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US Treasury Secretary Janet Yellen has set the doomsday clock: The US government runs out of money October 18, when it will hit the borrowing ceiling set by Congress.
America’s largest bank, JPMorgan Chase, is already prepping for a disaster in financial markets if lawmakers can’t agree to print more money to pay the nation’s mortgage with itself.
“Every single time this comes up, it gets fixed, but we should never even get this close,” JPMorgan CEO Jamie Dimon told Reuters. “I just think this whole thing is mistaken and one day we should just have a bipartisan bill and get rid of the debt ceiling. It’s all politics.”
The problem is that the debt cap is being reached just as Congress is stuck in negotiations over President Joe Biden’s massive social and economic agenda. Lawmakers are arguing over new spending, but failure to act before October 18 to make sure the US can keep borrowing to cover money that’s already been spent could send the entire world economy reeling.
What is the debt ceiling?
The “debt ceiling” is exactly what it sounds like – the maximum that the federal government is allowed to borrow. Why is there a maximum? Because Congress set one more than a century ago to curtail government borrowing. But instead of sticking to it, Congress has gone ahead and raised the limit every time it’s been hit.
The arguments in favor are generally the same every time. One is that the money’s already been spent – raising the debt limit just lets us keep paying back our creditors. (More on that in a second.) Another is that failing to raise the limit would cause the US to default on some of its obligations, triggering a crisis in the financial system.
The reasons against it are simpler. Outstanding public debt is about $28.7 trillion. That’s a hard number to choke down, and it’s getting larger every second.
A true and complicated mess. The debt limit is one of four big spending measures that are all tangled up together on Capitol Hill. These also include a bipartsan infrastructure bill that’s needed to unlock a much larger Democrats-only spending bill.
Progressive Democrats in the House are fuming at moderates in the Senate who won’t yet buy into the larger bill. Republicans haven’t offered the support needed to pass the bipartisan bill.
Get the latest on the snarl, which led Biden to clear his schedule, from CNN’s Phil Mattingly and Lauren Fox here.
Opposed to debt, just fine with spending. Republicans might buy into that bipartisan infrastructure bill, but they have settled on a party line that Democrats are in the majority and can raise the debt limit on their own. But Republicans are also forcing Democrats to use a budget process that’s been manipulated out of all recognition to get any of this done.
It is a SNAFU in the original World War I sense of the term.
Government spending vs. government debt. There’s also a more immediate issue, which is a so-called partial and surely temporary government shutdown that would be triggered if lawmakers can’t agree to extend funding for the entire federal government past September 30, when it’s set to run out.
But shutdowns have happened before, and they can be resolved quickly. The threat of a US default, which is what will happen if lawmakers can’t agree on acting on the debt ceiling by October 18, is scarier by magnitudes because they’ve never been stupid or stubborn enough to risk it.
What will happen, procedurally, is that the Treasury Department will have to decide what bills it pays quickly and which ones it lets slide. CNN’s Tami Luhby explains that will hit Social Security recipients and others who depend on government benefits.
But this is also a big deal because the US is supposed to be a risk-free investment. US debt is the “benchmark for the entire world,” said Mark Zandi, the chief economist for Moody’s Analytics.
The world has faith in the US because they get principal and interest on time.
“They feel like this debt is risk free. It’s the benchmark for the entire world. If that confidence is shaken – if they don’t get paid on time even briefly – that means they’re going to demand a much higher interest rate to compensate for that risk.”
If the faith is shaken? Then there would be a domino effect, Zandi said.
- Stock markets decline.
- Mortgage rates rise.
- It’s going to be difficult for businesses to raise the cash that they need to fund their daily operations.
If the threat of those consequences doesn’t shake lawmakers into action and they do default, the problems would only escalate. Particularly if they didn’t immediately react and a default persisted for weeks, Zandi said it would:
- cost millions of US jobs,
- unemployment would shoot to double digits and
- the stock market could lose up to a third of its value – $15 trillion.
There is a counterargument that the actual default would not be as cataclysmic as anticipated. When the country approached default in 2011, S&P downgraded the US credit rating, but the consequences were minimal since lawmakers ultimately paid the debt.
Republicans have never liked raising the debt limit. Even when they controlled the Senate. When the debt ceiling was raised in 2019, all but 28 senators supported the move. Most of the “no” votes – 23 of them – were Republicans.
While more than half of Senate Republicans voted to extend the debt limit, GOP support was much smaller in the House, which was controlled by Democrats. There were 132 “no” votes from Republicans and just 16 from Democrats.
The US has been in debt since its inception. When the country was founded, it was already in debt – more than $75 million – as it tried to pay off Revolutionary War debt, according to the Treasury Department. President Andrew Jackson actually zeroed out US debt for the one and only time, but he did it by blowing up the US banking system. The national debt has shrank and grown periodically through wars and, increasingly, as the US has done more to take care of its citizens through social welfare programs while at the same time cutting taxes.
Both parties used to work together on this. One thing that helped passage was buy-in from leaders in both parties – in this case, Democrats Chuck Schumer and Nancy Pelosi and Republicans Mitch McConnell and Kevin McCarthy.
What’s different this time is that McConnell and McCarthy have made a political decision to oppose, regardless of the effect on the economy, and they’re taking the vast majority, if not all, Republicans along with them.
Getting creative to raise the debt limit. Lawmakers didn’t technically raise the debt limit in 2019. They just passed a law saying that the law on the debt limit “shall not apply” for two years. And any accrued debt during that time would be added to the tally. That seems like a cop-out, but it also allowed them to dispense with the damaging debt debate.
Getting even more creative to raise the debt limit. McConnell was the mastermind behind a much more clever solution in 2011, where Congress ceded its authority on this difficult subject and allowed then-President Barack Obama to unilaterally raise the debt ceiling. Lawmakers reserved the right to pass a motion of disapproval.
Republicans could caterwaul about the skyrocketing debt without actually having to do anything about it except express their disapproval.
Getting most creative. The trillion-dollar coin idea, by which Biden would issue one or more massively valuable coins to be deposited, is not yet being taken very seriously.
Status quo for now. Recently, lawmakers settled on either annual or biannual suspensions of the debt limit, essentially writing a blank check every year or two.
The most recent of these expired at the end of July, but the Treasury Department has been moving things around since then by delaying payments to retirement and pension accounts. That flexibility ends October 18.
Read more about the history of national debt from the Congressional Research Service.
A “permanently weaker nation.” It’s not just creditors like pension plans and foreign governments that could stop getting paid interest. Should the government use the money coming in to pay seniors on Social Security or troops? Should it pay for food assistance that helps people eat?
Yellen argued in the Wall Street Journal that a default would permanently weaken the US.
Contorting a budget process to blow up the debt. Now McConnell’s insisting Democrats carry the burden of raising the debt ceiling and, by enforcing a GOP blockade of votes in regular order, he’s trying to make them use a process that was developed to help balance the budget. Instead, both parties have used it to blow up deficits (Republicans used it to pass tax cuts they’re now forcing Democrats to vote to pay for and Democrats used it to pass the Affordable Care Act and for additional government spending during the pandemic).