US National Default and Government Shutdown Imminent... Fed Also Considering Emergency Plans

Deadline Nears for Federal Budget and Debt Ceiling Increase by Month-End
Historic National Default Concerns Grow Amid Democratic-Republican Conflict
NYT Warns "High Possibility This Time"
Fed May Implement Emergency Plan Established in 2013

Nancy Pelosi, Speaker of the U.S. House of Representatives, is speaking in front of the U.S. Congress. [Image source=AP Yonhap News]

[Asia Economy New York=Correspondent Baek Jong-min] The unprecedented possibility of a U.S. national default and federal government shutdown is increasing. If no agreement is reached in the U.S. Congress by the 31st, the worst situation, incomparable to the China Evergrande Group default crisis, will occur. There are even expectations that the U.S. Federal Reserve Board (Fed) will activate an emergency plan.

The Wall Street Journal (WSJ) reported on the 26th (local time) that the Fed may bring out the emergency plan prepared during the 2013 federal government debt ceiling increase crisis again.

The U.S. federal government debt has exceeded the legal limit of $28.78 trillion. If the debt ceiling is not raised, a U.S. default will occur between October 15 and November. Based on the Fed's 2013 conference call transcripts, WSJ predicted that the Fed would respond by purchasing defaulted U.S. Treasury bonds in the market and selling the Treasury bonds it holds.

This is not the first time the U.S. has faced the debt ceiling increase issue. Since 2013, the Democratic and Republican parties have periodically conflicted over adjusting the debt ceiling. Each time, the government and the Fed have activated emergency plans or prepared countermeasures.

The New York Times (NYT) expressed concern that although the U.S. national default crisis has escalated before, it has never actually happened, but this time the possibility of default is high. This is because the Republicans are actively opposing the Democrats' attempt to combine the debt ceiling increase and the temporary budget bill.

NYT also reported that sources in Washington expect that due to the Democrats and Republicans failing to respond properly, the financial market could fall into chaos and the economy, which is recovering from the COVID-19 crisis, could be shaken again.

The budget bill processing is also problematic. If the budget is not finalized by the end of this month, when the federal government's fiscal year ends, a partial federal government shutdown will occur. This is a crisis where a U.S. national default and shutdown could happen simultaneously.

Senate Budget Committee Chairman Senator Pat Toomey, a Republican, stated in an interview with CNN on the 26th, "If the Democrats try to combine the debt ceiling increase and the temporary budget bill, I will oppose it," declaring he will oppose the Senate vote scheduled for the next day.

House Speaker Nancy Pelosi said in an interview with ABC, "(The Republicans) are irresponsibly difficult to even talk to," and insisted, "The U.S. credit must not be compromised."

The Democrats plan to invoke the budget reconciliation process to overcome Republican opposition, but Senator Joe Manchin is strongly opposing it, making even this difficult. The Democrats and Republicans split the 100 Senate seats evenly with 50 each. If Senator Manchin defects, the Democrats cannot secure the 50 votes needed to invoke the budget reconciliation process.

Some suggest the possibility of last-minute negotiations. A major foreign media outlet predicted that the Democrats might separate the debt ceiling increase and the temporary budget bill for processing, considering Republican opposition.