Debt limit: Biden expected to meet with Hill leaders Tuesday following ‘productive’ meetings among staff

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Debt Limit Talks Intensify: Biden and Hill Leaders Seek Deal Amid Eager Markets

As the United States approaches an unprecedented default crisis, President Biden and top lawmakers from both parties are stepping up efforts to raise or suspend the federal debt limit before a critical deadline in October. On Tuesday, Biden is expected to meet with Senate Minority Leader Mitch McConnell and House Speaker Nancy Pelosi, following what White House officials describe as “productive” conversations among staff over the past few days.

The debt limit is the statutory cap on the amount of money that the federal government can borrow to finance its operations and obligations, such as paying Social Security benefits, military salaries, and interest on existing debt. It is not the same as the actual level of debt, which has surged to over $28 trillion due to pandemic relief spending and earlier tax cuts. Without a higher debt limit or temporary relief, the Treasury Department would exhaust its cash reserves and be unable to pay some bills, risking default on its bonds and other obligations.

The consequences of a default would be severe and widespread. The Treasury would have to prioritize payments, potentially delaying or cutting essential services. Investors would demand higher interest rates on U.S. debt, causing the dollar to lose value and increasing the cost of borrowing for businesses and individuals. The stock market could tumble, erasing trillions of dollars in wealth and triggering a recession. Moreover, a default could damage the reputation and standing of the U.S. as a global economic power and undermine confidence in the dollar as the world’s reserve currency.

The debt limit has become a contentious political issue in recent years, with Republicans often using it as a lever to demand spending cuts or policy changes from Democrats. However, both parties have acknowledged the need to avoid default and have raised or suspended the limit numerous times. The current limit was set at $22 trillion in 2019, but that level has already been breached due to emergency measures taken by the Treasury to keep the government funded during the pandemic.

The deadline for Congress to act on the debt limit this time is uncertain, as the Treasury can use various tools to extend its cash balance for several weeks or months. However, some experts estimate that the Treasury may run out of maneuvering room as soon as October 18. The Treasury Secretary Janet Yellen has repeatedly urged lawmakers to act swiftly and avoid a crisis that could harm the economy and the well-being of American families.

The Biden administration has proposed a two-pronged strategy to raise the debt limit and fund the government for the next fiscal year, which begins on October 1. First, it seeks a straightforward increase or suspension of the limit, without any conditions or amendments. Second, it aims to pass a massive $3.5-trillion social and climate package through a budget reconciliation process, which would allow Democrats to bypass a possible Republican filibuster in the Senate and pass the bill with a simple majority. However, this process could take weeks or months to complete, and the package faces fierce opposition from Republicans and some moderate Democrats who are concerned about its size and scope.

Although the debt limit talks have not yet yielded a breakthrough, the markets have shown signs of optimism and relief in recent days, as investors bet on a resolution before any calamity occurs. The S&P 500 and the Nasdaq closed at record highs on Monday, while Treasury yields fell as demand for safe haven assets eased. Analysts say that both the markets and the political leaders may be underestimating the risk of a prolonged standoff or accidental default, which could cause much damage than a short-term disruption.

As the clock ticks and the stakes get higher, all eyes are on the Capitol Hill and the White House, hoping that common sense and compromise would prevail. The debt limit may be a technical and arcane issue, but its consequences are all too real and alarming. For the American people and the global community, the need to preserve the full faith and credit of the U.S. is not negotiable or partisan – it is a moral and practical imperative that should transcend politics and ideology.