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Category: Soap Box

Soapbox: The Debt Ceiling Charade

It's that time again – 'squabbling over the US debt ceiling' time. If it slipped our notice then Janet Yellen, the US Treasury Secretary, is there t...

17 January 2023

Gary Mead

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It’s that time again – ‘squabbling over the US debt ceiling’ time. If it slipped our notice then Janet Yellen, the US Treasury Secretary, is there to remind us. On 19 January, the US will surpass its current borrowing limit of $31.4 trillion according to Yellen. The US debt ceiling is the legislative limit on the amount of national debt that the US Treasury can run up. The debt ceiling was created in 1917 to help finance spending on the First World War. It’s a way in which the government can borrow money to cover the fiscal gap – the gap between the amount the government takes in tax revenues and what it spends. Today, raising the debt limit has become an excuse for a brawl between the Democrat and Republican parties in Congress. A reprieve can be gained but this year it’s likely to last no longer than the end of May. Between now and then we can expect a Democrat vs Republican squabble over what to fight for and what can be sacrificed. If the ceiling looks like being breached the US government grinds to a halt and global financial stability will be threatened.

$31.5 trillion and rising

Wow! $31.5 trillion! That’s the current size of the US federal debt. Putting it another way, it’s more than $94,000 per US citizen. Or, another way, it’s the same as the combined economies of China, Germany, Japan and the UK, according to the US Peterson Foundation. The foundation helpfully adds that if every US household paid $1,000 a month it would take more than 19 years to eliminate the debt. Interest payments on this debt cost more than $1 billion a day.

America is running on fumes – the only significant question is how long before the engine stutters and packs up. Certainly, not all debt is bad, either individually or nationally. Taking on debt to buy a home, to get education, to grow a business, can all be sensible decisions and can help grow the national economy. But borrowing to buy assets that lose value over time, such as a car, is not such a great idea, unless you can get a no or very low interest rate.

Getting over the debt ceiling crisis has become a regular feature of US politics in recent years. Usually some kind of deal is cooked up but this year may be different, now that the Republican Party has a narrow majority in the House of Representatives. Eric Winograd, chief US economist at the asset management company AllianceBernstein told Reuters on 11 January that in his view “this is going to be the most contentious debt ceiling debate in memory”. Last time Congress sailed close to the wind over raising the debt ceiling was in 2011; Standard & Poor’s downgraded the US credit rating for the first time, and financial markets started to panic. So this year may be no charade after all.

Murky manoeuvres

US politics being what it is – very murky – will the Republican Party be able to maintain its current stiff stance about debt ceiling negotiations this year? The House Speaker, the Republican Party member Kevin McCarthy, has reportedly told President Biden that the price for a deal is the imposition of a spending cap on the government. But according to his press spokespeople Biden “will not be doing any negotiation over the debt ceiling… there’s going to be no negotiation over it”. A small number of die-hard conservative Republicans opposed McCarthy’s attempt to become Speaker; notoriously it took the largest number of voting rounds since 1856 to squeeze him in. The New Yorker says the “good news for Democrats is that the Republican leadership is this weak – except that weak Republican leadership is what paved the way for [Donald] Trump in the first place”. It’s in everyone’s interest – in America’s interest – that the debt ceiling debate should be settled, and fast. In 2011 it wasn’t only the financial markets that took a beating from the debt ceiling fiasco – consumer confidence also dropped as did confidence in all US politicians. No negotiations, says the President. He may have to eat those words.

Different this time?

The world has changed as a result of Russia’s war in Ukraine. It’s not simply that the US in 2022 directed a vast sum to support Ukraine, more than $52 billion according to the Kiel Institute for the World Economy. The war is nearly a year old and shows no signs of ending; worryingly Ukraine’s defence minister, Oleksii Reznikov, claimed recently that Ukraine is now a de facto member of the NATO alliance, a red rag to President Putin. This kind of stealthily obtaining something that has been denied is not an attractive feature, even if (with the delivery of tanks from the UK, a NATO member) it may be true.

The war has also hastened the almost imperceptible creep of countries to reduce their exposure to Dollar-denominated debt. China’s holdings of US Treasury bonds fell by $100 billion, almost 10%, in the first half of 2022. China’s decision to lower the amount of US debt it owns is probably related to the US decision to weaponize its currency, by freezing the Dollar assets of Russia’s central bank.

Russia can’t use the Dollar; China doesn’t want to rely on the Dollar; both stepped up their purchases of gold last year. So the US may indeed carry on issuing ever-greater amounts of debt; but will it have as many eager buyers as in the past?

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