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Yellen warns of U.S. ‘economic chaos’ if debt limit not raised

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Treasury Secretary Janet Yellen said Sunday that there are “no good options” for the United States to avoid an economic “calamity” if Congress fails to raise the nation’s borrowing limit of $31.381 trillion in the coming weeks. She did not rule out President Joe Biden bypassing lawmakers and acting on his own to try to avert a first-ever federal default.

Her comments added even more urgency to a high-stakes meeting Tuesday between Biden and congressional leaders from both parties.

Democrats and Republicans are at loggerheads over whether the debt limit should even be the subject of negotiation. GOP lawmakers, led by House Speaker Kevin McCarthy of California, are demanding spending cuts in return for raising the borrowing limit, while Biden has said the threat of default shouldn’t be used as leverage in budget talks.

Yellen, interviewed on ABC’s “This Week,” painted a dire picture of what might happen if the borrowing limit is not increased before the Treasury Department runs out of what it calls “extraordinary measures” to operate under the current cap. That time, she said, is expected to come in early June, perhaps as soon as June 1.

“Whether it’s defaulting on interest payments that are due on the debt or payments for Social Security recipients or to Medicare providers, we would simply not have enough cash to meet all of our obligations,” she said. “And it’s widely agreed that financial and economic chaos would ensue.”

An increase in the debt limit would not authorize new federal spending. It would only allow borrowing to pay for what Congress has already approved.

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Biden’s White House meeting with McCarthy, House Minority Leader Hakeem Jeffries, D-N.Y., Senate Majority Leader Chuck Schumer, D-N.Y., and Senate Minority Leader Mitch McConnell, R-Ky., will be the first substantive talks between Biden and McCarthy in months.

House Republicans on April 26 passed a bill that would raise the debt limit but impose significant federal spending cuts. But those cuts are unlikely to win the support of all Republicans in the Democratic-controlled Senate, and Biden has said he will only negotiate about government spending once Congress takes the risk of default off the table.

Arizona Sen. Kyrsten Sinema, an independent who left the Democratic Party in December, encouraged Biden and McCarthy to meet each other half way.

“There’s not going to be just a simple clean debt limit — the votes don’t exist for that,” she told CBS’s “Face the Nation.” “So the sooner these two guys get in the room and listen to what the other one needs, the more likely they are to solve this challenge and protect the full faith and credit of the United States of America.”

Yellen was asked on ABC whether Biden could bypass Congress by citing the Constitution’s 14th Amendment that the “validity” of U.S. debt “shall not be questioned.” Yellen did not answer definitively, but said it should not be considered a valid solution.

“We should not get to the point where we need to consider whether the president can go on issuing debt. This would be a constitutional crisis,” she said.

“What to do if Congress fails to meet its responsibility? There are simply no good options,” she added.

Sen. James Lankford, R-Okla., agreed about the risks of invoking the 14th Amendment, He told ABC that the Constitution is “very clear that spending — all those details around spending and money actually has to come through Congress.”

He criticized Biden for not being willing to negotiate on spending cuts, arguing the debt limit exists to force a broader conversation on government outlays. “It’s about not just debt that’s incurred,” the senator said. “But it’s also raising the limit of what we can continue to be able to add on this.”

The 14th Amendment question was studied by Obama administration lawyers during the 2011 debt limit showdown, which informed Biden’s refusal to negotiate now with Republicans on raising the debt limit. At the time, Justice Department lawyers said they did not believe the president had the unilateral power to issue new debt.

Biden, in an interview with MSNBC on Friday, was asked about the 14th Amendment proposal, saying, “I’ve not gotten there yet.”

Republican Rep. Mike Turner of Ohio, chairman of the House Intelligence Committee, and the committee’s top Democrat, Connecticut Rep. Jim Himes, told CNN’s “State of the Union” that the debt limit debate posed a national security threat.

“The Russians and the Chinese would seek to exploit it,” Himes said. “The United States has never really come close defaulting on its debt before. So it’s hard for us to imagine what that might look like.”

Turner argued that Biden would bear the brunt of the responsibility. “I think if the president fails to negotiate with Congress and has continued out-of-control spending that threatens our economy, that it is a national security threat,” he said.

