The issue of the debt limit is perhaps the most addressed and debated economic issue since last week. Indeed, U.S. Secretary of Treasury, Janet Yellen, sent an alarming letter urging the legislative and the executive branches to find a consensus to raise the debt limit by June 1, in order to prevent the U.S. government from defaulting on its legal obligations. The debt limit only authorizes the U.S. government to meet its existing legal obligations (past commitments). It does not authorize the federal government to create new spending for new projects and use that debt limit to fund these new projects. And this is an issue for President Biden, a man who believes that the government shall be thriftless rather than parsimonious, raising the debt limit presents a serious conundrum to his spending plans on foreign policy.
The window to negotiate a new deal is closing, Biden is set to huddle with congressional leaders, including McCarthy—no fan of the sitting president—and Senate Majority Leader Chuck Schumer, on Tuesday at the White House to try to sort out the mess. The lack of consensus could force the White House to curb or cancel a major foreign-policy reassurance mission. Indeed, Biden is set to leave on May 19 for a G-7 summit in Japan and a meeting of Quad leaders in Australia. The White House is ready to unveil a new executive order curbing outbound U.S. investment to China in sectors related to national security.
What happens if the U.S. government defaults on its debts? The U.S. dollar accounts for 60% of global currency reserves, making it still by far the world’s most circulated banknote, but the U.S. government failing to service its debt could be the proverbial kick in the tenth that allows China to mount a challenge with renminbi-based trade.
While foreign policy remains a critical factor, increasing government spending when the country is already in a budget deficit, does not favor the U.S. taxpayer. If President Biden decides to pass an executive order in order to raise money for his foreign policy budget, then this will lead to a potential increase in the money supply, and therefore a potential increase in inflation. Let us not forget that inflation remains the current public enemy number one, and all decisions made are related to inflation and interest rates. Budget deficit favors the public sector but not the private sector and people who produce the goods and services that enable the economy to sustain itself.
As a firm Keynesian, President Biden believes that the use of fiscal deficit is beneficial for the national economy. Currently, the United States has a budget deficit of $1.1 trillion. According to Keynesian economics, fiscal deficit increases aggregate demand, thus economic growth, because stimulating demand leads to more spending, and more spending leads to more revenue being generated for suppliers. But the fundamental problem with the fiscal deficit is that it increases the national debt, increases the cost of borrowing, and more importantly, it could potentially increase inflation.
By passing his executive order to bypass the debt limit and increase federal spending for his foreign policy agenda, President Biden is willing to risk an increase in the rate of inflation, which will penalize the American taxpayer. Inflation is still stubbornly high, and economic activity is gradually slowing down. During times of economic slowdown, increasing government spending is not the solution to stimulate economic growth. And President Biden is yet willing to risk it all to pursue an agenda that does not primarily benefit the American taxpayer but only the political elite.