I follow a blog called Calculated Risk. It has been one of my go-to blogs for over a decade. I don’t necessarily agree with Bill McBride on various points, but he generally knows his stuff and has been one of the better finance/econ blogs over the years. One topic Bill McBride has covered over periodically is the debt ceiling. He’s often been a voice of relative calm whenever the matter comes up, given all the “sky is falling” talk that usually surrounds any debt ceiling vote. Usually his bottom line is, “no worries.” Where is he at now?
My reading of his most recent posts is “no worries (probably).” Yesterday, he posted a few clips from Goldman Sachs’ analysis:
What happens if Congress does not raise it in time?
Scheduled federal payments would be delayed and financial markets would be disrupted. The primary consequence of a failure to raise the debt limit before October 2 would be a likely failure to make some payments on that day or soon thereafter. This could include, for example, the main monthly payment to Social Security beneficiaries, which occurs on the 3rd of every month. All told, the decline in federal payments that would be necessary to avoid breaching the debt limit would be roughly equal to the budget deficit, resulting in a temporary fiscal contraction of 3-4% of GDP for the period the debt limit is binding. A sharp decline like this would likely be disruptive to financial markets and could have consequences for the real economy, which is why Congress has managed to avoid such an outcome in the past.
Note that was prefaced with their expectation that Congress will take at least til 29 September to raise the debt ceiling (about the time the US would begin to default on its debts).
Today, he takes a few clips from a recent post by Paul Krugman:
I]t looks fairly likely that by October or so there will come a day when the U.S. government stops paying some of its bills, including interest on debt.
How bad will that be? The truth is that we don’t know …
…
Suppose that everyone expected normal payments to resume, with back interest, in a couple of weeks. In that case, even a slight discount on, say, Treasury bills would make them a very good investment — so speculators would basically step in and support the value of U.S. debt despite temporary default. In that case default might not be that big a deal.The big problem would come if investors see the default as more than a temporary glitch — if they see it as a sign of enduring, critical dysfunction in American governance. In that case they wouldn’t necessarily step in to buy our debt, and their confidence in the whole economic edifice would take a severe hit.
And of course with that severe hit, we can imagine some severe long term repercussions that we clearly do not want. Now this issue has come up periodically, and after the usual game of chicken gets played, the necessary (but stupid) vote to raise the debt ceiling happens. There are still ideologues who are convinced that default would not be a bad thing. Here is McBride from 2014 saying something that is as true now as it was then:
Note: There are certain politicians who think it is OK to not pay the bills as long as the U.S. makes interest and principal payments on the debt. That is crazy talk. There is a name for people who don’t pay their bills: deadbeats. If politicians don’t pay their personal bills, they are deadbeats. But if they stop the government from paying the bills, we are all deadbeats. And there will be serious economic consequences for not paying the bills on time. The consequences will build over time, but in a few months, not “paying the bills” will ripple through the entire economy.
Last year I pointed out that the election impact of a partial government shutdown would probably be minimal. BUT if Congress stopped paying the bills, people would remember. It was Republican Senator Mitch McConnell who said in 2011, if the debt ceiling isn’t raised the “Republican brand” would become toxic and synonymous with fiscal irresponsibility.
One area where I have consistently agreed with McBride’s judgment is that the whole debt ceiling idea is ridiculous anyway, and that Congress should just vote to do away with it altogether. The debt ceiling is just about posturing and nothing more. In that sense, it would be wise for the opposition party, or at the very least some members in the House and Senate, to call out the charade for what it is and demand that the debt ceiling be abolished. I hold no hope that such a proposition would be passed. It would make a statement that the last minute posturing that happens each time we run up against the debt ceiling is irresponsible, every bit as much as is the risk of failing to pay our bills as a nation.
My guess is that cooler heads will prevail (once again) and that a clean debt ceiling increase will get passed. Regrettably, the can will be kicked down the road a bit further, until the next debt ceiling crisis occurs. Wash, rinse, repeat, until we can finally get a majority of Congresscritters who will do what should have been done long ago and do away with the debt ceiling once and for all. In the meantime – probably no worries.
Tips and recs appreciated.
Not pay Social Security monthly payments? Crap! That covers my mortgage!
