In what seems to be turning into a biannual tradition of sorts, headlines out of the nation’s capital are currently dominated by news, speculation, predictions, and other assorted communications about the looming debt ceiling and warnings about the US government potentially defaulting on its obligations. Depending on which side of the aisle you listen to, either one side is refusing to allow the government to pay for spending that Congress already approved, or the other side is intent on ballooning the deficit with no intention of bringing the national debt under control. Both sides have a certain number of facts on their side, but both are also emphasizing the parts that make their case and not necessarily accurately describing the full picture.
It may help to think of the national debt as the government’s credit card and the debt ceiling as the credit limit. Of course, the government is in the unique position of being both the card issuer and the card user. In other words, the government can raise the credit limit when it needs to for the purpose of covering costs associated with spending that has been approved by Congress. In fact, the US has raised the debt limit 78 times, just since 1960: 29 of those occasions were during Democratic presidencies and 49 happened when the GOP had the White House. The limit was raised three times during the Trump presidency, for example.
So far, so good. But certain conservatives in Congress are currently insisting that they will not vote to raise the limit unless there are guarantees of spending cuts. Other groups of the opposite persuasion are insisting just as loudly that they will not accept a debt ceiling increase that requires such cuts. And in between the two groups, US Treasury Secretary Janet Yellen is reporting that the government will run out of money to pay its bills, possibly as early as June 1, unless Congress acts to raise the debt ceiling.
What would happen if Congress fails to come to a compromise and act before a government default? It’s hard to say, since Congress has always managed to increase the limit in time—though sometimes just barely. Some analysts, who believe that the US economy is already teetering on the brink of recession, see a default on US obligations as the event that finally tips the economy over the edge. Predictions of the severity of such a recession—if it happens—and the associated increases in unemployment range from mild to severe. Because US Treasury obligations are generally regarded as the most secure debt in the world, the possibility of default would likely create at least short-term turmoil in domestic and world credit markets. The Treasury would be forced to decide which bills to pay and which to defer, and most scenarios indicate that they would likely prioritize direct US Treasury obligations and defer payments to programs and federal agencies like Social Security, the armed forces, and government workers. At least some disruption in financial markets seems likely, as the stock market would react to credit uncertainties in light of their implications for companies’ ability to obtain operating funds and maintain cash flow. Again, precise predictions of the dimensions of the disruption are difficult, because the government has never actually defaulted. But it seems reasonable to expect at least some short-term volatility.
It is probably worth noting that so far, despite the nearness of Secretary Yellen’s deadline, the financial markets have remained relatively calm. We continue to have confidence in the resiliency of the markets: for more than a century, they have been a principal engine of wealth generation—through wars, disasters, recessions, depressions, and everything in between. Even if we go through some temporary disruption around this latest debt ceiling debate, we can probably expect the markets to resume their generally upward trend at some point.
Of course, guessing what politicians will do is about as easy as predicting the financial markets. But one thing we do know is that they will typically do whatever they believe will get them re-elected. It is doubtful that any members of Congress relish the thought of campaigning while being tagged with the responsibility of causing Social Security and Medicare payments to be delayed. So, it seems somewhat likely that the current talks going on between the two sides will ultimately result in some kind of agreement that prevents such a scenario.
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