The difference is that Americans are now beginning to pay for it.
On October 3, Republicans dismissed House Speaker Kevin McCarthy, beginning what may turn out to be the most unnerving chapter in the 20 years of dysfunctional US politics. The previous low point occurred when US debt came dangerously close to defaulting in 2011, which prompted S&P Global Ratings to lower the country’s credit rating for the first time ever. It took six months for the S&P 500 stock index to rebound after falling 7% in one day.
Three government shutdowns have occurred since then, largely as a result of Republicans’ refusal to finance the government unless they receive spending cuts or other concessions that are unpopular enough to pass Congress through regular legislation. Even though the public despises it and it may lose the party votes, the GOP has started using this bullying strategy again.
There was a Republican-led debate earlier this year over whether or not the United States should increase its federal borrowing cap while still making interest payments on its debt. In June, Congress struck a last-minute agreement that prevented a self-imposed catastrophe.
The chance presented itself when it came time to pass the measures funding the government for fiscal year 2024, which began on October 1. Republicans usually have a new chaos plot in the works. A small group of far-right conservatives wanted more spending cuts than what Congress approved in June, but they were unable to pass them through regular legislation due to a lack of support. In order to get their way, they threatened to shut down the government once more.
McCarthy overruled them and joined forces with Democrats to pass funding measures that would keep the government open until November 17. The obstructionists on the far right reached their breaking point after that, and they utilised obscure procedures to depose their own leader as speaker of the House without having a replacement in mind.
Without a speaker to control the agenda, schedule votes, and define procedures, the House cannot run. The selection process for McCarthy’s replacement is still under way. No matter who wins the position, the forecast is for greater chaos and further harm to the country’s financial situation.
In a report published on October 4, research firm Capital Alpha Partners warned that “the next government shutdown is hurtling towards us.” “We automatically assume that on November 17 the government will shut down. If not immediately after a shutdown, we wouldn’t be shocked to see all three ratings agencies downgrade US debt.
If it does, the country merits it. Only Moody’s still ranks the United States as a AAA credit risk, despite having stated in September that it was considering downgrading the country like S&P and Fitch. Nobody is concerned about the United States’ true creditworthiness since, despite having a $33 trillion national debt, it still has the most dynamic economy in the world and a sizable amount of prospective revenue.
All of America’s issues are political in nature. In a report published on September 25, Moody’s stated that a government shutdown “would demonstrate the significant constraints that intensifying political polarisation continue to put on US fiscal policymaking during a period of declining fiscal strength, driven by persistent fiscal deficits and deteriorating debt affordability.” “Fiscal policymaking in the US is less robust than in many AAA-rated peers.”
Top-rated For example, Canada and Germany consistently approve government budgets that are well-planned and cohesive. In contrast, the United States has been supporting its government through piecemeal “continuing resolutions” that don’t have a plan for dealing with the nation’s growing debt for years. The obsolete statute that restricts federal borrowing also exists in the United States, which causes ongoing disputes in which Republicans threaten a federal default. However, Congress doesn’t appear to be seriously interested in repealing that law.
These Washingtonian farces are largely considered to be a distraction by most Americans. However, they are advancing up the bill and might soon start to directly affect Americans’ wallets. Some economists believe that markets are starting to price in Washington’s worsening fiscal outlook and the waning appeal of US Treasury securities as the world’s preferred safe-haven assets. Interest rates have started to rise by amounts that cannot entirely be explained by the Federal Reserve’s efforts to combat inflation.
Apollo Global Management’s chief economist, Torsten Slk, recently proposed seven possibilities for the extraordinary increase in long-term rates. One was the enormous size of the US budget deficit, which currently stands at 6% of GDP and is increasing. That calls on the Treasury Department to issue more debt, raising the risk of an excess supply that would drive bond prices down and interest rates higher. Another factor is the August Fitch downgrade, which reduces the desirability of US debt in comparison to bonds with higher ratings.
Some debt hawks have long anticipated that “bond vigilantes” will eventually demand higher rates as payment for tolerating the fiscal shenanigans in Washington, punishing the United States for its wastefulness. Even though the total quantity of US debt doubled from 2007 to 2014, it didn’t happen for a very long time. With a significant increase in 2020 and 2021 when Congress enacted COVID relief totaling trillions of dollars, it has since increased once again. According to Kevin Warsh, a former member of the Fed board, the United States is “courting trouble” by naively presuming that foreign investors don’t notice its poor financial management, as he claimed in a Wall Street Journal article on October 5.
Democrats are not completely innocent in this vexing story. They approve massive expenditures with little consideration for deficits. Republicans reduce taxes while promoting the notion that this will somehow boost government revenues higher, not lower. Furthermore, neither party has the guts to tell people that the solution would involve a painful combination of tax increases and benefit reductions that will likely affect the majority of Americans. Although the nation’s debt situation can be resolved, it is unlikely to happen under the current leadership of fools.