Andrey Shitov
At the opening of the current session of the UN General Assembly, Secretary General of the organization, Antonio Guterres, said that the world “stands on the brink of an abyss and moves in the wrong direction.” I remember this phrase when I look from the outside at what the Americans are doing now with public finances. It is not the first time that they have come close to default on their debts, and the current situation does not yet seem more dangerous than the previous ones, but you still involuntarily cringe: what if this time they will fall off the financial cliff? In this case, little will not seem not only to themselves, but to the whole world.
“Financial Armageddon”
Last week, the House of Representatives of the US Congress passed legislation to exceed the national debt ceiling, currently set at $ 28.4 trillion, and continue funding the federal government after September 30, when America’s fiscal year ends. But this is the lower house, where the ruling Democratic Party of President Joe Biden has the majority of votes, albeit a small one. But in the Senate, almost complete equality of forces reigns, and there the leader of the Republican faction, Mitch McConnell, has already made it clear that, together with his party members, he is ready to block the same decisions. Their political calculation is understandable: in fact, this would slow down Biden’s entire domestic political agenda and increase the opposition’s chances of success in the midterm congressional elections next year.
However, you will not be full of politics, and obstructionism threatens the economy with serious shocks. The White House has already instructed US government agencies and departments to prepare for a shutdown in the event of a suspension of funding. The decision was presented as a routine: they say, in the absence of financial certainty, such a step should simply be taken a week before October 1. But, of course, the possible termination of the work of the state apparatus is a crisis in itself, especially in the context of the ongoing COVID-19 pandemic (although for the most part, shutdown does not apply to doctors, military and federal law enforcement officers). All of this is perceived as such, but for the bickering politicians in Washington, something else is primary: who will the voters blame for this crisis?
With debt, the situation is potentially even more dangerous. If state institutions in the United States, even in my memory, have already suspended work five or six times due to interruptions in funding, then there has not yet been a default in American history. And they are proud of it overseas. “We pay our debts; this makes the United States different from almost every other country on the planet,” Mark Zandi, chief economist at Moody’s Analytics, told CNN the other day.
A default “would be a financial Armageddon,” the specialist added. “Even the very idea of not paying your debts on time is complete madness.”
“Irreversible damage”
“But we live in a crazy world,” and “legislators in Washington are once again playing games with America’s ability to pay, checking which of them will be the first to chicken out,” the TV company commented on his words. In any case, the US executive branch itself does not rule out the worst-case scenarios. The report was triggered by a letter sent to Congress by US Treasury Secretary Janet Yellen.
In this message, an American woman who previously headed the Federal Reserve System (FRS), i.e. The US central bank urged lawmakers not to delay raising the government debt ceiling. History shows that delaying “until the last minute” in resolving this issue “can seriously damage” entrepreneurial and consumer confidence, lead to higher borrowing costs and damage the country’s credit rating, she said.
“And a delay that calls into question the [US] federal government’s ability to meet all of its obligations would likely cause irreversible damage to the American economy and global financial markets,” Yellen said.
What exactly is the question, of course, you need to ask the specialists. But according to the short definition of the same CNN, “a default would be an economic cataclysm.” “Discount rates would skyrocket, a crater would form in the stock market, pension accounts would depreciate, the US dollar would sink, and the financial reputation of the world’s only superpower would be tarnished,” the TV company explained. Of course, one can argue with it about the only superpower, since economically America is already catching up and overtaking China, but the essence, in general, is conveyed intelligibly.
“D-Day”
Back in late July, the Congressional Budget Bureau predicted that without raising the ceiling on the US Treasury, the Treasury would run out of money in the last quarter of this year, most likely in October or November. It explained that a specific “D-day” can shift in one direction or another – depending on the flow of tax revenues to the federal treasury.
Yellen did not specify a deadline in her letter to lawmakers. But she still clarified that, “according to the best and most recent information” at her disposal, “it is most likely that cash and emergency measures will eventually be exhausted during October.” The department switched to preparation for a potential financial emergency in advance.
