sell-off, wiping out 15 trillion dollars in household wealth.

White House economists also argued that since U.S. Treasuries are the global benchmark safe asset, a default would likely cause a financial crisis and recession.

According to the Securities Industry and Financial Markets Association, a trade group of broker-dealers and investors, as of the second quarter, the Treasury market had grown to more than 21 trillion dollars, with about 29 percent held by foreign investors, and the rest by institutions and individuals such as the U.S. Federal Reserve, U.S. banks, pension funds and mutual funds.

Photo taken on Sept. 30, 2021 shows the U.S. Capitol building in Washington, D.C., the United States. (Xinhua/Liu Jie)

Ferguson at the Council on Foreign Relations warned that should a default occur, the credit rating of the United States would be downgraded "drastically," and the ultra-low interest rates that the Treasury pays on its bonds to raise money -- which reflect their status as the world's safest investment -- would rise "sharply," triggering a spike in overall interest rates in the United States and around the world, and potentially causing a recession.

"The mounting political brinkmanship over the debt limit is thus painful to watch," said Mark Zandi, chief economist of Moody's Analytics.

"If lawmakers are unable to increase or suspend the debt limit before the Treasury fails to make a payment, the resulting chaos in global financial markets will be difficult to bear," Zandi said.

He added that the United States and the global economy, still reeling from the impact of the pandemic, will descend back into recession. (Video reporters: Xiong Maoling, Gao Pan; video editors: Hong Liang, Zhang Yuhong)