our oncoming late-July debt crash
The US is now expected to crash into its statutory debt limit sometime in late July. Under statute, the federal government may only borrow a certain amount from the public, and as a result will run out of cash on or before July 31. Broadly speaking, there are only two ways out of this: (1) Congress increases the limit, and (2) the President mints additional coinage and spends that instead of borrowing more.
Most of the time Congress has routinely increased the debt limit as needed to pay for the spending already authorized by Congress. Occasionally it fights over this first, especially when Republicans control Congress while Democrats control the White House. Right now there's another fight brewing, because the Republican House passed a bill (by only one vote) to couple an increase in the debt limit with about $5 trillion in spending cuts and other policy changes. Democrats in the Senate and the White House oppose these spending cuts and policy changes and insist on a "clean" debt limit increase. Meanwhile, the President has said that he won't solve the problem by minting additional coinage, a solution that would worsen inflation by increasing the money supply.
With annual federal deficits running over a trillion dollars per year, a large fraction of federal spending would need to be delayed if the Treasury couldn't issue additional debt. Some Republicans want the Treasury to prioritize certain payments over others, while Democrats say that's practically impossible because of the volume of payments and the way payments are currently automated. Software would need to be reprogrammed, for example. Also, such a prioritization scheme would destroy the credit rating of the US government -- just as your own credit rating would collapse if you started deciding which of your bills you had to pay and which you didn't.
Now that Republicans in the House have passed a bill, it's the Senate's turn to pass something, and then the normal process would be to set up a committee of House and Senate members to negotiate the differences between their bills. But Democrats want to play "chicken" instead, hoping that if they allow the deadline to get close Republicans will blink, hoping that they can blame Republicans for any chaos in the financial markets.
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We've already seen federal government shutdowns become more frequent when Republicans and Democrats cannot agree on the annual federal budget -- we might get one of these this fall. But first we've got this debt-limit hurdle coming in July.
I think the reasonable way forward is some sort of compromise between the "clean" bill Democrats want, and the "massive spending cuts" bill Republicans want. Maybe a bill with half the spending cuts that Republicans voted for? But I expect we'll have to get very close to the deadline, if not past it, before genuine negotiations will ensue.
If we do get to the point where the Treasury has to delay paying bills, then you'll have lots of Social Security recipients, federal employees, bondholders, and government contractors up in arms about their missing checks. The disruption would be wider than a government shutdown, and would probably spark an immediate recession. But this kind of disruption may become part of our New Normal, just as government shutdowns have. As the US has become more closely divided on a partisan basis over recent decades, the parties have also moved farther apart in what they support, and less willing to compromise over their differences.
I think breaching the debt limit could become one more way in which the US fractures as people put their partisan and regional goals above national unity and even national survival. But we'll have to see how the people involved work through this impasse. When something hasn't happened before, such as breaching the debt limit, it is difficult to assign odds. Obama was able to work things out with Republicans, but our divisions have become worse since then.
Most of the time Congress has routinely increased the debt limit as needed to pay for the spending already authorized by Congress. Occasionally it fights over this first, especially when Republicans control Congress while Democrats control the White House. Right now there's another fight brewing, because the Republican House passed a bill (by only one vote) to couple an increase in the debt limit with about $5 trillion in spending cuts and other policy changes. Democrats in the Senate and the White House oppose these spending cuts and policy changes and insist on a "clean" debt limit increase. Meanwhile, the President has said that he won't solve the problem by minting additional coinage, a solution that would worsen inflation by increasing the money supply.
With annual federal deficits running over a trillion dollars per year, a large fraction of federal spending would need to be delayed if the Treasury couldn't issue additional debt. Some Republicans want the Treasury to prioritize certain payments over others, while Democrats say that's practically impossible because of the volume of payments and the way payments are currently automated. Software would need to be reprogrammed, for example. Also, such a prioritization scheme would destroy the credit rating of the US government -- just as your own credit rating would collapse if you started deciding which of your bills you had to pay and which you didn't.
Now that Republicans in the House have passed a bill, it's the Senate's turn to pass something, and then the normal process would be to set up a committee of House and Senate members to negotiate the differences between their bills. But Democrats want to play "chicken" instead, hoping that if they allow the deadline to get close Republicans will blink, hoping that they can blame Republicans for any chaos in the financial markets.
-----
We've already seen federal government shutdowns become more frequent when Republicans and Democrats cannot agree on the annual federal budget -- we might get one of these this fall. But first we've got this debt-limit hurdle coming in July.
I think the reasonable way forward is some sort of compromise between the "clean" bill Democrats want, and the "massive spending cuts" bill Republicans want. Maybe a bill with half the spending cuts that Republicans voted for? But I expect we'll have to get very close to the deadline, if not past it, before genuine negotiations will ensue.
If we do get to the point where the Treasury has to delay paying bills, then you'll have lots of Social Security recipients, federal employees, bondholders, and government contractors up in arms about their missing checks. The disruption would be wider than a government shutdown, and would probably spark an immediate recession. But this kind of disruption may become part of our New Normal, just as government shutdowns have. As the US has become more closely divided on a partisan basis over recent decades, the parties have also moved farther apart in what they support, and less willing to compromise over their differences.
I think breaching the debt limit could become one more way in which the US fractures as people put their partisan and regional goals above national unity and even national survival. But we'll have to see how the people involved work through this impasse. When something hasn't happened before, such as breaching the debt limit, it is difficult to assign odds. Obama was able to work things out with Republicans, but our divisions have become worse since then.