Debt Showdown – The New York Times

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President Biden and congressional leaders will meet this afternoon to discuss what, if anything, they will do to prevent an economic crisis.

Talks at the White House about what kind of deal Democrats and Republicans could reach to increase the limit on how much money the federal government can borrow. The stakes are high: If the debt limit is not raised, the government could default on its debt. The US has borrowed tens of trillions of dollars, so a default could cause chaos in global financial markets.

Today’s meeting is the first time in months that Biden and House Republican leaders have directly discussed the issue. Since last speaking, House Republicans have passed their own bill that calls for sweeping but largely unspecified cuts to government spending. And the Department of Finance warned that the country has until June 1 to raise the debt limit before it runs out of money.

The sides are not expected to make a deal, or anything close, today. Most likely, the talks will set the contours for future discussions. Today’s newsletter will look at four scenarios for what comes next.

Congress can raise the debt limit unconditionally. This is the outcome Democrats want and the most common historical outcome when the U.S. comes close to breaching the limits. The increase has occurred three times during the Trump administration and dozens of times during previous presidents.

After Congress created the debt limit in 1917, it remained a technicality for decades. The big fight in Congress over government spending will focus on the federal budget, which sets taxes and spending levels, separate from the debt limit. But over the past few decades, lawmakers — especially Republicans — have seized on the debt limit as a tool to try to win additional concessions on spending. The Biden administration has tried to stop that tactic by refusing to negotiate.

Another possibility is that the two sides strike a deal that increases the debt limit while also cutting spending. This is the result of the selection of House Republicans.

The parties are far from an agreement on how to balance the budget. Republicans say they want to cut spending on everything except Social Security, Medicare and the military, which could cut programs like Medicaid, food stamps, border security and funding for local police. Democrats called the proposal a nonstarter. Next, Democrats want to raise taxes on the rich and big corporations — a nonstarter for Republicans.

“While both sides say they want to reduce the nation’s debt burden, there is almost no overlap in how they intend to achieve those results,” my colleague Jim Tankersley wrote.

Because of the impasse, the parties may agree to increase the small debt limit to give time to reach a deal. (My colleagues Jeanna Smialek and Ashley Wu explore this possibility in more detail.)

If no deal is reached, the Biden administration could take the unprecedented step of using executive action to pass the debt limit. No one wants this outcome, but the White House has been considering it privately.

Many White House officials are not happy with this idea because it has not been tested and may not make sense. The White House could declare that the debt limit is unconstitutional, arguing that it violates the 14th Amendment’s clause that “the validity of the public debt of the United States … shall not be questioned.” The government can then ignore the debt limit and continue paying the government’s bills. In a more outlandish scenario, the government could mint $1 trillion in platinum coins to give the government money to pay its bills.

That approach may hold up in court, and it’s unclear whether it would survive a legal challenge. Such uncertainty could affect financial markets and increase costs for the federal government. Consider the investor’s perspective: If you believe that the only thing holding government debt is untested executive maneuvering, you will charge a higher price — or interest rate — to buy that debt.

But even these results seem better than the remaining alternatives.

The last possibility is that the US government reaches its debt limit and can no longer repay, including federal programs or debt payments. It can then be forced to pay off at least some of the debt – which means it will admit that it can’t effectively pay back the money owed to others.

Mark Zandi, chief economist at Moody’s Analytics, described the default as “financial Armageddon.”

Why? For decades, investors have viewed US debt as the safest investment because the government always pays it back. So they used US debt as a backstop for riskier opportunities – knowing that, whatever happens with less certain bets, they will make the most money from government debt. But if the US defaults on its debt, that credibility is lost. And the financial system can go backwards, slowing down the economy.

NBA playoffs: Lonnie Walker scored 15 fourth quarter points in the Lakers’ crucial Game 4 victory, helping Los Angeles take a 3-1 lead over the Warriors.

NHL lottery: The Blackhawks got the No. 1 pick – probably 17-year-old Connor Bedard.

Gambling: Officials are investigating 41 student-athletes from Iowa and Iowa State for prohibited sports wagers, both schools said.

Two authors won the Pulitzer for fiction this year: Hernan Diaz for “Believe it,” the financier’s fortune story told from a different perspective; and Barbara Kingsolver for “Demon Copperhead,” a reimagining of Charles Dickens’ “David Copperfield.”

The Pulitzer for drama went to Sanaz Toossi for “England,” a drama about four Iranians preparing for an English exam. Two Washington Post reporters, Robert Samuels and Toluse Olorunnipa, won the nonfiction prize for “His name is George Floyd.”

Journalism Prize: The Associated Press and The Times won for their coverage of the war in Ukraine. AL.com, a local news site covering Alabama, won two awards. Here are the winners.

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