Dancing with the debt ceiling


In 2011, while she was still vice-president of the US Federal Reserve, Janet Yellen reassured her colleagues that the drama surrounding the federal government’s debt ceiling “generally turns out to be nothing but drama”. Theater of the absurd, one might add. A decade later, the debt ceiling debate promises to be a tragedy for centuries.
To understand the absurdity of the debt ceiling, remember its origins. The statute creating it was passed in September 1917, along with legislation authorizing the issuance of bonds to help finance the United States’ entry into World War I. the country would go.
The Constitution had given Congress the power to micromanage Treasury borrowing, which was impractical in wartime. The legislators therefore delegated this power to the president. But to appease those who opposed any expansion of executive powers, as well as the German-Americans who opposed a war with Germany and the Irish-Americans opposed to the alliance with Britain after the violent Repression by that country of the Easter Rising of 1916 for an independent Ireland, Congress capped this borrowing.
These nearly forgotten grievances of over a century ago created the dilemma the United States faces today. Absurd is right.
So far, Congress has always managed to avoid the worst. Even in 2013, a year of partisan resentment, Democrats and Republicans agreed to suspend the debt ceiling just a week before the Treasury, already unable to borrow, ran out of cash. But this year could be different.
Clearly, the political polarization is even greater than it was in 2013. The norms of political behavior – including the idea that the two parties should work together to avoid a foreseeable catastrophe – have disappeared since the attack. of January 6 against the United States Capitol by partisans. then President Donald Trump. In a post-fact world, Republican members of Congress, even though they are the real agents of calamity, can successfully blame – at least in the eyes of the Republican base – Democratic lawmakers and their free-spending ways.
The immediate consequence of failing to raise or suspend the debt ceiling would be a lowering of the government’s credit rating. If US Treasury debt lost its investment rating, institutional investors would be prohibited by their mandates from holding it, while foreign investors, including central banks, would think twice. US borrowing costs would rise.
Some studies show that the safe-haven status of the dollar saves the Treasury up to $ 700 billion in interest payments over a decade – enough, ironically, to finance nearly three-quarters of the bipartisan infrastructure package. There is already evidence of the loss of this bonus.
Uncertainty, as the Covid-19 crisis reminded us, is what investors fear the most, and uncertainty would increase with a suspension of interest payments for an unknown duration. The stock markets would react negatively. In addition, since Treasury securities are used as collateral in a wide range of private financial transactions, short-term funding markets would be compromised if the Treasury were forced to withhold interest payments. Withdrawals would force money market mutual funds to engage in uncontrolled sales of treasury bills and, eventually, suspend redemptions.
Estimates of the economic fallout range from deeply damaging to catastrophic. A representative forecast suggests that GDP would decline by 4%, while unemployment would rise to 9%.
The Fed would intervene, of course, as it does in every crisis. It would activate the emergency measures discussed in the run-up to previous debt ceiling crises. It would buy defaulted Treasury securities and accept them as collateral in its own lending operations, albeit at their now lower market prices. But that would put the Fed on thin ice. He would find himself in the middle of a political conflict. Democrats would blame him for protecting Republicans from the consequences of their inaction. Republicans would accuse the Fed of complicity with the Democrats’ “socialist” program. – Project union

Last update: October 07, 2021 12:07 AM


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