Many scenarios are being played out in public and private, but no one is certain. The possibilities from kumbaya to economic chaos with many possibilities in between.
So far, neither President Joe Biden nor House Speaker Kevin McCarthy, R-Calif., has come forward speeches scheduled for Tuesday. Biden wants to increase the $31.4 trillion legal limit on government borrowing, so the federal government can keep paying its bills and avoid 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 short: The Treasury Department has warned that the US could default on June 1 without a deal.
A look at the potential outcomes:
LET’S AGREE TO TRY
The president wants to defuse the entire debate by making the Republicans a public commitment that the US will not default. He is ready to discuss spending, taxes and other budget issues.
He wanted an assurance from McCarthy that the US could continue to pay all its bills by having the ability to continue borrowing. The president says he’s willing to have a public debate with GOP lawmakers about the budget, not just the world’s largest economy being held hostage.
“As I said before, we can debate where to cut, how much to spend, how to finally move the tax system where everyone starts paying their fair share,” Biden said. “But not under threat of default.”
It’s unclear how many GOP lawmakers share his definition of default. Some have proposed that a default apply only to unpaid debt, while the administration wants to include federal workers’ wages, contractors’ payments and help the poor, veterans, schools and so on.
Before the House narrowly passed a bill with $4.5 trillion in deficit savings along party lines, McCarthy said the US would not default. But he still linked that issue directly to spending cuts in a way Biden wants to avoid.
“Resolving the debt requires us to come together, find common ground, and cut spending,” McCarthy said last month. “Let me be clear: Defaulting on our debt is not an option, but neither is a future of higher taxes.”
THE REPUBLICANS ARE TIGHTENING
Republicans in Congress will be strong and force Democrats to falter.
McCarthy has a slim majority in the House: 222 Republicans, compared to 213 Democrats.
His debt limit bill restore discretionary spending to 2022 levels, then put a 1% cap on increases going forward. The bill would also restore Biden’s student loan forgiveness, his additional funding for the IRS and the tax incentives created in 2022 to encourage the adoption of clean energy. The cuts would extend the debt limit through March 31, 2024, or up to an additional $1.5 trillion.
GOP conservatives like South Carolina Rep. Ralph Norman and others said they would not support anything less than the bill passed by House Republicans on April 27 with 217 votes.
But Senate Majority Leader Chuck Schumer, DN.Y., will not allow the bill to pass the Senate. Neither is Biden. The question as the deadline approaches is whether Republicans will stay united and that will cause Democrats to cave. There is also the risk that dissent within the GOP caucus could jeopardize McCarthy’s speakership, making reaching an agreement even more challenging.
The question is what kind of agreement will get through the House, the Senate and the Oval Office.
GET AN EXTENSION
Washington wants to stop things – the old “kick the can down the road” routine.
There is a possibility that lawmakers could agree to a short-term extension, pushing the expiration of the debt limit until Sept. 30, when a federal budget must also be passed.
This is in line with the GOP’s effort to sync the budget debate with the debt limit, while also removing the immediate risk of a default. This is the choice of government officials who usually discuss privately with the most optimistic.
However, House Minority Leader Hakeem Jeffries tried to pour cold water on that idea in an interview Sunday with NBC News.
“I don’t think the responsible thing to do is to kick the can down the road,” Jeffries said, although he emphasized the importance of avoiding a default.
THE MARKETS ARE GOING CRAZY
Wall Street saves the day, sort of, through a meltdown.
Along with economists, the Chairman of the Senate Budget Committee, Sheldon Whitehouse, DR.I., indicated that a tight market sale could force the Republicans to back down. Their donors will scream about the pending financial loss and give every lawmaker an incentive to be a hero and save the jobs and retirement savings of millions of Americans.
Joe Brusuelas, chief economist of the consultancy RSM US, said in a Monday email that talk of a potential default has already made it more expensive for investors to buy insurance on US Treasury notes. But the panic has largely been contained, so far, from the broader stock market followed by many voters and lawmakers.
Biden can play the Constitution card.
The 14th Amendment became part of the Constitution after the Civil War. It states that the “validity of the public debt of the United States, authorized by law, … cannot be doubted.”
Laurence Tribe, an emeritus professor at Harvard University’s law school, wrote Sunday in The New York Times that Biden may argue that he has a constitutional duty to avoid default and thus may violate the limit on debt to continue spending already approved by Congress. On Monday, a government employee union s sued by Treasury Secretary Janet Yellen and Biden to make the argument that they are constitutionally obligated to waive the debt limit.
As a former senator, Biden wants to defer to Congress. But when pressed about using the 14th Amendment last week, he kept his options open.
“I haven’t gotten there yet,” he said on MSNBC.
Sen. James Lankford, R-Okla., said Biden cannot act unilaterally. He told ABC News that the Constitution “is very clear that spending — all the details about spending money have to come through Congress.”
MINT A COIN
This is one of the many creative – and unlikely – solutions circulating the internet. The idea is that the government can create a $1 trillion platinum coin and use it to avoid default. Basically, there is a loophole in the law that allows the US to make a coin of any denomination if it is made of platinum.
That has at least one big problem: Yellen dismissed the idea in a January interview with The Wall Street Journal, calling it “something of a gimmick.”
This is the most frightening possibility.
Without a deal, the US government could reach an “X-date” – the moment when it can no longer pay all its bills. The Treasury Department can no longer use accounting strategies to keep the government open. If the government can’t borrow, the unpaid bills will increase and the government will fail.
But, but, but … not all defaults are created equal.
The US could be short on some payments, and the risk of things getting worse could scare lawmakers from reaching a deal. But even a “short” default would cost the economy 500,000 jobs, according to a White House analysis. A “prolonged” default would cost 8.3 million jobs, according to the analysis, nearly as many job losses as during the 2008 financial crisis.