The Biden administration is close to reaching its $31.4 trillion debt ceiling. Once the limit is reached, which could happen in the next few weeks, the Treasury Department will not be able to issue more debt without congressional approval.
The department plans to take "extraordinary measures" to keep the government running. But once these measures expire, likely in July, Biden will be forced to reach an agreement with the new Republican majority in the House of Representatives to increase the debt ceiling if it does not want to default.
No more bonds may be issued
As in most countries, the government can operate at a deficit and issue more debt to manage its expenditures. The problem is that even if deficit-free budgets were to be approved, taxes and expenditures do not flow in and out of the fund simultaneously, so the country needs to issue bonds to finance itself.
The law requires that the Treasury Department receive permission from Congress before it can do this. Without such permission, the government will not be able to issue more bonds, triggering a default.
In the hands of the GOP
The White House insisted that it will not allow the national credit "be held hostage to the Republicans." But the concessions made by new Speaker of the House Kevin McCarthy in his hectic ascension to the post after 15 votes have raised doubts as to whether a deal could be reached.
McCarthy said Republicans will agree to raise the debt ceiling only in exchange for budget cuts in spending they consider "unsustainable." Although these cuts were not specified, freezing public investment and spending items at 2022 levels, which would mean a cut of $130 billion, or cutting Social Security pensions, Medicare, and public health care for retirees could be some of the demands.
The speaker of the House faces the challenge of having enough power to keep the party united, since the future of the country's economy depends on him.
Regarding his relationship with Biden, McCarthy claimed to have told the president that "it doesn't have to come to that," in reference to a government shutdown over reaching the debt ceiling. "This is the moment to change our behavior," he told Fox News.
However, many economists advise investors to "be cautious as the summer approaches" because a debt ceiling battle "can cause volatility in the markets," said Brian Gardner of investment bank Stifel Nicolau,
