Everyone is saying it will be Armageddon if the US doesn’t raise the debt ceiling, because then it will be unable to pay its creditors for some time, which will raise the future cost of borrowing, and then have a giant ripple effect throughout the rest of the economy.
But here’s what I don’t understand. Isn’t the fact that we are *approaching* the debt ceiling already an indication to creditors that “Hey, we can’t pay the debt without borrowing more money.” Yet we’re fine.
Doesn’t that distress signal already basically indicate that we can’t really pay the debt? It would be like asserting “It’ll really damage your credit score if you miss a payment” to somebody… who has paid their last 3 years of payments *with other credit cards.* Shouldn’t their credit *already* be shot at that point?
Why do the people lending the government money see the government any differently? Why is our credit considered excellent when we pay off our creditors with other creditors money?
In: Economics
The “debt ceiling” has nothing at all to do with the government’s creditworthiness.
Here’s how government spending works:
– Congress passes a law every year (and the President signs it) setting the amount of money the government is going to spend, and how it’s going to spend it
– The Treasury Department makes the money available to government agencies to spend, and they spend it according to law
– If tax revenues are inadequate to support all the Congressionally-required spending (as they historically have been for decades, except for the late Clinton administration), the Treasury sells debt to investors to make up the difference (so, in return for a promise to be paid some return on investment over the course of or at the end of a specific period of time, people give the Treasury money)
It is the Congress which sets how much money the government will spend in that first step. It used to be that that was how Congress exclusively controlled spending.
But starting in the late 1930s, Congress also decided to establish a “debt ceiling”, saying that the Treasury could only issue so much debt in order to fund Congressionally-directed spending. For decades, increasing the ceiling was uncontroversial, because, as everyone recognized, it was basically redundant — if Congress didn’t want to take on more debt, it should just not spend more than its revenues; and if it did want to deficit spend, it should expect to take on debt.
Only in the last 20 years or so (and really since Obama was elected in ’08) has the debt ceiling become something the Republicans use to grandstand over taking on a debt burden that, in many cases, they themselves voted for.
The reason it would be far more catastrophic to American creditworthiness than just issuing the debt is that it would indicate that our political system is broken to such an extent that it is actively refusing to honor its commitments. This is completely separate from the question of whether the American government’s debt burden appears sustainable to investors, which speaks to economic creditworthiness. It does, in no small part because (outside a weird incident in the ’70s that affected a small number of bonds) the US has been deficit-spending for decades and never failed to pay its obligations, and as the largest economy in the world it appears unlikely that it will fail to do so within the next, say, 30 years — which is the longest-term bond the Treasury sells.
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