The U.S. Secretary of Treasury is worried that the federal government may go broke. Indeed, Janet Yellen said on Monday that the United States could run out of money to pay its bills by June 1 if Congress does not raise or suspend the debt limit, which puts pressure on President Biden and lawmakers to reach a swift agreement to avoid defaulting on the nation’s debt. It is essential to understand that the debt limit exists for the government to meet its existing obligations; not to set up new spending commitments.
In a letter to the House and Senate leaders, Yellen urged congressional leaders “to protect the full faith and credit of the United States by acting as soon as possible” to address the $31.4 trillion limit on its legal borrowing authority. She asseverated in the letter:
“We have learned from past debt limit impasses that waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States.”
The House passed the bill to raise the debt limit but it still has to make it to the Senate and then to the White House in order to be passed into law. It was expected that President Biden may show extreme reluctance toward the passage of this bill because raising the debt limit would prevent him from increasing government spending in the future, especially if he is re-elected. But Janet Yellen is urging the legislative and the executive branch to find a compromise to make this bill go through.
In response to Secretary Yellen’s new timeline, President Biden called the top four leaders in Congress to ask for a meeting on May 9 to discuss fiscal issues. The President reached out to Speaker Kevin McCarthy and Representative Hakeem Jeffries of New York, the minority leader, along with Senator Chuck Schumer of New York, the majority leader, and Senator Mitch McConnell of Kentucky, the minority leader. But President Biden continued to insist that he will not negotiate directly over the limit, saying Congress must raise the cap without conditions.
The U.S. government plans to borrow $726 billion during the quarter. That’s $449 billion more than projected in January, due to a lower beginning-of-quarter cash balance and projections of lower-than-expected income tax receipts and higher spending. Eric Van Nostrand, Acting Assistant Secretary for Economic policy, said in a statement that “even if Congress ultimately raises the debt limit before a default occurs, the ensuing uncertainty could raise borrowing costs and induce other financial stress that would weaken our labor market and our standing in the world.”
If the U.S. government fails to raise the debt limit on time and ends up defaulting, this will consolidate the BRICS position vis-à-vis the dollar and the U.S. government. At the end of the day, the value of the U.S. dollar is determined by the faith that people have in the U.S. government. If the U.S. government ends up defaulting, this will weaken further the position of the dollar on the international stage, and more countries will start rallying behind the BRICS as they will be looking for alternatives.