As the June 1 deadline fast approaches for the Democrats and Republicans to agree on what to do with the debt ceiling, various strategies are being articulated that might have negative consequences for the US economy and the global financial system.
The Democrats want to continue with their planned spending on various social programs, Ukraine war assistance, and other populist promises. The Republicans on the other hand want to rein in uncontrolled spending, since the US national debt is now at around $32T, not counting off-balance sheet expenses and future expenses that need to be paid in succeeding years.
There is a Democratic proposal to mint a $1T coin and deposit it in the Treasury General Account to give it a few more months of money to spend. Another is to use Section IV of the Fourteenth Amendment of the US Constitution which reads as follows:
“The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.
But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.”
All these unconventional proposals are basically shortcuts to avoid engaging valid points on the size of the US public debt. To still continue spending in the face of that fact is a big problem. The examples of 1939 Nazi Germany, Argentina, Zimbabwe, and other failed currencies point to the destructive effects of hyperinflation due to excessive printing of currency.
A democracy should be a platform where ideas are debated, and the resulting law is a compromise among various viewpoints. That’s not what’s happening here. Using the Fourteenth Amendment is basically saying that the other party’s views on the budget don’t count.
If we keep spending with no cutbacks as if it were business as usual, it will get to the point where the national GDP and taxes collected can no longer pay for our debts present and future because it has ballooned to extreme levels. When that happens, there will be dire consequences for everyone.
The Impact Of The Debt Ceiling On Other Countries
So what’s going to happen here? International credibility is already shrinking. The Saudis are wondering why they should accept payment for their oil, a real commodity, with newly printed US dollars. Unfortunately this feeling is growing. The BRICS (Brazil, Russia, India, China, Saudi Arabia) alliance keeps growing each month, and countries are increasingly dropping the dollar as a basis for pricing their goods and services.
Add to this the more than 500 basis point hike by the Fed over the span of a few months. Many countries don’t really care for the US domestic problems affecting their economies. They also don’t like the fact that this debt ceiling, which is an internal US problem, is also affecting them because the US dollar is the world’s reserve currency.
The Congress is a body of representatives of the people. To simply disregard the views of a particular segment of the population because of this Constitutional provision is to put it plainly, unfair. Unfair not just to the Republicans but also unfair to the American people.
There’s also the fact that if the 14th Amendment strategy is used, it will go through the courts. Ultimately the Supreme Court will need to rule on it, and that could take time. Time which will undermine US credibility around the world and at home while this isn’t resolved with finality.
For the sake of America, the solution should come from a compromise of both these major Congressional parties. It cannot be a solution forced by one party for the sake of expediency.
That is no longer democracy. That is no longer the American way.