Could the GOP Congresscritters really be stupid enough to piss off hordes of senior citizens, one of their most reliable voting bases? (Not that I’m one of their reliables, of course.)
That would hurt my parents and in-laws, and a couple friends of mine who live on SSI. Failure to act on the debt ceiling would be short-sighted and disastrous. I’m still betting that the GOP Congresscritters will stare once more into the abyss and pull back, cooperating with the Democratic counterparts to pass a clean debt ceiling increase. I am not optimistic about any vote to simply get rid of the debt ceiling altogether even getting to the floor of either chamber. Since ultimately the issue is that as a nation we must pay our bills, doing away with that piece of archaic legislating would be sound fiscally (the world watches each time this drama plays out, and outfits like Moody’s won’t think twice about cutting our credit rating if the drama gets, well, too dramatic).
While CalculatedRisk is pretty sanguine about the situation, I think he’s mostly sanguine about the chances of Congress coming to its senses, not the effects of actually crossing the debt limit.
The crisis will be set off if there’s a drop in value in short-term government debt. That happens if a debt payment gets skipped, or if the markets get spooked that it might. A drop of a few percent in government spending won’t be a catastrophe and in that sense I think it would be less of a problem than a shutdown, which we’ve weathered a number of times. If it’s the SS checks that bounce, there will be a political firestorm but (most likely) not an economic catastrophe, which is a lot of why CR is sanguine about Congress’ behavior – McConnell and Ryan know that even in the “good” outcomes for a default they’re going to pay a big political price.
Not an economic catastrophe for the economy or the markets, perhaps, but for the individuals watching those checks bounce? I could scrape by for a month or two, but there are lots of seniors barely getting by as it is.
There would be a negative multiplier effect to this, though. A high one, since this is money actually spent. Missing the rent hits landlords too; skimping on groceries hits the food markets and their employees. The economy is pretty delicate, right now.
And ripples spreading out from there, too. Look how the mortgage collapse basically took down the entire economy.
The really funny thing is that the debt limit was created by Congress in the 1920’s! By Republicans, of course. It’s Congress’s rule, not a treaty or constitutional requirement.
Which Congress is very aware of, because they cancelled the debt limit for a year and a half from when Boehner quit until this spring. The cynicism is boggling – they know it’s bogus, they know it’s entirely optional, yet here we are.
Market manipulation? Someone is making money on buying or selling options?
Actually, yes. Congresspeople get fantastic returns on their stock portfolios.
And I seem to recall that they are exempt from laws forbidding trading on insider information.
Fourteenth Amendment says that pensions must be paid. Does that apply to Social security? Or could a court be so persuaded?
Who knows what the courts will say? But certainly it seems bouncing a check violates a debt of the United States. The courts might throw the law out as unconstitutional and save us a repeat, although that might be too late to stop a mess at the time.
I hate to be a dog in the manger but does the 14th amendment mean they have to pay my Civil Service pension?
NARFE has been sending e-mails about a bill in Congress to retroactively reduce pensions. Would that not be unconstitutional? Of course, the bill may be for show, just to tell rabid followers “I introduced a bill to …”. You know? just like EFCA?
I think the psychological effects of a default could be profound, effecting the $ status as the world’s reserve currency (with respect to which all other currencies are benchmarked and the ultimate transaction and pricing currency for much of global trade).
Other countries and investors will increasing turn to the and Renminbi as their safe house store of value the longer such a default goes on, and things will never be the same again if all debts plus interest are not honoured in full once the default is ended by a raising the debt ceiling.
Interest rates on US debt will rise and FDI into the USA will fall – the longer the default continues. For many the default will symbolise the USA’s fall from grace as the world’s unchallenged economic, political and military superpower.
I don’t think many in the USA realise how much the US economy benefits from low interest rates and inward investment due to being the World’s reserve currency, and so many will be surprised by how damaging such a fall from grace will be.
The effect will be slow, cumulative and long term, and so not necessarily very visible in the short term but the the effect could be exponential with respect to how long the default turns out to be if all debts are subsequently not made good.
And all of that is in addition to any short term effects on domestic demand and consumer confidence if (say) social security cheques aren’t honored. There really is no upside to any of this, and Trump will stand accused to destroying the nation’s good name, goodwill and credit even if, technically, Congress is at fault.