I know this isn’t headline news, yet.  But in two weeks, it will be.

I knew if Hillary Clinton was elected, this crisis would happen.  With Clinton as President,  I knew the House Republicans would use this opportunity to threaten  to wreck the economy unless a “dirty” approval was signed into law.  A dirty approval contains additional riders outside of increasing the debt ceiling which the President and the Democrats oppose and would under normal circumstances never pass.   The threat of sovereign default is used as leverage.   This makes most economists cringe.

But I thought it would be completely different with Trump in the White House and Republicans in control of both the House and the Senate.  Boy was I wrong!

Obama and Treasury Secretary Jack Lew went through sheer hell in getting the debt ceiling approved in 2011.   There was another crisis in 2013.    Treasury Secretary Steven Mnuchin asked Congress to approve a simple and clean bill to increase the debt ceiling limit.  He is 100% right.

As this issue got politicized,  somehow what the debt ceiling really was got twisted out of shape.  It absolutely is not analogous to the limits on credit cards, which we all know stops someone from racking up huge debts. The debt ceiling is not a mechanism to control spending.   This is done through the budget and appropriation requests.   This is stated on numerous website including Wikipedia as follows:

Because expenditures are authorized by separate legislation, the debt ceiling does not directly limit government deficits. In effect, it can only restrain the Treasury from paying for expenditures and other financial obligations after the limit has been reached, but which have already been approved (in the budget) and appropriated.

The difficulty in approving this increase, is that it says to conservative Republicans, that they somehow approved huge government deficits.

If not approved by late September, the US will be  in default.   The US stock market crashed in 2011, when it looked like there would be no approval. According to Wikipedia:

The GAO estimated that the delay in raising the debt ceiling during the debt ceiling crisis of 2011 raised borrowing costs for the government by $1.3 billion in fiscal year 2011 and noted that the delay would also raise costs in later years.[39] The Bipartisan Policy Center extended the GAO’s estimates and found that the delay raised borrowing costs by $18.9 billion over ten years.

We are back in the same situation, and this time it could be far worse because of the White House in-fighting.    Mike Mulvaney of the Office of Budget and Management undercut the Treasury Secretary’s position by suggesting something truly frightening-  using the crisis to force changes to Medicaid.

I like the way the LA Times presented the crisis:

The debt ceiling fight: This time it’s different–and much more dangerous

It is a time bomb.  There are  ways to kick it down the road, but that’s a horrible idea, as it starts discussion of all sorts of ways to frustrate a simple approval.  Democrats and moderate Republicans should unite and pass what Mnuchin asked for, ASAP.  Mulvaney should just keep quiet if he can.

Most economists believe the debt ceiling shouldn’t exist.  I agree, as explained in the link.

Stay tuned,

Dave

Link:  Wikipedia Debt Ceiling