 

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Economy

Here is Trump economy: Slower growth, higher prices and a bigger national debt

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If Donald Trump is re-elected president of the United States in November, Americans can expect higher inflation, slower economic growth and a larger national debt, according to economists.

Trump’s economic agenda for a second term in office includes raising tariffs on imports, cutting taxes and deporting millions of undocumented migrants.

“Inflation will be the main impact” of a second Trump presidency, Bernard Yaros, lead US economist at Oxford Economics, told Al Jazeera.

“That’s ultimately the biggest risk. If Trump is president, tariffs are going up for sure. The question is how high do they go and how widespread are they,” Yaros said.

Trump has proposed imposing a 10 percent across-the-board tariff on all imported goods and levies of 60 percent or higher on Chinese imports.

During Trump’s first term in office from 2017 to 2021, his administration introduced tariff increases that at their peak affected about 10 percent of imports, mostly goods from China, Moody’s Analytics said in a report released in June.

Those levies nonetheless inflicted “measurable economic damage”, particularly to the agriculture, manufacturing and transportation sectors, according to the report.

“A tariff increase covering nearly all goods imports, as Trump recently proposed, goes far beyond any previous action,” Moody’s Analytics said in its report.

Businesses typically pass higher tariffs on to their customers, raising prices for consumers. They could also affect businesses’ decisions about how and where to invest.

“There are three main tenets of Trump’s campaign, and they all point in the same inflationary direction,” Matt Colyar, assistant director at Moody’s Analytics, told Al Jazeera.

“We didn’t even think of including retaliatory tariffs in our modelling because who knows how widespread and what form the tit-for-tat model could involve,” Colyar added.

‘Recession becomes a serious threat’

When the US opened its borders after the COVID-19 pandemic, the inflow of immigrants helped to ease labour shortages in a range of industries such as construction, manufacturing, leisure and hospitality.

The recovery of the labour market in turn helped to bring down inflation from its mid-2022 peak of 9.1 percent.

Trump has not only proposed the mass deportation of 15 million to 20 million undocumented migrants but also restricting the inflow of visa-holding migrant workers too.

That, along with a wave of retiring Baby Boomers – an estimated 10,000 of whom are exiting the workforce every day – would put pressure on wages as it did during the pandemic, a trend that only recently started to ease.

“We can assume he will throw enough sand into the gears of the immigration process so you have meaningfully less immigration, which is inflationary,” Yaros said.

Since labour costs and inflation are two important measures that the US Federal Reserve weighs when setting its benchmark interest rate, the central bank could announce further rate hikes, or at least wait longer to cut rates.

That would make recession a “serious threat once again”, according to Moody’s.

Adding to those inflationary concerns are Trump’s proposals to extend his 2017 tax cuts and further lower the corporate tax rate from 21 percent to 20 percent.

While Trump’s proposed tariff hikes would offset some lost revenue, they would not make up the shortfall entirely.

According to Moody’s, the US government would generate $1.7 trillion in revenue from Trump’s tariffs while his tax cuts would cost $3.4 trillion.

Yaros said government spending is also likely to rise as Republicans seek bigger defence budgets and Democrats push for greater social expenditures, further stoking inflation.

If President Joe Biden is re-elected, economists expect no philosophical change in his approach to import taxes. They think he will continue to use targeted tariff increases, much like the recently announced 100 percent tariffs on Chinese electric vehicles and solar panels, to help US companies compete with government-supported Chinese firms.

With Trump’s tax cuts set to expire in 2025, a second Biden term would see some of those cuts extended, but not all, Colyar said. Primarily, the tax cuts to higher earners like those making more than $400,000 a year would expire.

Although Biden has said he would hike corporate taxes from 21 percent to 28 percent, given the divided Congress, it is unlikely he would be able to push that through.

The contrasting economic visions of the two presidential candidates have created unwelcome uncertainty for businesses, Colyar said.

“Firms and investors are having a hard time staying on top of [their plans] given the two different ways the US elections could go,” Colyar said.

“In my entire tenure, geopolitical risk has never been such an important consideration as it is today,” he added.

 

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China Stainless Steel Mogul Fights to Avoid a Second Collapse

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Chinese metal tycoon Dai Guofang’s first steel empire was brought down by a government campaign to rein in market exuberance, tax evasion accusations and a spell behind bars. Two decades on, he’s once again fighting for survival.

