May 22nd, 2023 7:00am PDT
(PenniesToSave.com) – The Washington government is currently holding public discussions regarding the potential consequences if there is no agreement reached on the debt ceiling by June 1.
The economic consequences of the first-ever default in American history are still unclear. There is ongoing debate and division among negotiators on various issues related to this unprecedented event.
The deadline is looming with only 10 days left to reach a crucial agreement and pass it into law. President Joe Biden and House Speaker Kevin McCarthy have a meeting scheduled for Monday at 5:30 pm ET to continue their discussions.
According to Treasury Secretary Janet Yellen, it is crucial to reach an agreement as the government’s inability to meet its financial obligations is deemed unacceptable.
If a deal is not reached by June 1st, Janet Yellen’s main focus would be on guaranteeing that interest on the current debt is paid and that funds are promptly distributed to Social Security recipients and military personnel. She expressed these priorities in an interview on NBC’s “Meet the Press” last Sunday.
In the event that the negotiations are unsuccessful or proceed at a sluggish pace, there will be a need to make challenging choices regarding which bills can potentially go unpaid.
However, some Republican lawmakers in Washington believe that the economic turmoil’s initial impact may be relatively contained. Jeannette Lowe, Managing Director at Strategas Securities, echoed this perspective and suggested that Janet Yellen’s approach might prevent a true default on June 1.
If a deal is not reached by June 1, the government is likely to prioritize delaying payments to government contractors. This could pose a potential risk, particularly for companies in sectors like defense and healthcare, as stated by Lowe.
Brian Gardner, the Chief Washington Policy Strategist at Stifel, holds a similar perspective but highlights that none of these ideas have been tested as of yet.
In another interview, Gardner acknowledged the potential that the “X-date,” which is expected to occur around June 1, could pass without a resolution. However, he also noted that the impact may not be as severe if crucial groups like bondholders, Social Security recipients, and military personnel do not face immediate disruptions.
It is important to mention that if a prolonged default were to happen, all predictions would become uncertain. The White House has warned that this scenario could lead to a severe recession and a 45% decline in the stock market.
Doubts Within the GOP
The discussion about the immediate consequences has arisen after a period of negotiations in Washington that came to a halt over the weekend. During this time, both sides traded accusations of being unreasonable.
Upon returning from Asia, President Biden expressed optimism and stated that he closely monitored the recent negotiations, deeming them successful.
Even some Republicans, including a prominent moderate, are suggesting that June 1 may not be as strict of a deadline as many people are concerned about.
During an interview on CBS’s ‘Face the Nation,’ Representative Brian Fitzpatrick (R-PA) discussed the possibility of a non-technical default. He proposed that if there were to be an initial breach, it could lead to less severe economic consequences as long as US Treasury bondholders continue to receive prompt payments.
While acknowledging some leeway in the figures, he emphasized the importance of negotiators having extra time to come to a consensus. However, he did caution against the ongoing risks of a credit rating downgrade for the US and potential market volatility.
Fitzpatrick clearly favors a timely deal to eliminate the possibility of a default.
Unpaid Bills Are Inevitable
In early June, the Bipartisan Policy Center analysts identified several essential government payments that could be in jeopardy. These include $47 billion of Medicare payments slated for June 1 and $25 billion in Social Security checks set to be issued on June 2.
Each day, the Treasury disburses a significant amount of money to cover an array of expenses. These include veterans’ benefits, federal salaries, tax refunds, Medicaid payments, and compensation for government contractors, to name a few. The payments being discussed here only make up a fraction of these overall expenditures.
During a recent briefing with reporters, Shai Akabas, the director of economic policy at the Bipartisan Policy Center, offered a cautionary note. He emphasized that despite policymakers’ expectations, the situation could quickly spiral into unpredictability once the X-date is surpassed.
He believes that if the X-date breach or other extraordinary circumstances were to occur, the control over the consequences would quickly transition from policymakers to market participants, investors, businesses, and individuals in the economy.
During Monday’s discussion, Gardner also pointed out several potential consequences that could arise if the X-date is reached. These concerns encompassed the Treasury’s system resilience as well as how investors might react to an unprecedented default.
Gardner notes that the amount of political pressure will primarily depend on which groups do not receive their payments if a default occurs.