How do we assess the likelihood that the world’s most important country will voluntarily default on its debts? If so, what are the possible consequences? It is impossible to answer these questions. This is not because it is a “black swan”, i.e. unimaginable. Rather, US defaults fall into the broad category of “known unknowns,” unpredictable and high-impact events. The financial crisis of 2007-2009, the pandemic, and the Russian invasion of Ukraine were of this kind.
Due to the rarity and complexity of these events, it is impossible to predict. We will never know when and how the next pandemic will strike, when and where someone will start a war, or whether American politicians will destroy the trust our country has built over centuries. does not have enough information. But we know that such shocks do happen. they are part of our reality.
So what about this specific threat? It’s not normal for a country to have a legal budget and separately approve the debt associated with this budget. For the United States, this was a product of the necessity of war. before 1917, Congress had to approve individual loans. Historically, the U.S. debt ceiling has always been raised when necessary. It’s happened about 90 times.
A sensible person would conclude that ceilings are nonsense. But it is not irrelevant. Republicans must stress that while more and more people see the cap as a lever for spending, not the deficit created by tax cuts. They were content with the latter under the administrations of George W. Bush and Donald Trump.So as “”explainerThe Brookings Institution paper states: “Over the past 30 years, the limit has sparked a political struggle, during which some lawmakers have tried to use the debt ceiling vote to slow the growth of federal spending.” This was under Barack Obama in 2011. , and before the debt ceiling was raised to its current $31.4 trillion in 2021 under the Joe Biden administration. The need to lift it again has become very urgent as the federal government may take actions such as: run out of cash in june.
Is default possible? The answer is yes. One reason is the large distance between the parties. The Republican proposal would impose a 47% cut in total nonmilitary and discretionary spending from 2024 to 2033. This is a big gap to fill. Even if the mood music gets better. Another reason is that key participants may feel unmotivated to compromise. Republicans are a very picky bunch, some with very radical views, and many seem to think that only the administration will suffer in the event of an economic disaster. Democrats, on the other hand, may find eating up spending too painful. There will be collisions in such chicken games.
Some hope that the situation will be manageable, at least for a while. The 2011 plan would have continued to make interest and principal payments, but delayed payments to government agencies, contractors, Social Security recipients, and Medicare providers. More radical proposals would have to include a trillion dollar platinum coin or resort to the 14th Amendment. state: “The validity of the public debt of the United States as recognized by law .
Think of all the people, institutions and countries that hold US Treasuries as the safest and most liquid asset in the world. Even a short interruption in payments could have a devastating effect on not only Treasuries but also capital market confidence. The possibility of default may be dismissed as unrealistic. One person’s experience is certainly too real.
Beyond that, trusting the United States would be a big shock. Michael Strain A professor at the conservative American Enterprise Institute said, “Foreign leaders and global investors will look at America and see a terrible portrait. In this broken system, many elected officials It disregards the outcome of the presidential election and allows policy and ideological differences to get in the way of the government meeting its financial obligations, prompting investors to think more seriously about allocating capital to U.S. companies. And the role of the United States as a beacon of liberal values, including the free market, would be greatly undermined.” Quite simply, they would conclude that lunatics have taken over mental hospitals.
Even if the worst is avoided this time, repeated repetitions of this game of chicken will cumulatively increase the likelihood of actual crashes. Glenn Hubbard, President Bush’s former chairman of the Economic Advisory Board, made a reasonable proposal. What is really needed is a long-term solution, one that replaces debt ceiling policies with coherent long-term budgeting. Given the current US debt dynamics, such a proposal is necessary.
Contrary to this, however, is the fact that efforts by Democratic presidents such as Bill Clinton and Obama to reduce future deficits only allowed tax cuts when the Republican Party returned to power. . Given this, is there the political will to put national needs ahead of partisan interests? This is not a similar failure either. Republicans have a big responsibility. They use the threat of default to achieve spending and tax cuts, not deficit cuts, which they have failed to win decisively in elections.
In the end, “It’s all about politics, you idiot.” The only possible reason for default is the depth of domestic and parliamentary disagreements. If the US were more fragmented, the debt ceiling wouldn’t be a problem. In today’s divided America, that’s the reality. As long as these divisions persist, so will the threat of default. Even if a temporary agreement is reached, the threat is likely to return soon.