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US President Joe Biden meets his 'Investing in America Cabinet' to discuss the Investing in America agenda in the Roosevelt Room of the White House in Washington, DC, on May 5.JIM WATSON/AFP/Getty Images

At the end of the month, the U.S. could default on its debt for the first time in history, with economists warning it would upend markets and plunge the economy into recession. Or President Joe Biden might be forced to agree to spending cuts, jeopardizing key parts of his agenda. Or maybe the country will mint a US$1-trillion coin in a particularly whimsical creditor-payment idea.

Treasury Secretary Janet Yellen’s warning last week that the U.S. government could start running out of money as soon as June 1 if Congress fails to increase the debt ceiling has raised a range of possible scenarios, from the alarming to the bizarre. And it has prompted Mr. Biden, after months of refusing to negotiate with congressional Republicans, to invite them to the White House on Tuesday.

“They’re trying to hold the debt hostage,” the President said at an economic meeting Friday, “to get us to agree to some draconian cuts.”

The looming crisis has focused renewed scrutiny on one of the strangest quirks of the U.S. fiscal system: a self-imposed doomsday clock that threatens to strike midnight every couple of years.

What is the debt ceiling and why does the U.S. have one?

The U.S. Constitution gives Congress the power to borrow money and pay public debts. To make this process more efficient during the First World War, Congress authorized the government to borrow as much money as necessary up to a specific limit. For nearly a century afterwards, Congress regularly raised this ceiling with little drama.

Then, in 2011 and 2013, Republican legislators decided to use the limit as leverage, forcing then-president Barack Obama to make spending cuts in exchange for lifting the ceiling.

While the artificial cap on borrowing has become a handy tool for making the White House negotiate with Congress, it doesn’t serve a necessary fiscal purpose since the federal budget is set through a separate process.

“Decisions about spending and revenue have already been made, and how much debt the U.S. is carrying is a direct consequence of those decisions,” said Sarah Binder, a congressional expert at the Brookings Institute think tank in Washington.

“So, tacking on a limit when the spending proclivities of both parties exceed that limit is just setting yourself up for these economically destabilizing events.”

What happens now to the debt ceiling?

While Donald Trump was president, Congress repeatedly suspended the ceiling as he piled on debt. During Mr. Biden’s first year in office, Congress raised the limit.

But in January, after Republicans secured a narrow majority in the House of Representatives, they started playing hardball. Last month, Speaker Kevin McCarthy demanded the end of Mr. Biden’s green energy subsidies and student debt forgiveness program in exchange for raising the ceiling for one year. “The President can no longer put this economy in jeopardy,” he said.

Initially, Mr. Biden insisted he would not make any deals. After Ms. Yellen announced that the U.S. could default as early as June 1, however, Mr. Biden announced the meeting with Mr. McCarthy and other congressional leaders.

Senate Republicans further turned up the pressure this weekend when 43 of them, including their leader Mitch McConnell, signed a letter vowing not to raise the ceiling without “substantive” cuts to government spending.

What happens next with the debt ceiling?

The most obvious possibility is that Mr. Biden and Mr. McCarthy strike some sort of cuts-for-debt deal. Such a solution, however, could be difficult for both men to swallow. Mr. Biden has no desire to dial back his achievements, including the climate change-fighting Inflation Reduction Act, especially since he announced that he is running for re-election. The emboldened right wing of Mr. McCarthy’s caucus, meanwhile, is likely to punish him if he fails to extract significant concessions.

Under the most extreme scenario, the U.S. could stop paying its debts, which economists warn would result in spiking interest rates, stalled funding markets and job losses.

What about that trillion-dollar coin?

Some constitutional scholars and liberal pundits advocate that Mr. Biden circumvent the debt-ceiling entirely. One school of thought holds that, because the Constitution’s 14th amendment says the U.S.’s public debt “shall not be questioned,” the debt ceiling is unconstitutional. By this logic, Mr. Biden could simply ignore it and keep borrowing money.

Another idea would exploit a loophole in U.S. currency law that allows the mint to strike platinum coins of any value it wishes, presumably to make commemorative coins. This power could instead be used to make a coin of ridiculously high value that would be given to the U.S.’s central bank to make payments without taking on more debt.

Given the constitutional crisis (and possible inflation) that would result, it seems unlikely that Mr. Biden would try either of these things.

Why does the U.S. keep doing this to itself?

For the last two decades, both Democrats and Republicans have pursued fiscal policies of growing deficits despite making no attempt to abolish the debt ceiling.

Jasmine Farrier, an expert in legislative-executive fiscal policy, says neither party wants to admit either that they are fine with debt or start a difficult conversation about lower spending and higher taxes to balance the budget.

“There is simply no political courage or voter interest to really make hard choices,” said Prof. Farrier, a political scientist at the University of Louisville. “Be honest with voters – either the parties can hold hands and say, ‘we both love debt, and you don’t want the pain of spending cuts or tax increases,’ or ‘we have to make hard choices.’”

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