Washington courts have a debt limit catastrophe standing at the precipice, albeit in the middle of the game

Washington courts have a debt limit catastrophe standing at the precipice, albeit in the middle of t ...

WASHINGTON, Sept 29 A confrontation between President Joe Biden's Democrats and Republicans is threatening to result in a financial and economic meltdown if Congress fails to act by about Oct. 18, when the Treasury Department expects to run out of cash to cover its costs.

Over the previous decade, this type of brinksmanship has become a typical characteristic of US politics. But the familiar battle birges the world's largest economy' fatal dangers if it failed to pay its debts.

WHY DOES THE DEBT CEILING BE CATASTROPHIC?

Washington will only have new tax receipts for paying its bills once it takes the $28.4 trillion borrowing limit. Because it currently borrows more than 20 cents for every dollar it spends, the Treasury would start missing payments owed to money lenders, citizens, or both.

Shockwaves would ripple through global financial markets as investors question the value of US bonds, which are key components for the globe's financial system.

As the government missed payments on everything from Social Security payments for the elderly to soldiers' salaries, domestic spending cuts would push the United States economy into recession. A financial crisis would only aggrave the economic problems, and economists believe millions of Americans would lose their jobs.

WASHINGTON DOES NOT HAVE OPTIONS?

Most experts say the most straightforward option would be to abolish the borrowing limit altogether.

The debt ceiling was first introduced in 1917, and it evolved from an occasional political football in the late 20th century to a full-blown crisis in 2011, when political dysfunction nearly caused obliviousness to default.

Some observers claim that the debt ceiling itself violates the United States Constitution. However, if the Biden administration reacted to that argument, the court battle would result.

While the administration has not stated what it will do if the borrowing limit isn't raised, the U.S. Treasury's 2011 financial plans offer a baseline scenario. During that year's political crisis, the plan prioritized paying financial market creditors to stave off a debt default while lowering sharply on the government'' other spending obligations, which would include social welfare payments to the old, sick, and indigent, during that fiscal year.

ARE INVESTORS ALREADY SPOOKED?

They may just start. Despite recent warnings from Federal Reserve and Treasury officials, market reaction to the political impasse has been subdued. The Standard & Poor's 500 stock index (.SPX) dropped more than 2% on Tuesday, in part because of debt ceiling concerns, but rebounded slightly on Wednesday. Investors believe Biden's Democrats will resolve the problem, according to Bien'S Democrats.

Despite this, the market for Treasury bills has a slew of remorse. Investors are now demanding higher yields for Treasury bills due in one month compared to bills scheduled in three months, according to Michael Purves, chief executive of Tallbacken Capital Advisors in New York, in a research note on Monday that investors are currently requiring higher returns for debts due out of three month because the latter "presumably won't be burdened by default risk."

Certain investors are concerned that the government may miss payments for a long time.

HOW BAD DID IT GET IN 2011?

The S&P 500 plunged about 20% during the 2011 debt ceiling crisis, which pitted former President Barack Obama's Democrats against the right-wing Tea Party faction of Republicans. It resurfaced, but investors were irritated, and the Standard & Poor's credit rating agency spotted U.S. politicians on alert, lowering America''S credit score for the first time in history.

What ABOUT MINING A GIANT COIN?

In the 2011 crisis, the Treasury was required to mint a $1 trillion commemorative coin, which was dominated by policy wonks. Officials would deposit the coin at the Federal Reserve and utilize the funds to pay government bills, avoiding default. President Obama later acknowledged his administration discussed the idea, and Senate of Representatives Speaker Nancy Pelosi said on Tuesday that Rep. Jerry Nadler of New York was also introduced to the issue. Biden's White House rejected the idea earlier this month.

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