A one-time scrap-metal collector, he built and rebuilt a fortune as China boomed. Now with the economy cooling, Dai faces a debt crisis that threatens the future of one of the world’s top stainless steel producers, Jiangsu Delong Nickel Industry Co., along with plants held by his wife and son. Its demise would send ripples through the country’s vast manufacturing sector and the embattled global nickel market.

 

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Why Trump’s re-election could hit Europe’s economy by at least €150 billion

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A Trump victory could trigger a 1% GDP hit to the eurozone economy, with Germany, Italy, and Finland most affected. Renewed NATO demands and potential cessation of US aid to Ukraine could further strain Europe.

The potential re-election of Donald Trump as US President poses a significant threat to the eurozone economy, with economists warning of a possible €150 billion hit, equivalent to about 1% of the region’s gross domestic product. This impact stems from anticipated negative trade repercussions and increased defence expenditures.

The recent attack in Butler, Pennsylvania, where former President Trump sustained an ear injury, has boosted his re-election odds. Prediction markets now place Trump’s chances of winning at 71%, a significant rise from earlier figures, while his opponent, Joe Biden, has experienced a sharp decline, with his chances dropping to 18% from a peak of 45% just two months ago.

Rising trade uncertainty and economic impact from tariffs

Economists James Moberly and Sven Jari Stehn from Goldman Sachs have raised alarms over the looming uncertainty in global trade policies, drawing parallels to the volatility experienced in 2018 and 2019. They argue that Trump’s aggressive trade stance could reignite these uncertainties.

“Trump has pledged to impose an across-the-board 10% tariff on all US imports including from Europe,” Goldman Sachs outlined in a recent note.

The economists predict that the surge in trade policy uncertainty, which previously reduced Euro area industrial production by 2% in 2018-19, could now result in a 1% decline in Euro area gross domestic product.

Germany to bear the brunt, followed by Italy

Germany, Europe’s industrial powerhouse, is expected to bear the brunt of this impact.

“We estimate that the negative effects of trade policy uncertainty are larger in Germany than elsewhere in the Euro area, reflecting its greater openness and reliance on industrial activity,” Goldman Sachs explained.

The report highlighted that Germany’s industrial sector is more vulnerable to trade disruptions compared to other major Eurozone economies such as France.

After Germany, Italy and Finland are projected to be the second and third most affected countries respectively, due to the relatively higher weight of manufacturing activity in their economies.

According to a Eurostat study published in February 2024, Germany (€157.7 billion), Italy (€67.3 billion), and Ireland (€51.6 billion) were the three largest European Union exporters to the United States in 2023.

Germany also maintained the largest trade surplus (€85.8 billion), followed by Italy (€42.1 billion).

Defence, security pressures and financial condition shifts

A Trump victory would also be likely to bring renewed defence and security pressures to Europe. Trump has consistently pushed for NATO members to meet their 2% GDP defence spending commitments. Currently, EU members spend about 1.75% of GDP on defence, necessitating an increase of 0.25% to meet the target.

Moreover, Trump has indicated that he might cease US military aid to Ukraine, compelling European nations to step in. The US currently allocates approximately €40bn annually (or 0.25% of EU GDP) for Ukrainian support. Consequently, meeting NATO’s 2% GDP defence spending requirement and offsetting the potential reduction in US military aid could cost the EU an additional 0.5% of GDP per year.

Additional economic shocks from Trump’s potential re-election include heightened US foreign demand due to tax cuts and the risk of tighter financial conditions driven by a stronger dollar.

However, Goldman Sachs believes that the benefits from a looser US fiscal policy would be marginal for the European economy, with by a mere 0.1% boost in economic activity.

“A Trump victory in the November election would likely come with significant financial market shifts,” Goldman Sachs wrote.

Reflecting on the aftermath of the 2016 election, long-term yields surged, equity prices soared, and the dollar appreciated significantly. Despite these movements, the Euro area Financial Conditions Index (FCI) only experienced a slight tightening, as a weaker euro counterbalanced higher interest rates and wider sovereign spreads.

In conclusion, Trump’s potential re-election could have far-reaching economic implications for Europe, exacerbating trade uncertainties and imposing new financial and defence burdens on the continent.

 

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