Finally, Moody’s Analytics’ best estimate is that the target date is October 20th. After that, if the upper limit on borrowing is not raised, the US authorities will have nothing to pay the bills and will have, as the Washington Post wrote, “make an unimaginable choice: either not pay the $ 20 billion owed to the elderly by social security programs, or refuse payments to holders of US debt securities “- knowing that” this could undermine confidence in the solvency of the United States and forever increase the cost of federal borrowing. “
The publication from which this quote is taken is a study by Zandi and his subordinates, according to which “a protracted standoff over the public debt ce-iling would cost the US ec-onomy up to 6 million jobs, reduce the value of household wealth by up to $ 15 trillion and would lead to an increase in unemploym-ent from about 5% to 9%.” Here’s the approximate default price.
The origins of intransigence
The question is: do American legislators themselves do not know or do not understand all this? Of course they do. And the aforementioned Republican Senator McConnell, the leader of the opposition, does not deny that, in the end, the national debt ceiling will have to be raised willy-nilly. But he wants the ruling party to push through this decision (incl-uding, if necessary, with the help of various procedural tricks in Congress) and thereby assume full responsibility for the increase in the debt burden in the eyes of voters.
And the Democrats are outraged by this approach. According to them, under the former Republican President Donald Trump, they themselves, being in opposition, agreed to raise the borrowing ceiling. White House spokeswoman Jen Psaki has repeatedly stressed that this “non-partisan” approach is in the country’s interests. At the same time, the ruling party and the media close to it remind that under Trump, the US national debt grew by almost $ 8 trillion, and the latest decision made under the Republican and allowing such an increase remained in force until the summer of this year.
At the same time, the difficulties that the United States faces in solving its financial problems are caused not only by the inter-party confrontation in Washington, but also by a deeper ideological divide. Within the Democratic Party itself, there are not very visible from the outside, but persistent and principled disputes over the astronomical cost of the economic programs of the Biden administration.
This is not surprising, because the bill goes to the trillions. Already this week, Congress intends to consider an infrastructure investment program for about $ 1 trillion, then the next package of socio-economic innovations worth about $ 3.5 trillion.
There is no such money, as already mentioned, in the American treasury, so the plans initially caused a lot of controversy…. Overseas politicians who are usually called “fiscally responsible”, including among moderate Democrats, are wondering whether it is permissible to pay such amounts “by credit card”. But left-wing liberals, led by Senator Bernie Sanders and Rep. Alexandria Ocasio-Cortez, flatly refuse to consider more modest alternatives. They can also be understood: when and to win back economic and political resources, if not now – in the conditions of a pandemic, which revealed the vital necessity of relying on the state for everything and everything? In addition, after the next elections, according to analysts, Democrats may lose control of Congress; it also makes them rush.
Well, and the right-wing conservatives, who in recent years have equaled Donald Trump across the ocean, of course, see in the approach of the liberals an attempt to institute “American socialism” outright. In their eyes, this course is disastrous for the country and absolutely unacceptable. Hence the general bitterness and mutual irreconcilability.
Without memory and without conscience
It is curious that the Americans wandered into the abyss of their current political and economic feuds along the road of good intentions. Initially, the US national debt ceiling was a reflection of the patriotic consensus of the branches of government, not their ideological squabbling. It was first installed by Congress in October 1917 to make it easier for the country’s 28th President, Woodrow Wilson, to place war loans during World War I. In the spring of the same year, America, after three years of neutrality, declared war on Kaiser’s Germany.
Previously, any placement of government bonds in the United States required special permission from legislators. But as the country entered the war, it became clear that loans would be required on a regular basis. And therefore, already in the second act on the military “loan of freedom” (Second Liberty Bond Act), Congress granted the executive power the right to attract borrowed funds at its own discretion. Naturally, only up to a certain limit, which became the first debt ceiling.
By the way, initially war loans were repayable in gold. But the US gold reserves quickly became insufficient for this, and in 1933, Congress, at the initiative of President Franklin Roosevelt, retroactively ca-nceled this rule. This cau-sed a storm of outrage and litigation, one of which re-ached the US Supreme C-ourt. The government’s po-sition was supported by fiv-e out of nine judges’ votes. The other four judges rega-rded the abandonment of the “gold standard” in this matter as the actual first US default on its obligations.
As you know, all this ended with the ” Nixon shock ” of 1971, when the “gold standard” was finally put to rest. In fact, Washington then shamelessly “threw” its foreign partners, including its closest friends and allies. The cynical phrase of the head of the US Treasury John Connally, addressed to him, remained in history: “The dollar is our currency, but your problem.”
