Top U.S. lawmakers emerged frustrated and empty-handed after a tense Tuesday meeting with President Joe Biden over the nation’s debt limit. Biden sought to calm global financial jitters, saying he thought the meeting was “productive” and that the group would meet again Friday as the U.S. stares down the possibility of defaulting on its financial obligations for the first time in history.
Biden met Tuesday afternoon with Republican House Speaker Kevin McCarthy and Senate Minority Leader Mitch McConnell, as well as Democratic House leader Hakeem Jeffries and Senate Majority Leader Chuck Schumer, in a bid to ensure the government can borrow more money to pay for spending it has already incurred.
Afterward, Biden expressed optimism over a future deal. However, he reiterated that he will continue to insist that Congress lift the debt ceiling.
“I made it clear during our meeting that default is not an option,” he said. “I repeated that time and again, ‘America is not a deadbeat nation.’”
Republicans are insisting that the federal government reduce spending before they will agree to raise the debt ceiling. Meanwhile, Biden is adamant that Congress has a duty to pay its bills and that the two issues should be addressed separately. The two sides blame each other for the impasse, and Biden said “a default would be disastrous.”
“Everyone in the meeting understood the risk of default: our economy would fall into a significant recession, it would devastate retirement accounts, increase borrowing costs,” Biden said. “According to Moody's, nearly 8 million Americans would lose their jobs, and our international reputation would be damaged in the extreme.”
But McCarthy emerged from the meeting clearly disappointed that no progress had been made.
“I didn’t see any new movement,” McCarthy said. He added: “I asked him numerous times, ‘Are there some places we could find savings?’ He wouldn't give me any.”
However, McConnell sought to assure Americans that the U.S. will continue to pay its debts. Even with the Treasury taking “extraordinary measures” to pay the government’s bills, Treasury Secretary Janet Yellen told lawmakers last week that the Treasury’s ability to pay the government’s bills could run short as early as June 1.
“The United States is not going to default,” he said. “It never has and it never will.”
Default a 'gift' to adversaries
Earlier in the day, the White House warned that the United States defaulting on its debts would be “a gift” to adversaries, including China and Russia, and would lead to a recession that could send shock waves across the global economy.
“Default would create global uncertainty about the value of the U.S. dollar and U.S. institutions and leadership, leading to volatility in currency and financial markets and commodity markets that are priced in dollars,” White House press secretary Karine Jean-Pierre said during a press briefing on Tuesday.
Director of National Intelligence Avril Haines previously made a similar point to the Senate Intelligence Committee about the national security consequences of the U.S. teetering on the edge of a fiscal cliff.
The Treasury debt limit, which caps the amount of outstanding debt the country can have and thus Treasury’s ability to issue securities to fund the government’s obligations, was reached on January 19.
Ceiling raised 3 times under Trump
Lifting the debt ceiling was once a routine vote. Congress has raised it 78 times since 1960, 29 times under Democratic presidents and 49 times under Republican presidents, including three times under former President Donald Trump.
Policy analyst Arianna Fano of the Bipartisan Policy Center said even this verbal sparring will impact markets. A default, she said, would be especially rough for nations with high levels of external debt.
“Given the costs of this brinkmanship alone, we know the economic impacts of an actual default would range from damaging to catastrophic,” Fano said. “Treasury securities are viewed as one of the safest assets in the world, but in a default scenario investors could look to minimize their risk exposure by pulling investments from developing countries, thus reducing access to capital and hampering economic growth.”
How would a US default affect the world?
The U.S. economy is the largest in the world, and the dollar is considered the world’s reserve currency, meaning that many countries’ central banks and other monetary authorities hold U.S. dollars as part of their foreign exchange reserves as a backup in case their own currency fails.
A debt event in the United States would have serious consequences not only for the U.S. but also for the global economy and for world financial markets.
Should the U.S. fail to pay its debts, in addition to creating havoc in global stock markets and sending the American economy into recession, it would trigger a sell-off in U.S. Treasury bonds, weakening the dollar and raising interest rates. This would affect foreign currency reserves held by other countries and make the costs of borrowing more expensive, potentially leading countries with already high levels of borrowing into a debt crisis.
“If interest rates in the United States go up, it's going to take all other interest rates up with it. It's going to make all other risk assets look very shaky,” said Desmond Lachman, former deputy director at the International Monetary Fund who is now a fellow at the American Enterprise Institute.
He agreed with Yellen’s view that a U.S. debt default would be an economic catastrophe that must be avoided.
Lachman told VOA the world can ill-afford such financial turbulence, especially with the regional banking crisis that began with the collapse of Silicon Valley Bank in March, followed by the toppling of two other U.S. banks — Signature Bank and First Republic.
Safest investment
U.S. Treasury bonds are traditionally considered the safest investment that global financial investors turn to in times of distress, said Heidi Crebo-Rediker, former chief economist of the U.S. Department of State and adjunct senior fellow at the Council on Foreign Relations.
“It is the deepest, most liquid, solid and reliable market in the world,” she said.
Crebo-Rediker added that countries and investors need not be overly concerned about an actual U.S. default.
“This is a question of willingness to pay, not ability to pay,” she said. “And that is a very big distinction.”
Chris Hannas contributed to this report.
