Biden locked in stand-off as US hits debt ceiling

A COUNTDOWN to a possible United States default has begun after the government reached its borrowing limit, amid clashes between President Joe Biden and Republicans.

Janet Yellen, the US Treasury secretary, said the administration had been forced to take “extraordinary measures” after America breached its $31.4trillion (£25trillion) debt ceiling yesterday, which limits the amount the country can borrow.

The special measures, which amount to cost cutting, raise the prospect that the US could run out of cash in the coming months unless an agreement can be reached on raising the borrowing limit. The funding crunch comes as Mr Biden battles with Republicans in Congress, who believe the president is too profligate in his spending.

Kevin Mccarthy, the Republican Speaker of the House of Representatives,

‘I respectfully urge Congress to act promptly to protect the full faith and credit of the United States’

accused Mr Biden of arrogance earlier this week for failing to negotiate about the borrowing limits.

The stand-off follows November’s midterm elections, which left Democrats in control of the Senate and Republicans with a slim majority in the House of Representatives.

In a letter to congressional leaders, Ms Yellen warned that there was “considerable uncertainty” surrounding how long the “extraordinary measures” could continue before the US government risked default.

She added: “I respectfully urge Congress to act promptly to protect the full faith and credit of the United States.”

Ms Yellen said the Treasury would suspend investments into the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund until June to create extra borrowing capacity.

Meanwhile, Grant Shapps, the Business Secretary, warned the World Economic Forum in Davos that “it is very important that we don’t slip into protectionism”, pointing to the risk that could happen with the Inflation Reduction Act in the US.

The sweeping legislation, which was approved in August and includes a record $369bn in spending on climate and energy policies, angered some US allies, including the 27 EU nations.

‘My first reaction was ‘Oh my God, it’s protectionist’ ... then I realised that it’s the best thing that can happen to Europe’

‘The IRA is incredible legislation and matching it is nonnegotiable for Europe, otherwise it is going to be very difficult for investment’

Two competing ideologies of international capitalism are battling for 21st century dominance. The hegemonic Davos model of globalisation for the rich is at last being confronted and tamed by the Biden model of managed globalisation for workers.

That at least is the solipsistic pitch of Katherine Tai, the US trade chief who is the soft-spoken battering ram of the protectionist Biden administration, and the nemesis of free trade as we have known it since the Second World War.

“We need a new world economic order, with a global trading system that is worker-centred,” she said in Davos, as ministers from the developing world listened with forced smiles.

Tai said the model of global capitalism long pushed by the World Economic Forum (WEF) has gone off the rails, leaving half of society behind and setting off a populist backlash that threatens liberal democracy itself.

“Let us not lose sight of the people and the quality of the prosperity we’re creating,” she said.

She does an injustice to Davos. Klaus Schwab’s WEF was born out of south

German social Catholicism and informed by the tradition of Pope Leo XIII’S Rerum Novarum in 1891, which exhorted capitalists to respect the rights of workers. Davos, too, has been trying to tame globalisation.

Few can dispute Tai’s indictment of inequality. American corporate bosses today earn 320 times more on average than their employees. “It is unsustainable,” she said.

Yet Washington hides another agenda behind this morality tale. It delivered a body-blow to the World Trade Organisation (WTO) early last month, announcing in the most brutal of language that the US would “not cede decision-making over its essential security to WTO panels”.

Since most of US trade is now deemed a matter of national security, Washington has effectively killed what is left of the rules-based global trading system that it created and led for decades.

The US Inflation Reduction Act (IRA) – a $370bn (£299bn) bung of subsidies and tax credits for green tech – rubs salt into the wound with “buy American” clauses which mean, for example, that electric cars made in the US get a $7,500 subsidy: those imported from Europe do not. Biden’s globalisation for the workers is cover for old-fashioned protectionism. Every country has workers to look after.

Europe is no stranger to rigged markets and procurement. It too hides an iron fist beneath a velvet glove. There is an element of shadow-boxing and feigned indignation in the warnings of a trans-atlantic trade war. The more that the Europeans think about the implications, the more they are starting to like this hydra-headed IRA, and to like the excuses it gives them to gang up on China.

European companies love it because they think the EU will have to match the subsidies, allowing them to dip into two sets of gigantic honey pots, one on each side of the Atlantic.

“My first reaction was, ‘Oh my God, it’s protectionist.’ But then I realised that it’s the best thing that can happen to Europe,” said Ilham Kadri, chief executive of the Belgian chemical group Solvay.

“Yes, we’ll take the cheque from the IRA, but we need a EURO-IRA as well and an industrial policy of our own,” she said in Davos, arguing that the US shock will force Europe to pull its head out of the sand, get rid of obsolete infrastructure, and stop overregulating everything.

“It’s a call to arms,” said Aditya Mittal, head of Arcelormittal, the world’s largest steel company outside China. “The IRA is incredible legislation and matching it is nonnegotiable for Europe, otherwise it is going to be very difficult for investment.”

Others have noticed the irresistible allure of the IRA. “Before the bill we had no projects in North America: now we have four,” said Australian mining billionaire Andrew Forrest. “It didn’t take long once we looked at the text. We can do green hydrogen and get a 50pc or even 60pc refund on our capital.

“What I say to Europe is stop whinging about America doing the right thing, and going faster, and go after them yourselves.”

That is exactly what is now going to happen. European Commission president Ursula von der Leyen unveiled the EU’S first riposte this week, pledging to relax state aid rules and to fast-track planning consent. “We will put forward a new Net-zero Industry Act to focus investment on strategic projects along the entire supply chain,” she said at the WEF.

Eurocrats like the IRA because it opens the door to new EU slush funds along the lines of the €800bn (£700bn) pandemic Recovery Fund. These fall under the control of the commission and serve as a stealth tool for centralisation and creeping fiscal union. Unless there is a central fund – or so the argument goes – green-tech spending degenerates into an intra-eu dispute between countries such as Germany with fiscal muscle and weaker states at their borrowing limits.

Advocates of ‘European sovereignty’, meaning a superstate able to stand toe-to-toe against the US, also see the advantages of the IRA.

“It has widened the gap in competitiveness between Europe and the US, but I am not complaining because it is a wake-up call,” said Laurence Boone, France’s Europe minister.

“We need to be much more radical and concentrate on strategic sectors. We need a big bang,” she said in Davos.

The green lobby likes the IRA because it acts as a powerful catalyst for global decarbonisation, setting off an international arms race in green tech and accelerating the demise of fossil energy.

“From a sustainability perspective, a climate perspective, I like this competition,” said Mark Carney, the UN climate envoy and elder statesman of global finance.

Biden’s protectionism may end up being a blessing, so long as he does not push it too far. But the stark division of the global trading system into three giant blocs pursuing fortress green strategies is more than awkward for the rest of the world, watching from the sidelines with dismay.

The middle powers will have to match them with a criss-cross alliance of their own, assembling an even larger bloc with even greater market muscle. Somebody has to uphold the old order of free and open commerce.