The financial markets today have their eyes riveted on the calendar, and more precisely on the date of the 1is next June. At that time, the United States could find itself in default, that is to say unable to repay its loans. At issue: the debt ceiling which designates the sum, fixed by parliamentarians, that the executive is authorized to borrow. Currently, this limit is set at 31,400 billion dollars (29,135 billion euros)an amount that the United States reached on the 1is last January. Since then, only emergency measures have made it possible to release new funds.
In the American political arena, the debt ceiling has become something of a “chicken game” between Democrats and Republicans, a term borrowed from game theory. It designates a negotiation dilemma in which each of the parties prefers not to give in, at the risk of a mutually unfavorable result, because the first to give in appears weak. Given the critical issues that the debt ceiling represents, each party is trying to obtain concessions significant on the other, which would like to avoid the potentially catastrophic consequences of an American default. A agreement seems to be taking shapebut in the current polarized political climate, there is a premium on appearing as ideologically pure as possible, which makes any compromise difficult in this standoff between Joe Biden and his Republican opponents.
Caught in this impasse, the Democrats are tempted to invoke the 14th Amendment to the US Constitution. This, adopted in 1868, contains a clause, often called the “public debt clause”, which states that “the validity of the public debt of the United States […] will not be questioned”. Some interpret it as giving the president the power to bypass Congress and unilaterally lift the debt ceiling.
Avoid the crisis now and suffer it later?
However, this reading remains highly contested and could give rise to legal disputes. If this political battle were to become legal, it is a safe bet that it would then be a long-term one, which would contribute to more confusion around the ability of the American federal state to repay its debt. This would not reassure the financial markets usually looking for predictability.
It is also important to remember that such an approach is not without political risk. Recent history offers an eloquent example of the potentially negative consequences of this type of strategy. In 2013, under the leadership of Harry Reid, a Democrat from Nevada who was then Senate Majority Leader, the rules in the North Wing of the Capitol have been changed. The idea was to allow federal judges to be confirmed by a simple majority, with the exception of Supreme Court justices. This maneuver, known as the nuclear option eventually had undesirable consequences. In 2017, Republicans used this precedent to extend simple majority rule to the judges of the Supreme Court. As long as they held this majority, they were able to transform the composition of the highest court.
If Democrats were to take a similar approach with the 14e amendment and the issue of the debt ceiling, they could find themselves in a similar situation. While this strategy may avert an immediate crisis, it could also open the door to homologous use of the 14e amendment by a future Republican president to the detriment of the democratic process and the political consultation that the opposition Democrats would like to privilege then. In this context, it is therefore crucial that political leaders weigh carefully the long-term consequences of their actions, beyond the current crisis.
We can imagine that an agreement between Republicans and Democrats will be found on the edge, as has often been the case in previous crises. Recent history can even shed some light on the major features of this agreement: it will probably be modest and will push the debt ceiling to a level high enough to avoid the crisis in the short term and allow the entire political class to focus on other matters…until the new ceiling is reached. It is in this context that one can understand the relative calm of the financial markets which seem ignore the political crisis at the moment.
But what if the United States still defaulted?
However, it is worth asking how long this “chicken game” can continue and whether this context can precisely favor a payment accident that would occur following a major and unprecedented political crisis.
Indeed, the United States has never defaulted on its debt voluntarily, so that such a scenario remains difficult to describe as its effects would be unprecedented. According to UBS bank estimates, the S&P stock index could lose 20%. Such a fall would precipitate a recession, in particular through a drop in consumption by American households – the famous “wealth effect” of the stock market which explains that the level of consumption of an agent follows the level of his wealth. According to the analysis of the rating agency Moody’s, taken up by the White House as an additional argument in this showdown, a default could in particular slow down real American growth, destroy two million jobs and increase interest rates. interest that the country must pay on its debt.
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A default could also lead to a short-term global recession and significant turbulence in commodity markets, such as oil, which are closely tied to the mechanically weaker dollar. It is also American financial credibility that could be questioning, given the predominant role of its currency in international trade. If other countries sought to reduce their dependence on the United States, international trade could be slowed down and world trade further fragmented.
This scenario is all the more paradoxical as the American economic fundamentals remain solid, given the dynamism of the country’s economic activity and its labor market. In 2011, the rating agency S&P, in order to justify its decision to downgrade the sovereign rating of the United States, expressed its doubts concerning “the efficiency, stability and predictability of American political decision-making”. Criticized at the time for not having followed its mission of analyzing economic fundamentals, the agency had perhaps proposed an analysis that heralded the increased interference of politics in the economy, with the consequences that we are experiencing in the States States at present.