The farce of the US debt ceiling risks slowly pushing the global economy into a crash
Most countries – including Ireland – do everything they can to avoid defaulting on payments.
America is different, however, and every few years some Republican lawmakers embrace the idea that the looming default offers a cathartic moment to “drain the swamp,” break Washington’s spending streak, and shrink the government.
You get this opportunity because expenses and taxes are reconciled separately and before the debt approval. That time has come again, and with America’s gross debt now reaching a record $31.4 trillion, another stalemate looms.
Yet even amidst the bipartisan language of 2023, investors and rating agencies assume we’ve seen this film before and know how it ends — when push comes to shove and the US Treasury is faced with the choice of paying bondholders or soldiers, a deal will be made.
That’s what happened in 2011 in the bitter standoff when a deal was struck just hours before the deadline, and again in 2013. Even in 2015, when I was working as a journalist in Washington, a relatively amicable settlement was still being extended and has been resolved.
However, this benevolent assumption is probably the greatest risk to the global economy – just as the American consumer is the engine of global growth, US Treasuries are the engine of the financial system.
The problem in 2023 is bigger than it was in 2011. Given the tiny majority of the Republican House of Representatives — Speaker Kevin McCarthy’s job as Speaker depends on just four votes — whoever legislator shouts the loudest and lasts the longest will end up wielding the most power , and there’s good reason to believe that the likes of Rep. Marjorie Taylor Greene — a Trump ally and occasional QAnon conspiracy theorist who became a member of Congress in 2021 — have very little to lose by hanging out to the end.
The legislator who shouts the loudest and lasts the longest will end up wielding the most power
Ms Greene, an ally of Mr McCarthy, says “there must be spending cuts” in exchange for a debt ceiling hike. She didn’t do the math or “really formulate an exact list,” but still.
Others among the Freedom Caucus lawmakers of which she is a member say they have an agreement with the Republican House leadership to present a budget that will balance for 10 years and freeze discretionary spending at 2022 levels.
This is happening nowhere outside the fevered minds of the caucus. An analysis by the bipartisan Committee on Responsible Federal Budgeting calculates that all spending would have to be cut by a quarter to achieve this balanced budget. If you exclude defense, a Republican favorite, along with Social Security and Medicare, the remaining spending would have to be cut by 85 percent.
If the Republican lawmakers who forced Speaker McCarthy to skip 15 rounds of voting aren’t in the mood for compromise, then neither is President Joe Biden’s administration. Many Democrats believe Barack Obama made too many concessions in 2011, delaying economic recovery and hurting their election chances. This deal led to cuts in the sequestration budget, which automatically capped discretionary spending on defense and non-defense – ie all lost.
“The likelihood of lawmakers making mistakes, either intentionally or through incompetence, is uncomfortably high,” warned Mark Zandi, chief economist at credit rating agency Moody’s. This comes after US Treasury Secretary Janet Yellen said the government was taking extraordinary measures to maintain spending and push back the X-date, what the Treasury calls the date when the US will not be able to fully meet its commitments and some payments must be prioritized over others.
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US President Joe Biden. Photo: Reuters/Evelyn Hockstein
Ms Yellen says the date could come as early as June, although many economists say things could last until August. Of course, this long schedule takes the pressure off meaningful discussions in Congress.
We know that the US Treasury planned to prioritize debt and interest over other payments in 2011 to avert a default, thanks to the release of Federal Reserve documents. We – and the financial markets – have also learned that the reckless moves of 2011 did not result in a default and therefore the bond market reaction in 2013 was less violent. Also, since Ms. Yellen was with the Federal Reserve in 2011, we can be assured that she is familiar with the funds that the Treasury Department can use.
A study by Fed economists found bond yields across all maturities were four to eight basis points higher than they would otherwise have been just ahead of projected dates of breakouts during the 2011 and 2013 episodes, but fell sharply when they were resolved.
The reckless handling of the 2011 confrontation cost America its triple-A rating from Standard & Poor’s
“Furthermore, the 11th hour resolution in 2011 may have signaled to market participants that even a breach of the debt limit would in all likelihood be resolved quickly. In other words, the 2011 episode taught participants that the probability of a catastrophic event following a technical failure was less than previously thought,” concluded the March 2017 Fed analysis.
However, its reckless handling of the 2011 confrontation cost America its triple-A rating from Standard & Poor’s. At the time, S&P said, “The downgrade reflects our view that the effectiveness, stability and predictability of American policymaking and political institutions have been weakened more than we imagined at a time of prolonged fiscal and economic challenges.”
It would be difficult to say that political institutions have recovered. Oxford Economics has estimated $260 billion in spending cuts if there is no agreement to balance spending and revenue in the third quarter. According to the consulting firm’s calculations, this would result in real gross domestic product falling by 6 percent on an annual basis.
We saw how the financial markets reacted to the UK budget mistake last year. That was a storm in a teacup.
There may be another compromise. After all, the debt ceiling has been around in one form or another since 1917, but there are better ways to run the world’s largest economy, and by no means would the words stable and predictable be used about today’s US politics and institutions.
https://www.independent.ie/business/world/the-us-debt-ceiling-farce-risks-slow-walking-the-world-economy-into-a-crash-42328826.html The farce of the US debt ceiling risks slowly pushing the global economy into a crash