The Treasury Department says it has started taking “extraordinary measures” as the government has brushed up against its borrowing capacity of $38.381 trillion. Political frictions are raising alarms about avoiding a potential economic crisis.
“Why create a crisis over this?” McCarthy said this week. “I mean, we’ve got a Republican House, a Democratic Senate. We’ve got the president there. I think it’s arrogance to say, ‘Oh, we’re not going to negotiate about pretty much anything’ and especially when it comes to funding.”Any deal would need to pass the Democratic-run Senate. Many Democratic lawmakers are skeptical about the ability to work with Republicans aligned with the “Make America Great Again” movement started by Trump.
What happens if these measures are exhausted without a debt limit deal is unknown. A prolonged default could be devastating, with crashing markets and panic-driven layoffs if confidence evaporated in a cornerstone of the global economy, the U.S. Treasury note. The underlying challenge is that the government would have to balance its books on a daily basis if it lacks the ability to issue debt. If the government cannot issue debt, it would have to impose cuts equal in size on an annual basis to 5% of the total U.S. economy. Analysts say their baseline case is that the U.S. avoids default.
Unlike the 2011 showdown, the Federal Reserve is actively raising interest rates to lower inflation and is rolling off its own holdings of U.S. debt, meaning that recession fears are already elevated among consumers, businesses and investors.
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