Are American politicians playing a game of chicken?
This is the question that investors and financial markets worldwide have been asking for several days.
Many economists and experts have already sent out warnings that if the U.S. fails to find a compromise, a default could have significant consequences for the U.S. economy and could destabilize the rest of the world, at a time when inflation continues to limit growth.
Democratic President Joe Biden and House Speaker Kevin McCarthy (R-California) stuck to their guns during their May 9 meeting on the U.S. federal debt, as a default is looming.
According to McCarthy, nothing changed after an hour-long exchange with Biden and three other lawmakers. But he signaled that the same protagonists would meet again on Friday, which Biden confirmed.
The U.S. president promised that he would do “everything in (his) power to avoid” a default by the world’s largest economy. Default is “not an option,” he hammered.
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If the stalemate continues, the president even deemed it possible that he’d cancel a trip to Japan, Papua New Guinea and Australia in 10 days, which was meant to strengthen American alliances in Asia-Pacific.
Sen. Chuck Schumer (D-New York) for his part has accused McCarthy of holding the debt ceiling hostage because he conditions the vote for an increase in the debt ceiling on deep budget cuts.
This legislative action, specific to the U.S., consists of increasing the maximum amount of authorized public debt. It’s essential to prevent the world’s leading power from finding itself, perhaps as of June 1 or in any case this summer, unable to pay its bills.
The White House insists that raising the debt ceiling, for long a mere formality, must be voted on without conditions or negotiations. The conservatives are asking for the debt issue to be linked to an effort to curtail public spending, which they consider to be out of control.
In the short term Biden has ruled out, due to legal complications, a kind of coup de force, which would see him invoke the 14th amendment of the U.S. Constitution in order to continue to issue debt.
This political impasse is hardly new — Republicans and Democrats engaged in similar brinkmanship during the presidency of Barack Obama. But it’s already causing nervousness in the markets.
To lift the threat of a default, Biden needs to persuade some of the Republican senators, as he does not have a supermajority in Congress. Above all, he needs to find common ground with McCarthy.
The Democratic president and the Republican leader are betting big: the credibility of the U.S. as a debt issuer and also their political credit.
Biden, 80, is seeking reelection and so far has been struggling to boost his low popularity ratings. McCarthy, elected speaker by a slim majority after several votes, must consolidate his position.
Elon Musk Opposes Raising the Debt Ceiling
The debt ceiling is currently set at some $31 trillion — the sum for all sovereign debt in the world in absolute terms. This amount was reached in mid-January, but the federal government has so far managed the situation through accounting maneuvers.
If the impasse continues, for the first time holders of U.S. Treasury bonds, considered the safest assets in finance, might no longer recover their investment.
While most CEOs are urging the Republicans and the White House to find an agreement or a compromise, Elon Musk, the CEO of Tesla (TSLA) – Get Free Report is weighing in. He has taken a tough stance on the issue, supporting those who say that the debt ceiling should not be raised.
It all started with a Twitter thread in which a user tweeted a poll that found that 54% of Americans oppose raising the federal government’s debt ceiling.
“POLL: 54% OF AMERICANS OPPOSE RAISING FEDERAL DEBT CEILING; OPPOSITION STRONGER AMONG THOSE WITHOUT A COLLEGE DEGREE,” the account posted on May 10 in full caps.
Musk immediately drew attention to this poll. “They are right,” Musk commented.
His stance has led several users to point out to him that if the debt ceiling were not raised, the negative consequences would be substantial for, among others, NASA, a federal agency and a major player in aerospace.
NASA is a big customer of SpaceX, the billionaire’s rocket and satellite company, which has promised to conquer Mars with one of the biggest and most powerful rockets ever made. If NASA sees its budget reduced, this could severely hurt its service providers and suppliers, including SpaceX.
“What would a failure to raise the debt ceiling do to NASA though?” One user tweeted at the techno king, as Musk is known at Tesla.
Musk, for those who opposed raising the debt ceiling, may seem like a hard-liner, but his position comes as no surprise. The whimsical entrepreneur has been sounding the alarm on the level of government debt for several months. He has urged the Democrats to reduce spending.
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“It won’t get easier to pay down the debt,” Musk warned on May 9. “As debt rises for countries, interest consumes payments a larger part of the budget, until there is little room for anything else. TANSTAAFL.”
TANSTAAFL stands for “there ain’t no such thing as a free lunch.”
This is to say that raising the debt ceiling would mean higher taxes for all because, according to Musk, it would be the only lever the government could pull to pay the debt.
“Even if you tax every billionaire in America at 100%, it barely makes a dent in the national debt. In the end, the government will be forced to tax everyone to pay the debt,” the billionaire said in January.
He added that the actual debt data of $31 trillion doesn’t include “unfunded liabilities, which are *much* higher.”