“Honestly, no one knows. It would be uncharted territory. It’s hard to believe Congress would ever choose to run the experiment, but these are strange times. Anything seems possible,” said Dr. Stephanie Kelton, a Professor of Economics at Stony Brook University and a Fellow of the Sanders Institute, in an interview with me. “U.S. Treasuries are the equity that undergirds the global financial system, so a default on payments would, presumably, lead to serious disruption in financial markets.”
Debt Ceiling is an Arbitrary Political Tool to Perpetuate Austerity
The United States has never hit its debt ceiling without Congress intervening to raise it, but the prospects of this occurring are becoming increasingly likely under the Trump Administration and the current Congress.
On July 28th, Secretary of Treasury Steve Mnuchin wrote a letter to Congress to inform them that action would be required on the debt ceiling, as it’s expected to be reached by the end of September 2017. “I have determined that a ‘debt issuance suspension period,’ previously determined to last until July 28, 2017, will continue through September 29, 2017. As a result, the Treasury Department will continue to suspend additional investments of amounts credited to, and redeem an additional portion of the investments held by, the CSRDF, as authorized by law,” Mnuchin wrote to House Speaker Paul Ryan (R-WI). He urged Congress to take action before their August recess, but they have not.
If Congress fails to act, the government would shut down as a result. The consequences of what could happen if Congress fails to act are unknown, but they don’t bode well for the U.S. economy to even face the possibility of it occurring.
The debt ceiling was a common point of contention during the Obama Administration, and has served as an opportunity for political opposition to leverage for political gain. Obama told Congress in 2015, “If it gets messed with, it would have profound impact for the global economy and put our financial system in tailspin.” In 2011 and 2013, the debt ceiling debate engulfed Congress, as Republicans who held a majority used it to negotiate to achieve their own agenda. In 2011, the United States’ debt rating was downgraded by the S&P for the first time, increasing borrowing costs due to how close the U.S. came to defaulting on their debt in 2011 amid the debt ceiling debate. Financial markets tanked in response to the crisis, experiencing the most dramatic volatility since the 2008 economic recession. The debt ceiling sets a limitation on government spending and the government’s ability to regulate the economy and financial markets, as well as its ability to fund operations of the government. Though traditionally the ceiling has been raised without debate, during the Obama Administration, the Republicans in power used it for political purposes to the detriment of the economy; it’s possible the Democratic Party will return the favor, or Republicans will try to attach policy in exchange for raising the debt ceiling, sparking a heated debate.
Economist Rohan Grey told me in an interview, “What happens regarding the debt limit depends on how policy actors choose to respond. There are discussions about prioritizing certain kinds of payments over others in the event the Treasury General Account has insufficient funds to over payments, but they are all ultimately speculative. My personal view is that as long as the Treasury Secretary has the ability to issue certain instruments to finance the deficit, such as platinum proof coins of whatever denomination he wishes under USC S 5112(k), he is obligated to issue such instruments to ensure payments are made.” He added that credit agencies decide on their own to downgrade credit ratings at their own volition, based on predictions determined by the political climate, but since the U.S. produces its own currency, there is no tangible threat of actual defaulting or inability to pay debts.
“As the U.S. government is a sovereign currency-issuing government, it does not require bond issuance to deficit spend. Treasury bonds are issued by the government to establish and maintain a particular interest rate. Therefore, the debt ceiling serves no real financing purpose and it should be scrapped,” said economist Ellis Winningham in an interview with me. “The debt ceiling functions solely as a political tool that is used to strong-arm the opposition, usually into accepting cuts to vital programs, under threat of deliberately preventing the federal government from “paying its bills’; an act which would then generate public outcry and, thus, political damage to the opposition.” Winningham added, “The people are not separate from the federal government. Separate from politicians, yes, but not separate from the institution of the U.S. government. We are the government and the government is us. The economy is also us and it is ours. We the people create our own currency and it is time that we spend enough of our dollars into existence to reach the real ability of our economy to produce goods and services. I am talking about reaching maximum output and sustaining it indefinitely. I am talking about spending to achieve a condition of full employment, where all who are willing and able to work can have a job at a decent wage, and sustaining that condition in perpetuity.”
On August 8, CNBC reported, “the decision could have significant implications on the markets because the Republican Party seems to be ‘backing off the idea’ of a ‘clean’ debt ceiling. A ‘clean’ debt ceiling refers to a lifting or suspension of the agreed-upon cap on federal borrowing capacity without any additional provisions.” As the deadline nears, the economy and markets will likely respond accordingly, and the same partisan tug of war is likely to entrench Congress at the risk of shutting down the government and tanking the economy.
Joe Firestone, the author of the Kindle e-book Fiscal Myths of the 2016 Campaign said, “The law setting the debt limit can be turned into a dead letter by the President within single Executive Order issues by the President requiring the Secretary of the Treasury to mint a single 1-oz platinum coin with a face value of $100 trillion and then deposit that coin in the U.S. Mint’s Public Enterprise Fund (PEF) Account. The very quick result of that order, after another easy step, would be to add $100 trillion in reserves to the Treasury Spending Account, removing the need for the Treasury to ‘borrow’ any more money for at least 15 years, and also pay down nearly all outstanding Treasury debt falling due for at least that period.”
Firestone added, “Don’t fall for the idea that Congress can’t raise the debt ceiling without cutting spending programs or raising taxes because we already have $20 trillion in Treasury debt, and can’t afford to borrow any more money without increasing the already heavy burden on our children and granchildren. The truth is that ‘we the people’ don’t owe that money. Our Federal Government owes that money and it is not like your household. Your household cannot create US sovereign money: bank reserves, currency, and coins. Your Government can, and it can do that in unlimited amounts since it is a fiat sovereign, unlike our state and local governments and governments like Greece and other Euro nations. Since it is a fiat sovereign it can repay all its debts subject to the limit, including the whole $20 trillion now outstanding, without taxing any of us an additional penny beyond the level of taxation we pay now. So, tell the Congress that the public debt is their debt and that instead of giving us a BS debt ceiling crisis, what they need to do is to repeal their debt ceiling law and just let the Treasury do what they have already delegated it to do, namely, spend what they have already funded in legislation they have already passed.”