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Snake oil and spare change
The debt ceiling, again
It is once again the season for everyone’s favorite political-economic circus, the US debt ceiling and the possibility of a US sovereign default.
As of today, negotiations are ongoing between the US executive and the US legislature over raising the debt limit. A range of possible outcomes is still conceivable. The least messy, at this point, would be that Republicans in Congress extract some vague medium-run fiscal commitments in exchange for a one-year reprieve on borrowing. At the other end, negotiations break down, the US enters formal default and the global financial system collapses.
Below, a quick explainer, one picture, and a short political-economic analysis of the debt ceiling.
Time to look for spare change under the cushions
Let’s get clear on what it is exactly that threatens to run out, on or about June 1 as Treasury Secretary Janet Yellen has warned repeatedly.
The US Treasury, and therefore the US government as a whole, normally covers its payment commitments by issuing new debt. The ceiling is a kind of credit limit—a maximum on the outstanding amount of that debt. It is imposed by law, and it is therefore the power of the US legislature to increase it.
In addition to issuing new debt, the Treasury has cash on hand. More precisely it has the Treasury General Account, a deposit account at the Federal Reserve. Spending these cash balances down is another way that the Treasury can cover its commitments.
This graph illustrates these two sources of funds. Based on the Daily Treasury Statement, it shows borrowing capacity and cash on hand. The debt ceiling was last raised in December 2021, and the $2 trillion of borrowing capacity created was used up over the course of 2022. Since early 2023, the Treasury has had to spend down cash:
Cash is now running out, and is predicted to reach zero as soon as June 1 unless new borrowing capacity is created. This would requires Congress to pass a law raising the debt limit, which is the subject of the ongoing negotiations.
From here, the arguments get a bit wild.
Beware snake oil
One word of caution. Watch out for versions of the claim that the debt ceiling is, in one way or another, a fiction, a fiction that could be swept away through the timely exploitation of some loophole. One such loophole, often proposed, is the Treasury’s authority to mint coins; another is the idea that the 14th Amendment to the US Constitution allows the President to bypass Congress. We can’t rule out the possibility that one of these strategies will be tried. But they are transparent gimmicks, attempts to re-write the rules in the middle of the game. The opposing team would immediately strike back with all its might, starting with the US Supreme Court. Who knows how it would end, but it wouldn’t be quick, and the outcome is far from certain.
But even some of the more plausible scenarios are still pretty weird. If the Treasury does run out of cash, it would have to begin to prioritize payments, a de facto default. Perhaps this would trigger a wave of interlocking derivative contracts, and massive and unpredictable payment flows would follow, destabilizing the entire financial system.
This would be fascinating, for sure, and I promise to follow it closely if it happens. But though the global financial system is tuned to Treasury securities, it is a political and thus human relation, not a purely mechanical one. I predict that normal dollar hegemony would exert an immense gravitational effect, even during a US default. The simplest resolution would be for everyone simply to agree to ignore the fact of default. A plausible technicality, or a collection of plausible technicalities, would give everyone just enough cover to pretend it had never happened. An emergency credit facility could cover any cash-flow hiccups, to be wound up quickly afterward. Such a situation could go on for days or even weeks, and during that time the political pressure to reach a deal would rise to something most US lawmakers have probably never experienced.
No technocrats need apply
The debt ceiling offers many contradictions: Congress is withholding the power to honor the commitments that Congress itself approved. US politicians stand to lose far more by eroding US hegemonic power than they stand to gain from a bargain over spending. The panic caused by a US default could have the effect of causing a flight to the dollar, for lack of anything safer. The whole thing looks like a serious self-inflicted wound.
To which I have to reply, with a shrug: the contradictions are the point. If this had anything to do with the wise and benevolent operation of the global system of labor, production and exchange, or with the welfare of the people affected, it would have been sorted out long ago. The debt ceiling is a political spectacle, and I think we can only sit back and watch, and hope that no one gets hurt.
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