Living on Borrowed Time?

Experts suggest that sometime this summer, probably around August, the federal government will no longer be able fully to meet its financial obligations on time. We will hit that federal deficit debt ceiling. When that exact moment arrives, it will be a function of the Treasury Department’s cash flow, which could change depending on the trajectory of the economy and the fate of certain policies. Indeed, as the New York Times pointed out on January 11th, “If the Treasury Department is unable to make payments to lenders who hold federal debt — what is known as a default — investors would demand much higher interest rates in the future to loan money to the government. It would be similar to what happens when borrowers miss credit card payments — their credit ratings go down, and the interest rate they pay often goes up. We have never defaulted before.

“Such a scenario would add drastically to the government’s interest payments, which the White House projects will cost the equivalent of 2.6 percent of the total American economy over the next decade, further squeezing the federal budget. It would also threaten to destabilize bond markets globally because U.S. Treasury bonds are largely seen as one of the safest investments in the world…

“Perhaps most immediately damaging to an already fragile U.S. recovery, the government would pull a huge amount of spending power out of the economy overnight if it breached the borrowing limit. By choosing not to pay some combination of Social Security checks, federal workers, bondholders and more, the government would be immediately killing the equivalent of one-tenth of American economic activity, Goldman Sachs analysts have estimated…

“Just approaching a breach of the debt limit can hurt the economy. In 2011, congressional Republicans and President Barack Obama engaged in a standoff over spending and debt that was resolved just in time to avoid hitting the limit. That brinkmanship rattled investors, consumers and business owners, with concrete consequences.

“Stock prices plunged — and volatility in the market spiked — as lawmakers approached a debt limit breach. They did not recover for half a year. The cost of borrowing for corporations, which fluctuates with the level of risk that investors perceive in the economy, jumped substantially. That made it more expensive for companies to borrow to make new investments. Mortgage rates spiked similarly, hampering prospective home buyers. The credit agency S&P downgraded America’s credit rating for the first time.”

It could get even worse from there. Commodities, from oil to food, would be hard assets against an unstable dollar; prices could skyrocket. Even worse, the dollar’s status as the world’s primary reserve currency (the metric choice of international traders in pricing their goods and services) could easily change, suggesting that both a new reserve currency would rise… and that global dependence on our anchor financial markets would erode fast. Nobody likes that massive federal deficit, but by not taxing the richest in our country at the same rates assessed by other major developed countries, a big deficit is what we’ve got.

Despite the 2017 Trump-era GOP-sponsored corporate tax cut that instead of paying for itself as promised is adding trillions of dollars to the federal deficit, House Speaker Kevin McCarthy (R-CA) continues to threaten that unless the Biden administration accepts undoing much of its prized and passed legislation – with a distinct focus on cutting anything related alternative energy and climate change – the GOP in the House will not approve what was once an automatic approval of the debt ceiling. He calls it reining in wild spending, but it is little more than a pledge he made to win the speakership with swing votes from a band of ultra-rightwing Republicans who always voted against raising the debt ceiling.

McCarthy’s speech at the Wall Street NY Stock Exchange on April 17th in support of his “very real” threat, drew shrugs from skeptical traders who have been here before. The market did not move as a result of McCarthy’s effort; savvy investors on the Street still believe that the House GOP caucus will not stay together to impose a rather powerful explosion to disrupt and destroy our nation’s economy. It only takes four GOP dissenters to pass the debt ceiling increase. Such an economic catastrophe would be primarily blamed on those who refused to support an increase in the debt ceiling, effectively funding what Congress has already authorized and spent.

With the exception of Denmark, where a comparable right to control the debt ceiling exists (but is not viewed as a political weapon), we are alone among democracies where a debt ceiling vote can defund programs passed by that same legislature. It is as if people could simply decide not to pay their bills. The hypocrisy of this proposed GOP cutback is underscored by their proposed cancellation of about $80 billion for the IRS to increase their collections, particularly against rich taxpayers with legions of expensive lawyers that daunt the IRS into leaving them alone… for lack of resources.

The potential hard dollar savings annually, about $100 billion that is a large sum but not by the measurement of the entire budget, suggests that the real agenda is doing away with policies the GOP simply does not like. Republicans want more fossil fuels, not less. They don’t like federal money being spent for healthcare. They do not like new taxes on the mega-rich needed to fund some of the Congressionally approved projects. And so McCarthy is faced with holding the entire House GOP consensus unified to create a major economic catastrophe if they do not get their way. Given the nature of their quest, it is equally unlikely that the Biden administration will cave to these demands or that the House will fully support the effort. But if the GOP hangs tough…

I’m Peter Dekom, and I am watching as minority views on gun control, voting rights and abortion pass red state after red state legislature against a clear majority of their electorate… and wonder if self-destruction of the Republican Party… perhaps the US economy… is in the GOP vision for the future of the United States.