The Return of the Debt Ceiling, 2017 Edition


Monday August 14th, 2017   •   Posted by Craig Eyermann at 6:26am PST   •  

44036859 - theater stage with red curtains and spotlights. theatrical scene in the light of searchlights In what is almost an annual tradition now, the U.S. Congress will soon come up on the deadline where it must either approve a new increase in the statutory debt ceiling, the total amount of public debt outstanding that the U.S. government is officially allowed to have on its books, or risk defaulting on payments owed to the U.S. government’s creditors.

Business Insider‘s Bob Bryan outlines the worst case scenario facing the nation if the Congress fails to increase the debt limit to cover the amount of spending it has previously approved.

Congress, in the midst of a month-long August recess, faces a massive policy threat when lawmakers return to Washington next month.

By the end of September, Congress must approve legislation to raise the nation’s debt ceiling—or risk a goal economy disaster. And it already sounds like the attempts at a compromise aren’t going well....

If breached, it could lead to disastrous consequences for the federal government, the US economy, and the global financial system. If the debt ceiling is not raised, the federal government would lose the ability to pay bills it already owes in the form of US Treasury bills and could lead the US to default on some of that debt.

The possible fallout from a default, according to a study by the Treasury Department, would include a meltdown in the stock and bond markets, a downgrade of the US’s credit rating, which would increase the government’s borrowing costs, and the undermining of the full faith and credit of the country.

Currently, the Congressional Budget Office estimates that the Congress has until sometime in mid-October to act, while the U.S. Treasury Department is more conservative in estimating that the U.S. Congress must act on or before September 29, 2017.

This isn’t our first rodeo in contemplating the potential for the U.S. government to not have sufficient funds to make principal and interest payments to its creditors, where we’ve come to view much of the rhetoric coming from Capitol Hill as being a lot like the annual exercises of what we call government shutdown theater, where the positions that will soon be loudly taken by politicians on all sides of the issue are done more for publicity than for public purpose.

That wasn’t always the case. Just a few years ago, the combination of skyrocketing national debt with a peculiarly vindictive Presidential administration seeking to exploit risking the full faith and credit of the U.S. government for political advantage gave great cause for concern, but since then, things have changed.

The most noticeable change obviously is the current occupant in the White House, but much more significantly, is the demolition of the legal rationale used by the Obama administration to justify its partisan gamesmanship in playing with the national debt ceiling.

Simply stated, that rationale was that the U.S. Treasury Department could not legally prioritize payments to the U.S. government’s creditors over all its other spending. If the federal government didn’t have enough money to go around to cover all its planned spending along with all of its debt payments, the Obama administration argued that cuts in payments to all would have to be made equally across the board, thereby ensuring that a default on the nation’s debt would occur.

Since then, a number of institutions on what the U.S. Treasury Department can legally do in managing the federal government’s money and debt, with the Congressional Budget Office specifically addressing the question in its June 2017 report on the debt ceiling.

When Would the Extraordinary Measures and Cash Run OUt, and What Would Happen Then?

If the debt limit is not increased above the amount that was established on March 16, 2017, the Treasury will not be authorized to issue additional debt that increases the amount outstanding. (It will be able to issue additional debt only in the amount of maturing debt or the amounts cleared by taking extraordinary measures.) That restriction would ultimately lead to delays of payments for government programs and activities, a default on the government’s debt obligations, or both.

Writing at International Liberty, economist Dan Mitchell translates what that means.

In other words, the government can choose to pay interest on the debt and defer other bills. As I’ve repeatedly said in all my public pronouncements, a default will occur only if an administration wants it to occur.

But that’s not going to happen. Just as Obama’s various Treasury Secretaries would have “prioritized” payments to bondholders, Trump’s Treasury Secretary will do the same thing if push comes to shove.

In fact, the Obama administration actually had a secret plan to do exactly what it claimed it could not do.

Given President Trump’s business background, there’s every reason to think that his administration would prioritize principal and interest payments to U.S. government bondholders over all its other spending, despite recent statements by administration officials to the contrary. Not having the legal authority to borrow more to get the cash it needs to spread around to pay for all its spending no longer automatically means that the U.S. government must default on its debts.

But between now and such a time however, we will have a lot of highly stylized political theater in Washington D.C. to get through.




Facebook Twitter Youtube RSS

Search


By linking to Amazon.com from this page, Independent Institute earns referral fees of 4% to 15% from whatever you buy. Bookmark the above link and you can support the Institute when you do your normal shopping!

TIR
August 2017
S M T W T F S
« Jul   Sep »
 12345
6789101112
13141516171819
20212223242526
2728293031