According to a recent Wall Street Journal survey, the percentage of Americans who support and oppose letting the country default for the first time is about the same. The survey found that 45% of Americans polled do not support Congress raising the debt ceiling. John Houck, a 63-year-old resident near Phoenix, said, “I want them to stop printing money,” but he does not want the US to default on its debt.
Politically, Republicans tend to be more skeptical, with three-quarters of Republican voters opposed to raising the debt ceiling. Meanwhile, the general public’s approval rating is 44%, and Democrats’ approval rating is 74%. Donna Good, a 70-year-old Democrat living in Colorado, thinks the country must avoid default. If that happens, she will blame the far-right of the Republican Party, as well as House Speaker Kevin McCarthy, for failing to quell the objections.
The Republican-controlled House of Representatives is demanding spending cuts in exchange for agreeing to raise the debt ceiling. However, President Biden wants the House to approve it with no conditions attached. On May 9, congressional leaders from both parties gathered in the Oval Office with President Joe Biden for the first phase of negotiations. But that is just the beginning of the long road.
This week, President Biden launched a new effort to garner support from Republican lawmakers in localities with a large Democratic constituency. On May 10, he delivered a message to New York’s Hudson Valley, one of 18 Republican-controlled constituencies.
In recent years, the US’s inability to default on government bonds has been considered the basis of the global financial system. The country issues the world’s reserve currency, so investors are always ready to lend to the country.
However, through a politically rigid measure known as the public debt ceiling, the total amount of government-allowed loans, a real default is possible, according to the Economist. Occasionally, like in 2011, 2013 and now, the US faces a public debt ceiling that Congress must agree to or remove to avoid creating a default situation. This time, the US reached its maximum borrowing limit of $31.4 trillion in mid-January, prompting the Treasury Department to use temporary measures to pay off its due debts.
According to Finance Minister Janet Yellen, these options will expire after June 1. Experts say that if the public debt ceiling is not raised, leading to the country’s default, it could push the economy into a recession. Moody’s Analytics predicts that default will cost more than 7 million jobs and send the unemployment rate above 8%. The rating agency also predicts a 20% drop in stock market capitalization.
Over the past decade, the S&P 500 has fallen an average of 6.5% in the month before the debt ceiling deadline, analysts at asset management firm Pimco note. In 2013, during an impasse over the public debt ceiling, officials at the US Federal Reserve (Fed) calculated that if the country defaulted on its debt in a month, it would cause the dollar to fall by 10% and stocks by 30%.
However, not all Americans agree to raise the public debt ceiling, and they also expressed varying levels of skepticism about the severity of the country defaulting on its debt. Howard Brady, a 56-year-old microfinance consultant in Seattle, thinks the country’s credit rating will drop but only temporarily. Meanwhile, he thinks the White House can take additional steps to avoid default after June 1, including furloughing federal employees.
Christian Nascimento, a 49-year-old Republican and CEO from Philadelphia, acknowledges that raising the debt ceiling is inevitable for the US. However, he believes that the issue cannot be solved mechanically by just increasing the ceiling and urges discussions on government spending to determine how much is sustainable.
On the other hand, Lidia Cosme, a resident in her 60s from Chicago, remains optimistic that the economy will improve. Consequently, she sees little urgency for the President to agree to significant budget cuts, confident in the country’s strength.
The Economist predicts that despite political disagreements, both parties will find a way to prevent disaster for the nation, though investors may need to endure a period of insecurity. Moody’s Analytics’ chief economist, Mark Zandi, notes emerging concern in financial markets but states that most investors remain steady before the June 1 deadline.
Reaching a decision overnight is unlikely in American politics, and it cannot be ruled out that the market may need to experience turmoil to push legislators towards prompt action. Zandi comments that the longer the financial markets react, the greater the likelihood of legislative failure to act promptly, as market turmoil may be essential in creating the political will needed for acceptance.
While default remains the least likely outcome, it is no longer a pipe dream, given investors’ acute awareness, as stated by The Economist.