June 1 isn't far away. I wish it were a lot farther. Because that's the date when the United States could hit the debt ceiling.
The debt ceiling is a uniquely American bit of stupidity, along with the electoral college. Denmark is the only other country with a debt ceiling, but Denmark doesn't engage in political games over it as we do. A New York Times story explains this.
Almost no other country in the world has a debt ceiling. Elsewhere, politicians argue over how high taxes and spending should be when passing budget laws. Once those laws have passed, the government doesn’t need any additional authority to borrow money to pay for its programs.
Your household budget works the same way: You don’t first decide whether to buy a car and then separately decide whether you should repay the car loan. The decision is whether to buy the car in the first place. If you do, you repay the loan — or go bankrupt.
The U.S. government instead uses a two-step process. After passing tax and spending policies, Congress must pass another law that authorizes repayment of its obligations. This second law increases the limit on how much the government can borrow, which is known as the debt ceiling. (Here’s an explainer.) Denmark is the only other country with a similar system, and Danish politicians increase their debt ceiling well in advance, typically without rancor.
Republicans in Congress had no problem with raising the debt ceiling when Trump was president. But now that Biden is in the White House, they're making absurd demands of the Democrats in order to raise it.
House Republicans have voted to raise the debt ceiling for a year in exchange for massive cuts in federal spending, which include rolling back the climate provisions in the Inflation Reduction Act needed to combat global warming.
Not going to happen.
President Biden is wisely refusing to negotiate over the debt ceiling. As the New York Times story says, raising the debt ceiling doesn't authorize any additional spending. It simply guarantees that the United States will pay for programs already passed by Congress and signed into law.
Biden has said that he's willing to sit down with congressional Republicans and discuss spending in the next fiscal year budget, along with longer term efforts to reduce the rise in our national debt by increasing revenue, reducing spending, or both.
But Republicans are refusing to enter into budget negotiations.
They're demanding that Democrats give in to their hostage taking over the debt ceiling, the hostage being the credibility of the U.S. government to pay its bills and the financial catastrophe that will hit our country and the world if the debt ceiling isn't lifted.
Catherine Rampell, a Washington Post opinion columnist, lays out the consequences of not raising the debt ceiling in a disturbing piece accurately titled What would U.S. default actually look like? 'Financial Armageddon.'
Here's some excerpts.
For months you’ve heard warnings about the Very Bad Things that could happen if Congress fails to raise the debt ceiling. U.S. government default! Market crash! Global financial crisis!
That probably feels abstract, maybe even hyperbolic. Worldwide financial meltdown? Really?
I spent recent days talking to financial market experts and former government officials about the potential fallout. I wanted to better understand the channels through which panic and losses could spread and precipitate “financial Armageddon,” as one former Federal Reserve official dubbed it. (Other phrases that came up in interviews: “nightmare scenario,” “bankruptcies that rival those in the Great Depression,” and “we might have to go back to trading beads.”)
...One useful lens for thinking through possible consequences was suggested by Richard Berner, a senior Treasury official during the 2011 debt-limit crisis: The global financial system is like an upside-down pyramid, and the tip of that pyramid is the U.S. Treasury market. “Everything else rests upon it,” he told me.
With these disclaimers, here’s a summary of what market experts relayed. Our scenario assumes the U.S. government fails to pay for not only key services such as Social Security checks and military salaries but also principal or interest on at least some U.S. Treasury securities. (It’s unclear whether the government has technical capacity to effectively prioritize payments, anyway, or if ratings agencies would care.) On to the consequences, in seven terrifying steps: [I'm just sharing the terrifying headlines; read the opinion piece for a discussion of each.]
1) Treasurys get downgraded — as does virtually every other asset on earth.
2) Interest rates rise for U.S. consumers, businesses and the government.
3) The dollar might lose value in foreign-exchange markets.
4) Stock markets plummet.
5) Companies holding Treasurys suffer hits to both revenue and balance sheets.
6) There might be a scramble to close out trades that people would otherwise hold.
7) Some of the infrastructure underpinning large parts of the financial system (called “central counterparty clearinghouses”) could essentially get overwhelmed and go down.
In the past, there were enough reasonable Republicans in Congress to assuage my fear that the GOP will allow a national and global financial meltdown over the debt ceiling fight. But "reasonable" and "Republican" now are two words that don't go together very often.
And certainly not in the House of Representatives. House Speaker McCarthy sold out to the farthest right of his party in order to win the speakership. Those arch-conservative crazies aren't willing to raise the debt ceiling unless Biden gives in to their ridiculous demands, which Biden won't do.
At least, I hope he doesn't.
Giving in to hostage-taking just guarantees additional hostage-taking. Biden and congressional Democrats have to stay firm on their current simple stance: a clean debt limit hike with no conditions comes first; then negotiations can begin on the federal budget for the next fiscal year, and possibly future years.
Our country has never failed to pay its bills. We've never defaulted on our debt.
If the GOP pushes the United States over a financial cliff, that debacle will come back to bite Republicans in their political butt, big time. When Americans see their stock market investments drop 20-30%, or even more, they're going to want to punish the GOP for what congressional Republicans have done.