For Dummies - American Politics in two minutes - as it relates to the debt ceiling.

The Actors:

President: Joe Biden, 80 (Democrat)

Vice President (and President of the Senate): Kamala Harris, 58 (Democrat).

Speaker of the House: Kevin McCarthy, 58 (Republican). He is the leader of the House of Representatives, and thus second in line to succeed the President after the Vice President

House Minority Leader: Hakeem Jeffries, 52 (Democrat)

Senate Majority Leader: Chuck Schumer, 72 (Democrat)

Senate Minority Leader: Mitch McConnell, 81 (Republican)

U.S. Congress:

Congress is comprised of two houses. A lower body (The House of Representatives), and an upper body (Congress).

Bills

Either house may make a bill (a proposed rule or law). For a bill to become law, both houses must agree to identical versions of the bill. The President may sign it, making it into law, or veto it. If the President does neither, the bill becomes law after 10 days.

U.S. House of Representatives:

The Republican Party currently holds more than half the seats in the House of Representatives. 222 Republicans vs 213 Democrats (Total 435).

The Senate:

The Democrat party, together with 3 independent members, holds more than half the seats in the Senate. 51 out of 100. (48 Democrats, 3 Independents and 49 Republicans (Total 100).

Quick summary

At the moment, the House and the Senate are controlled by different political parties, making it more difficult for the two sides to agree on legislation.

The parties are arguing about the debt ceiling. Both sides want to raise the ceiling, but the Republicans (majority in the House) want to tie the increase to spending cuts. The Democrats (majority in the Senate) don't agree to those cuts.

US Department of the Treasury

The Treasury has overall responsibility for the U.S. Government's finances. It pays its bills, and collects its revenue (taxes). Since the U.S. Government spends more than it collects in taxes (a budget deficit), the Treasury also borrows money on behalf of the Government. The lender is typically either the Federal Reserve, or the Public. Repeated budget deficits cause the debt to go up and up. The total debt of the USA is at the highest level ever, both in absolute terms and as a percent of GDP.

The Federal Reserve

The Fed prints the money that the Treasury needs to borrow from it. That's where all the money is coming from. The more they print, the less it's worth. It buys less. Prices rise.

As security for its borrowing, the Treasury issues Treasury bills (Maturity up to one year), Treasury Notes (maturity 2 years to 10 years), or Treasury bonds (Maturity 10 to 30 years).

The Debt Ceiling

The current debt ceiling is $31.4 trillion. This level was hit on 19th January 2023. It means that the Treasury may not borrow any more money. It is running out of cash. Therefore, to pay the bills, the Treasury has been calling in its bank balances and raiding government pension funds. However, these sources are running out and are expected to be exhausted in early June.

Bill to increase the Debt Ceiling

On 26th April the Republican controlled House of Representatives narrowly passed a bill (217 vs 215 votes) called "Limit, Save, Grow Act 5 of 2023".

Whilst the bill allows for a $1.5 trillion increase in the debt limit, it also contains hundreds of provisions relating to expenditure (mainly spending cuts). In other words, it is modifying the Budget previously approved by the President.

For example the bill cuts back on the President's student loan forgiveness program and cancels most credits to encourage climate change, whilst allowing for additional sales of oil and gas leases.

The Bill proposes cut backs in social welfare. For example, relating to Medicaid, the Bill would require able-bodied adults without dependents aged between 19 and 55 to either work, engage in community services, or participate in a work training program for at least 80 hours per month to remain eligible for Medicaid benefits.

About half the cut-backs relate to "Discretionary Spending" which is mainly national defence, but also programs related to transportation, education, housing, and social service programs, as well as science and environmental organisations.

The Bill, which contains 320 pages, is unlikely to pass the Senate where Republican's do not have a majority. Even if it does pass, President Biden has said he will veto it. Biden does not agree with the proposed spending cuts.

Debt Ceiling - what happens next

The Democratic Senate Majority Leader, Chuck Schumer and other Democrats in the Senate might propose a "clean" bill which only raises the debt ceiling, and nothing else. This would require a 60 vote threshold. However Senate Republicans would likely block any bill which does not address spending cuts.

Meeting Tuesday 9th May 2023

A meeting between President Joe Biden (Democrat), Kevin McCarthy (Republican), House Democratic Minority leader Hakeem Jeffries (Democrat), Senate Majority Leader Chuck Schumer(Democrat) and Republican leader Mitch McConnell (Republican) will be held this Tuesday 9th May 2023. Whether they will flesh out an agreement remains to be seen. Even if they do, it will still require to be passed in both the Senate and the House of Representatives.

Raising the debt ceiling will mean more cash gets printed. This will devalue all existing cash, It will buy less. Prices will rise.

What happens if agreement is not reached on Tuesday?

The US and world markets are not going to like it. It will make the risk of a US default seem more likely.

Gold could soar as investors rush for safe-haven assets.

There will still be a little more time for further negotiations, but the amount of time is fast running out. Credit default Swaps, (CDS) which are insurance against default, will become more expensive.

What happens if the USA actually defaults?

I discuss this here:

Simplified version of US Politics

This is a simplified description of US politics and the debt ceiling. I have left a lot out in the interest of brevity. Some pieces of information have been deliberately omitted or consolidated to keep it simple and to avoid over-loading my readers with too much information.

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