| Hello, hello, welcome back to the World Weekly. The US Treasury secretary has warned that the US is running out money to pay its bills. This week we are discussing what this means and what happens if the US defaults?  US President Joe Biden has invited the top four congressional leaders to the White House for discussions on the budget on Tuesday. (AFP) US dances with default In the US, Republicans and Democrats disagree on most issues, including financial ones like the debt ceiling. Republicans want spending cuts in exchange for raising the debt ceiling. Democrats and President Joe Biden have insisted on a clean debt ceiling increase. Time is running out. On Monday, US Treasury secretary Janet Yellen warned that the government could run out of money to pay its bill as early as June. This is a much faster timeline that anticipated earlier. Let’s look at what that means. The debt ceiling is simply a limit on how much money the US government can borrow through Treasury securities (bills, savings bonds) to fund the government and meet its financial obligations. This includes, but is not limited to, social security programmes (pensions, disability), Medicare (the federal health insurance programme for people over 65 and with certain disabilities) and, foreign aid. The budget and cap on borrowing are both decided by the US Congress. The US already reached its current borrowing limit of $31.381 trillion on January 19.The development went largely unnoticed as a result of extraordinary measures taken by the Treasury to continue paying the bills and avoiding default. But that has only delayed the inevitable till June. Polarized politics In the House of Representatives, the lower chamber of Congress controlled by Republicans, lawmakers narrowly passed a bill to reduce government deficit by $4.8 trillion over 10 years. Republicans say the budget’s current path is unsustainable. The US national debt crossed $31 trillion for the first-time last year. Their bill proposes adding work requirements to Medicaid disbursement, as well as expanding them for the food stamp and the Temporary Assistance for Needy Families programmes. It also proposes, among other things, cuts to Biden’s Inflation Reduction Act (including spending on the environment and transportation etc.) The bill has no chance of passing the Democrat-controlled Senate. Democrats say they are willing to discuss spending, but that is a separate discussion. But with the looming deadline, the bill is essentially holding government hostage. Passing it would suspend the current borrowing limit till March 31, 2024, or until by another $1.5 trillion, whichever comes first. On Tuesday, the White House said it will not negotiate on the debt ceiling extension. “Happy to meet with McCarthy but not on whether or not the debt limit gets extended,” Biden told reporters last week. “That’s not negotiable.” And meet he will. Biden has invited the top four congressional leaders – House Speaker Kevin McCarthy, Senate Majority Leader Chuck Schumer, House Minority Leader Hakeem Jeffries, and Senate Minority Leader Mitch McConnell – for discussions on the budget on Tuesday (May 9). The invitations were made public after a letter from Yellen to lawmakers said tax receipts in April were less robust than expected and warned of a default by June 1 if Congress doesn’t raise or suspend the debt ceiling.  US Speaker of the House Rep. Kevin McCarthy (R-CA) speaks to the media at the US Capitol on April 26, 2023 in Washington, DC. The US House voted and passed a bill raising the nation's debt ceiling. (AFP) Where’s the fire? There’s a long way to consensus between the two parties, and Tuesday’s meeting seems less than optimistic. So, the main question is what happens if the US defaults on its debt? Well, we can’t really be sure since it hasn’t happened before, even though it has come close to it. Still, a default would be bad news, in the US and abroad. At home, the government’s inability to pay its bills could result in millions of job losses and businesses left bankrupt. Financial markets could crash. Among other things, it could result in a loss of confidence in the US economy and financial system, likely leading to increase in the interest rate that investors demand to hold US Treasury debt, making it more expensive for government to borrow money in the future to service its debt (By at $1.3 billion, analysts say). That could potentially force the government to raise taxes and cut spending. The sell-off of US assets and a decline in the value of the US dollar are also possible outcomes. That in turn could result in even higher inflationary pressures, a fall in economic growth and increased volatility in financial markets. In 2011, a similar situation led to credit agency S&P to downgrade the country’s ratings for the first time. A US default also has consequences abroad. US Treasury bonds, a safe haven asset, are held by governments (even in India and China), institutions and individual alike. There’s a chance other countries could see their national debts rise – engendering a broader crisis in the global financial system. Oil prices sank about 5% to a five-week low and Wall Street’s main indexes fell on Tuesday after Yellen’s warning. This comes as the world economy is already dealing with the fallout from the pandemic, the war in Ukraine and the US banking crisis (kicked off by one of the biggest bank collapses since the 2008 financial crisis). The US Federal Reserve followed by the European Central Bank on Thursday announced a quarter point 25 basis points in the fight to bring inflation down. In light of this, it is imperative that the US avoids a default at any cost. A secret plan If things get especially dire, House Democrats say they have been working on a secret plan since January. The plan, revealed on Tuesday, involves a discharge petition, which would allow them to force a floor action on legislations which is supported by a majority of the lawmakers but opposed by the Speaker (McCarthy). “A dangerous default is not an option,” Jeffries wrote in a letter to Democrats on Tuesday. “Making sure that America pays its bills – and not the extreme ransom note demanded by Republicans – is the only responsible course of action.” Unfortunately, the plan still requires some Republican lawmakers to break ranks and back it. In the current climate, that seems highly unlikely. As Tuesday’s meeting approaches, there are two options on the table. Either the debt ceiling can be suspended, meaning the government can continue to borrow money without any limit, or it can be raised, the likelier of the two outcomes. The debt ceiling has been raised 78 times since 1960 of which 49 were under a Republican president and 29 times under a Democrat.However, neither of the two solutions deal with the underlying fiscal problems (rising spending and falling revenues) or the unnecessary politicization of the issue. That's all for this week, folx. If you have any suggestions, feedback, or questions, please write to me at sanya.mathur@hindustantimes.com | 