This is me talking about the national pride of Americans in the fact that they seem to have never had defaults. It’s just that people’s memories are short and selective.
Sleight of hand and no fraud
Now, in order to get out of financial difficulties at the state level, Washington is again ready to consider “everything that is not prohibited by law.” A good example is the idea of issuing a coin in denominations of… a trillion dollars.
“Since the crisis season is in the yard due to the ceiling of the national debt, it’s time to remember the most extravagant solution to this problem: let President Joe Biden issue a $ 1 trillion coin,” CNN suggested in a seemingly joking tone, but in the business news section.
The idea, he explained, is to enable the executive branch of government to achieve the desired outcome “bypassing Congress.” According to CNN, “the president can issue a $ 1 trillion commemorative coin, deposit it with the Fed, and thereby enable the government to keep paying its bills.”
It turns out that this non-trivial method of fictitious “replenishment” of the treasury was considered even under Barack Obama, who at one time had to clean up the consequences of the 2008 financial crisis. As he himself later revealed in the Pod Save America podcast, this “wacky” idea was discussed “with Jack Lew and others” (Jacob Lew was US Treasury Secretary from 2013-2017).
Legally, the idea is based on the fact that the law that allows the President of the United States to issue commemorative and commemorative banknotes does not limit their denomination. As Everett Millman, a specialist in precious metals trading, noted the other day in a commentary on this topic, even investment coins made of gold, silver and palladium have “the nominal value – mostly symbolic”, and for platinum it is directly stated that the Ministry of Finance can mint coins from it ” dignity “.
Worse than a default?
I am not an economist and cannot judge how the appearance of, if I may say so, a “means of payment” of $ 100 trillion (and sometimes such an amount is also called) would affect, for example, inflation or the value of US debt obligations. But experts interviewed by CNN argue that the consequences could be worse than a default.
From the point of view of confidence in the dollar and the entire financial and economic system of the United States, “this is the worst thing that can be done,” explained Philip Wallach, an employee of the American Enterprise Institute in Washington. “Something like a $ 1 trillion coin is the best way to convince people that the dollar isn’t all that good as a currency,” he added.
Even more categorical in the assessments of Zandy from Moody’s Analytics. “The $ 1 trillion coin is a completely perverse way to bypass the national debt limit, which will only exacerbate an already bleak situation,” he said. This will increase the chances that at some point in the future they will not be paid on time. The $ 1 trillion coin will not ward off either the financial crisis or the worsening of the economic crisis. Only cryptocurrency will win. “
Presumably, this kind of feedback reaches the Ame-rican authorities. White House spokesman Mike Guin assured CNN that the idea of issuing a nominally overvalued coin is “not being considered.” “There is only one viable option for approaching the national debt limit,” he said.
But it’s a crazy world…
It would seem that one can put an end to this, but I still have a worm of doubt stirring. After all, Paul Krugman, a New York Times columnist and Nobel laureate in economics, ar-gued that issuing the same $ 1 trillion coin “would be just a reporting trick” that “would simply allow the Treasury to bypass Republican blackmail.”
If the venerable colleague had made economic arguments, I would probably have taken his words on faith without much hesitation. But he appeals to politics, and this is a completely different calico. In this area, Krugman, in my opinion, since the time of the frenzied anti-Trump campaign, which we all recently observed, has been engaged not so much in explanatory work as in agitation and propaganda work. And in this case, the reference to “republican blackmail” seems to me self-revealing. After all, in fact, the luminary is kicking the system of checks and balances – the basis of American democracy, in which his haters accused Trump of encroaching.
When I recently wrote about the “Nixon shock”, I turned to the Russian Foreign Ministry for a comment. In response, I was sent a carefully verified text, which, in particular, said: “The constant uncontrolled build-up of the dollar supply is the core of Washington’s macroeconomic policy and, in a sense, is indeed our common problem. ways of default for the sake of zeroing debts. The status of the world reserve currency allows the owner to issue any amount of funds and refinance their liabilities. “
Well, well, if our specialists don’t see any problems. But with politicians and their apologists in the United States, I would still keep my ears open. Since ancient times, it has been known that the gods deprive the mind of those who want to punish. And I quoted you from CNN – about the “crazy world” of American politics.
