Debt Ceiling Crisis 2021

It’s one of the most reckless, one of the most irresponsible votes I’ve seen taken in the Senate, and it should send a signal to every family, small business, market watcher, about who in this chamber is in favor of endangering the economic stability of our country,” said Schumer on the Senate floor, following the vote.

Schumer is right. A procedural vote in the Senate failed by a vote of 50 to 48. It solved two critical problems: (1) Extension of short term funding for the government and (2) Raising the debt ceiling limit. We’ve experienced the consequences of a lack of funding, as we’ve had partial shutdowns in the past. It is bad, but nothing in comparison to a failure to raise the debt ceiling. That is catastrophic.

My credit card has a limit. The debt ceiling is NOT analogous to the credit card limit. The reason is, the debt ceiling does not limit government’s ability to spend money. Congress separately authorizes the expenditure of money. The debt ceiling allows government to borrow more money it needs to pay for ALREADY approved expenses including pay for the military salaries and social security.

From the Washington Post, “Treasury Secretary Janet L. Yellen said earlier this week that such a default would be unprecedented in U.S. history. Moody’s “best estimate” is that this date is Oct. 20, although Treasury has not given a more precise day.

At that point, Treasury officials would face excruciating choices, such as whether to fail to pay $20 billion owed to seniors on Social Security, or to fail to pay bondholders of U.S. debt — a decision that could undermine faith in U.S. credit and permanently drive federal borrowing costs higher.

Failure to raise the debt limit would have catastrophic impacts on global financial markets. Interest rates would spike as investors demand a higher rate of return for the risk of taking on U.S. debt given uncertainty about repayment. An increase in interest rates would ripple through the economy, raising costs not only for taxpayers but also for consumers and other borrowers. The value of the U.S. dollar would also decline long term as investors questioned the security of purchasing U.S. treasuries. The cost of auto and home loans would rise.”

I’ve written on this topic before. I suggested instead of calling it an increase in the debt ceiling, just refer to it as allowing the government to pay it’s bills when they come due.

Every single recent president has required Congress to increase the debt limit (see links). A new twist is simply to suspend the debt limit temporarily, allowing Republicans a way out of actually voting for a debt increase. It is a way to kick the can down the road.

It is estimated that the 2011 debt ceiling crisis cost the government 18.9 billion dollars in increase interest and credit downgrade which followed, resulted in the Dow Industrial Average dropping 2,000 points.

Yes, all Presidents including Reagan, Bush I, Clinton, Bush II, Obama and Trump, who proudly proclaim they were more fiscally responsible than Democrats (Bush GW was famous for “Read my lips, no new taxes”) all needed the debt ceiling raised to keep borrowing money. In fact, the one president who had to go to Congress the most, was Reagan.

My credit card has a payment date, and failure to make a minimum payment on that date, will affect my credit. That is the appropriate analogy. Failure to make payment of money the country owes on time will affect the faith and credit in the US government, something that can not be risked.

The political deadlocks on raising the debt ceiling are occurring more frequently, and it is very scary situation. I have no problem with Republicans who state that we should spend less on various programs, but this is all about money we have to pay. Full stop.

Moody’s Analytic report concludes, “The U.S. and global economies, which still have a long way to go to recover from the recession caused by the pandemic, will descend back into recession. In times past, lawmakers have taken strident warnings like these to heart, and acted. Let us hope they do so again. Soon.”

Put simply, we are making great progress recovering from the pandemic, despite some distractions from anti-vaxxers and it is a lousy time to shoot ourselves in the foot. It is pretty simple. We have no time for grandstanding or brinkmanship.

Stay tuned,

Dave

Links:

History of Debt Limit Crises

U.S. default this fall would cost 6 million jobs, wipe out $15 trillion in wealth, study says

Senate Republicans block bill to avert government shutdown and extend debt limit

Debt Ceiling Approval Issue: Unbelievable

I wrote on August 9, 2017 that the debt ceiling approval was not headline news, but in two weeks it would be.  Boy did I nail it!

Congress must act fast to increase the debt ceiling limit.   After September 29, 2017, the US will start to default on its debt obligations if they fail to act.  Congress goes back in session on September 5, 2017  after Labor Day.   Secretary Treasurer Mnuchin  has call the debt ceiling limit “ridiculous”  and I agree with him 100%.

Unfortunately,  commentators in the media constantly confuse the issues of budget approval (non-approval results in a shutdown of non-essential gov’t services)  and debt ceiling approval (non-approval lowers credit rating of the US with long term harm to our economy).  They fail to mention that the ceiling does not restrict spending, only the government’s authority to pay its bills for approved expenditures.  Perhaps it should be called,  “Pay your bills on time approval” to get popular support.

Trump’s recent tweets were down right scary,  chastising McConnell for not slipping into the recently passed Veteran Affairs budget  bill, the debt ceiling approval.   The VA bill was controversial because it allowed veterans to seek medical care outside of the VA hospitals (Choice Program).  The problem with any free health system is it gets abused.  It has been documented that non-veterans were also getting free medical care.    But, the Choice options to the VA medical system were put in the budget bill, so it would get approval.   So, the VA bill was already dirty in a way and it was the reason why the bill didn’t pass until VA funds were nearly gone.

Adding to this bill an approval for the debt ceiling was a horrible precedent, as it says either you approve the VA Choice program or the country will be in sovereign default.  I call that super ridiculous-  but it is exactly what Trump tweeted.

Treasury Secretary Mnuchin calls for a clean debt ceiling increase,  just as the former Treasury Secretary Jack Lew did before him.    Clean means clean.  It means that Trump’s administration request  for increased funding for the border wall, or anything else, including infrastructure spending must be passed on the merits of requests, and not a political deal.

There are just 12 working days between Sep 5 and 29, 2017.   The exact same arguments used by President Obama, in pleading with Republicans in Congress to pass a clean approval,  are being made by the Secretary of the Treasury.   But this time,  he is pleading with his own party and most likely will need the Democrats to get the job done.

There are Republican groups pushing for a dirty bill and to tie the ceiling approval to spending cuts or other things on the Trump neoconservative  agenda.   This is the same horrible idea that Obama had to deal with.   I particularly like the idea analogy of a President Trump putting a gun to his head, and declaring “You pass this bill with border security and debt ceiling in it, or I’ll pull the trigger.”

If President Trump really wants to go on the attack,  he can propose elimination of the debt ceiling altogether.    I certainly would support this.

Stay tuned,.

Dave