By Steven Murnane Jr. | Photo: “The newly refurbished U.S. Capitol building in the sunlight this week” by dionhinchcliffe is licensed under CC BY-SA 2.0 via Creative Commons
Note: This article was originally published on Murnane’s blog, https://impiusmundi.com, and was revised for publication on the Voice’s website.
To run the United States, Congress must spend money on everything from defense to social welfare. The reality of these expenses is that the United States does not make enough revenue from taxes and other sources to cover them. Annual deficits accumulate over time and raise the debt owed to Treasury security holders by the federal government. Treasury securities consist of Treasury Bills, Treasury Notes, and Treasury Bonds, among others. The debt ceiling was an act passed in 1917 to streamline government spending and give the federal government the ability to pay its bills using debt accruing methods. No, it is not allowing Congress to spend more money; it gives the government the ability to pay its bills. However, if the debt limit fails to be raised, the treasury will not only be unable to pay its current bills, but it will not be able to issue any more debt, meaning it couldn’t spend any money until the limit is raised.
Failing to raise the debt limit will lead to several known consequences and could lead to many unknowns, due to the heavy international reliance on the US dollar. The dollar is the international reserve currency, meaning a lot of other country’s currency values are based on the dollar. Over the past century, US debt has continually increased and has reached about $27 trillion as of 2020.
Over time, the United States has accrued this debt by selling Treasury securities, primarily to local holders and partly to foreign holders. Foreign holders buy U.S. treasury bonds over the Euro and other securities because it is known to be the most reliable, the United States always pays off its debt. Out of the $27 trillion in federal debt, foreign investors own about $7.1 trillion of it, with Japan holding the most at $1.3 trillion, followed by China at $1.1 trillion, then the United Kingdom holding $440 billion. These foreign investors expect to be paid back and if there is a default, there is a chance they will not be paid, having direct consequential effects rippling from multiple markets. Locally owned debt is owned by common households, businesses, and state/local governments in the United States.
For the past 100 plus years, the United States Congress has unanimously and routinely passed the motion to raise the debt limit whenever called upon; it is considered a bipartisan and essential part of our government. The U.S. has never defaulted on its debt by failing to raise the debt limit; from 1993 onward, Congress has continually agreed on this issue without much partisanship. The most recent and perhaps most serious issue over the debt limit was in 2011 when the GOP disagreed on raising the debt limit unless Democrats met their demands. This stalemate caused a government shutdown and considerable delays in raising the limit, but the United States did not default on its debt. The US Treasury can use ‘extraordinary measures’ for some time, using non-debt accruing assets to pay the bills, however, this is only a temporary solution.
During the 2011-2013 crisis, Congress passed several motions to temporarily suspend the debt limit until they could work out a solution. Over the three years the treasury enacted extraordinary measures twice, the first time Congress was able to suspend the debt limit in time, the second the treasury ran out of its ability to fund the government and congress did not have a budget in place because of the debt limit debate, leading to a shutdown. The crisis in 2011-2013 had major economic impacts on the stock market and decreased the demand for US Treasury securities, therefore slowing the amount of money going into the treasury.
The crisis also impacted consumer spending and business optimism, slowing the flow of money within the economy. These factors led to a wealth decrease in the United States where between April and September of 2011, household wealth declined by $2.4trillion, retirement assets fell by $800billion, corporate debt jumped by .5%, and mortgage rates increased by .7%. These financial impacts were before the government shutdown, the only factor being the potential risk of default.
Economic and political analysts estimate that a United States debt default “could have serious negative economic implications. An actual default would roil global financial markets and create chaos”. And “Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations – an unprecedented event in American history.”
While the US Treasury gets closer to the October 18th, 2021 date of default, President Biden has issued numerous statements calling on the GOP to do their duty to keep the US, and the world, out of financial ruin. President Biden stated:
“A failure to raise the debt limit will call into question Congress’s willingness to meet our obligations that we’ve already incurred — not new ones; we’ve already incurred. This is going to undermine the safety of U.S. Treasury securities. And it will threaten the reserve status of the dollar as the world’s currency that the world relies on.”
Because debt default has never happened in the history of the United States, the worldwide implication can only be estimated; country-wide effects would be along the lines of the 2008 financial crisis combined with the 2011 crisis on a bigger scale. Due to the COVID-19 pandemic, the US Treasury has already cut interest rates to near 0%, among other economic accelerators, so there would be few options to help the derailed economy if we even get close to defaulting.
A world-renowned economic analytics company, Moody’s Analytics stated:
“…the downturn would be comparable to that suffered during the financial crisis. That means real GDP would decline almost 4% peak to trough, nearly 6 million jobs would be lost, and the unemployment rate would surge back to close to 9%. Stock prices would be cut almost in one-third at the worst of the selloff, wiping out $15 trillion in household wealth. Treasury yields, mortgage rates, and other consumer and corporate borrowing rates spike, at least until the debt limit is resolved and Treasury payments resume.”
This typically bipartisan vote can be used by a dissenting party for political advantage, though Senator Mitch McConnell has not clued the public in with his reasons for holding back the vote. Congress today is bitterly divided and the majority the Democrats hold is razor-thin, thus allowing the Republicans to use this to their advantage. And because of the filibuster, it is necessary to gain 60% of the chamber’s support to pass a vote. It is unfathomable that the United States would default on its debt but political experts suggest that when the new December date closes in, Congress will pass another delay as they already have done.