FOR GOOD REASON, countries avoid defaulting on their sovereign debts if they can. Argentina, Greece and Lebanon can all testify to the pain of this experience. America, however, is exceptional. Every few years, it ends up precariously close to partial default, only to give way just before taking all the faith and credit of the country (and world markets) to the brink of the precipice. Triggering events are never economic, but always political. The most recent surge in this self-defeating habit was particularly insane. And it is almost certain that it will not be the last.
The reason is an abstruse mechanism called the debt ceiling. Since 1917, Congress has in one form or another maintained a limit on the amount of debt the Treasury can issue. Because Congress tends to run budget deficits, this has had to be increased or suspended over 100 times since its inception. The only other western country to maintain a similar debt limit is Denmark, although it is set much higher than actual debt and therefore not close to “binding”.
In contemporary America, the approach of a binding debt ceiling is perversely viewed as a moment of maximum leverage. As the final deadline grew pressing, Republicans in Congress used filibuster (a parliamentary blockade tactic allowed in the Senate) to prevent Democrats from easily raising the ceiling. Janet Yellen, the Secretary of the Treasury, warned that the federal government could be close to default as early as October 18. The Treasury calls the day when it no longer has the capacity to pay both debt service and essential programs like social security the “x date”. The guys on Wall Street happily call it the “deadline.” On October 6, a deal seemed close at hand between the deadlocked Democrats and Republicans – who seemed poised to continue the pool game until the moment of economic cataclysm draws near – to push the issue until the end of the day. ‘in December. At this point, the rigmarole begins again.
Previous struggles against the debt ceiling have been destructive. In 2011, Republicans brought the country to the brink of default in order to force budget cuts, leading to a downgrade in the country’s credit rating for the first time. Federal borrowing costs increased by $ 1.3 billion that year alone. Another near miss occurred in 2013, when Republicans unsuccessfully tried to force Barack Obama to fund his iconic healthcare program. This time around, however, the Republicans don’t seem to have political goals.
Before the standoff was postponed, Republicans insisted Democrats bypass their obstruction by using a special process called reconciliation. It was doable, although it would have cost the Senate 10 to 15 days of speaking time to finish. Mitch McConnell, the Republican leader in the Senate and chief architect of past and present impasses on the debt ceiling, had opposed the idea of providing a “shortcut” to these procedural hurdles he had erected. Reluctant to go that route, Democrats jumped at Mr McConnell’s later offer to postpone the issue until December.
This deal offers only a temporary reprieve from this infuriating cycle. What was once emergency measures has now become routine. The Treasury must use “extraordinary measures” to avoid impending default (such as suspending payments on certain types of retirement accounts) so often now that they are barely noticed. These had been in effect since August. Another round could begin as the December deadline approaches, but they will eventually run out, a new x date will arrive, and frantic trading will resume.
The more often Congress plays this game, the greater the chance of miscalculation. On the other hand, there would be a painful economic crisis, especially since it would be entirely self-inflicted. Without the ability to issue more debt and without any accounting gimmicks to secure more margin, the Treasury would have to make tough decisions. Daily expenses are expected to match daily revenues, resulting in day-to-day spending reductions of up to 40%. If the government prioritized paying interest on its debt, it would require the cessation of vital payments like Social Security checks and health care payments or the salaries of soldiers and federal employees. It would certainly invite prosecution as well. But the risk of default on debt is potentially calamitous: A Federal Reserve research note drafted during the 2013 debt ceiling crisis predicted that U.S. debt yields would soar, the dollar would plunge in value. , that stocks would fall by a third and a mild recession would ensue.
Almost everyone agrees that this result is chaotic, destructive and utterly insane. So of course, Congress will be here again in a few months.■
This article appeared in the United States section of the print edition under the headline “Groundhog Days”