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Washington
CNN
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House Republicans insisted on spending cuts before agreeing to raise the nation’s debt ceiling to more than $31 trillion.
Democrats argue that Congress has already spent the money and should be allowed to pay America’s debt holders without an embarrassing and economically damaging default.
President Joe Biden returned early from a trip to Asia to restart negotiations with House Speaker Kevin McCarthy, a California Republican.
The clock is ticking on a US default, but it’s not entirely clear when the US will officially run out of money. It’s also unclear what a potential deal would look like to avoid an early default.
You’ll be hearing a lot more about this in the coming days as the country grapples with the previously unthinkable: US lawmakers failing to agree to pay off the nation’s debts. Economists and government officials say it is a financial disaster of untold proportions.
Some Republicans, who have changed their majority in the House, argue that the country must make tough choices regardless of the outcome. Democrats, on the other hand, don’t want to give up some of the spending they enacted in 2022, when they have the majority.
The size of the debt is staggering, but failure to allow the government to cover its spending will send the US economy into a tailspin and ultimately jeopardize Social Security and government checks that millions rely on. Americans.
Debt, which is largely owned by the public, pension funds, insurance companies and, to a lesser extent, foreign governments, is considered a safe form of investment and an important backbone of economy. If America fails to pay its debt holders on time, that trust could be destroyed forever.
If you haven’t been following the debt drama, here are the answers to some questions to get you up to speed.
It’s a moving target.
The U.S. actually exceeded its borrowing authority in January, but Treasury Secretary Janet Yellen authorized “extraordinary measures” — essentially cash transfers — to give lawmakers time to act.
He said the extraordinary measures would expire as soon as June 1, but third-party estimates suggested it could take weeks or even months.
The government receives and spends every day. It also needs money from the public debt it sells to cover expenses.
The Treasury Department publishes a daily balance sheet. On Thursday it showed an operating cash balance of $57 billion, including billions in deposits — everything from income taxes and Medicare premiums to the foreign military sales program — and $205 billion in cash. from debt.
CNN’s Tami Luhby writes that if the US can slow down until mid-June, the expected infusion of estimated tax payments could push back the so-called X date until later in the summer. Treasury officials may not even know until a day or two before the X date occurs.
In April, House Republicans passed a bill to raise the debt ceiling paired with unspecified requirements for spending cuts, to offset climate change-related spending championed by Democrats and impose new federal work requirements for Medicaid recipients, and more.
The one-sided bill was a nonstarter for Democrats, who ignored it in the Senate. But it proves that the Republicans can be united and is seen as a kind of opening bid in the negotiations.
Negotiations really began in early May, when McCarthy and Biden met at the White House.
Staff-level discussions between the White House and congressional Republicans continued Sunday night after Biden and McCarthy spoke on the phone in the afternoon, according to a White House official. Biden and McCarthy will meet on Monday, the official added.
No. Just as Democrats generally oppose spending cuts, Republicans generally oppose tax increases. Along with the increase in government spending, cutting tax rates plays a key role in this story.
Almost every economist and policymaker agrees that a continued default would have catastrophic consequences for the U.S. economy and for the many millions of Americans who rely on Social Security, Medicare, government paychecks or welfare assistance. government.
The stock market can lose a large portion of its value when investors fear instability.
But a default of a day or two might not be that dire, especially if there isn’t any disruption to government services.
Related: Here’s how we know a US default would be an economic disaster
Any default has consequences. If investors no longer trust the US government to pay its bills, the government’s cost of borrowing money could rise — especially if credit rating agencies downgrade America’s good credit rating. . That’s what happened in 2011 before the last significant break in the debt ceiling, which increased the amount America had to pay to pay off its debt obligations.
Some Republicans have already suggested that a short-term default would not be catastrophic.
It’s not entirely clear if Social Security payments will be delayed immediately.
The Treasury Department has to make tough choices about which bills to pay. It does not set out a specific plan for what happens after a default.
The consequences can cascade and compound as a default continues.
Related: 5 ways a loan default can affect you
No. And this is a very important point. Any deal announced by negotiators must be passed by the House and Senate. That takes time, so an agreement must be reached before June 1 to avoid the June 1 X date. McCarthy argued that this past week was the real, functional deadline.
There’s also a real question whether House Republicans will pull together any deal McCarthy makes.
His position as speaker is tenuous and if he agrees to a bill acceptable to Democrats, he could face a revolt by conservative Republicans. Anything that passes the House must get support from a majority of Republicans there.
The debt limit exists because of laws dating back to the 1930s. There is a compelling argument that subsequent legislation – the Budget Act of 1974 – gave Congress specific powers over the federal budget and made the debt ceiling double, essentially negating it.
But that’s an untested legal theory. Currently, Republicans will get two opportunities to make cuts, with the debt ceiling and the normal order of passing a budget and spending bills.
Democratic senators, former President Bill Clinton and some prominent legal experts have argued that Biden has the power to raise the debt ceiling himself if he wants to.
This much-discussed final run-around in the standoff was Biden’s invocation of the 14th Amendment, which was ratified in 1868, and ordered the Treasury Department to continue funding spending already authorized by Congress.
Section 4 of the 14th Amendment reads: “The validity of the public debt of the United States, authorized by law, including debts incurred for the payment of pensions and gratuities for services in the suppression of insurrection or rebellion, cannot be asked.”
While Biden didn’t rule out the idea of invoking the 14th Amendment, he said that because that avenue hasn’t been tried in the courts either, there’s no time to do so for this standoff. Read more about the 14th Amendment and the debt.
Not yet, apparently.
Market experts think a default would destroy the financial system. But the immediate reaction will be muted if investors do not identify a safer option for the treasures.
