There are contradicting opinion pieces on the debt limit in the Wall Street Journal today. William Galston says that the House should relent:
F. Scott Fitzgerald once wrote that “the test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time and still retain the ability to function.†The challenge for Congress and the president is to meet this test. On one hand, the likely consequences of default are unacceptable. On the other, our long-term fiscal trajectory isn’t sustainable. Our political leaders must find a way of reconciling these truths to reach a practical result.
Like many observers, I believe that the disagreements between the parties are too deep to resolve between now and June. I hope that party leaders can agree to suspend (not increase) the debt ceiling until Sept. 30, allowing discussions of the debt ceiling and the budget to proceed simultaneously. Mr. Biden has said that he is willing to discuss fiscal policy as part of the budget negotiations, but only separately from debt-ceiling talks. Republicans should care more about the substance of budget cuts than about the legislative context in which they occur.
Long-term budget talks need a goal that is both feasible and meaningful. A balanced budget would require spending cuts and tax increases that neither Congress nor the American people would accept. A more practical target is to reduce the annual deficit enough so that U.S. debt grows no faster than the U.S. economy.
while James Freeman says that’s absurd:
Those not accustomed to studying the absurdities of Washington may wonder why Biden administration staff are discussing increasingly kooky ways to evade federal law rather than simply accepting the constitutional reality that Congress has a say in federal spending and debt decisions. Perhaps due to Mr. Biden’s career as a political posturer, he doesn’t even appear to be embarrassed as he pretends that he’s standing on principle in rejecting negotiation to secure more borrowing authority. Naturally our posturer-in-chief had the opposite position as a senator and as vice president, when he served as a negotiator.
Now, apparently disappointed that he didn’t cut a better deal on behalf of President Obama in 2011, Mr. Biden suddenly pretends that negotiation is unnecessary and the White House can simply order Congress to pass a higher debt limit.
Yet much of the press portrays Mr. Biden as someone who is trying to solve a problem. “Biden meets with congressional leaders in urgent bid to avoid default,†claims a Washington Post headline. But his bid is obviously not urgent if he’s still unwilling to negotiate on the subject.
Tyler Pager and Jeff Stein report for the Post:
The White House in recent days has emphasized that Biden is willing to discuss spending cuts as long as they are not tied to the debt ceiling increase, a message he is expected to repeat at Tuesday’s meeting.
So he’s conceded that a president must negotiate such things with Congress, except at the moment when negotiations are most needed? This is absurd. But it won’t be funny if the government can’t pay its bills.
As a matter of policy I’m more predisposed to agree with Mr. Galston’s view but for one detail: President Biden poisoned the well when he reneged on his commitments to Sen. Manchin in the Inflation Reduction Act. At this point it is not unreasonable to conclude that President Biden will honor no commitments on spending cuts unless forced on him.
Thirty years ago as the Cold War ended and people were talking about the “peace dividend” I observed that it would be fun while it lasted but it wouldn’t last. The same was true of the COVID-19 spending spree.
There is obviously a desperate need for us to align federal spending with the growth of the economy. Everything that we know tells us that the higher the debt overhang the greater the impediment to economic growth. China is experiencing that as well.
The question is how to accomplish it. It won’t be easy with one party that believes every dollar spent by the federal government stimulates the economy while the other party believes that every dollar by which taxes are reduced does the same. Two one-trick ponies together do not make for a competent team.
The budget issue does need resolved. However, in essence the GOP has kidnapped your wife and treated to send a piece of her to you everyday until you agree to their plan. Ok, its actually a default and not fingers or toes but eh principle is the same. Now, suppose Biden/Dems give in, what happens? The Dems learn that the way to get the budge they want, not just a project or two like in the past, is to use the debt limit as leverage. Who thinks we really solve the budget issue by seesawing back and forth between huge changes dictated by fear fo default?
If you want to solve the budget, and the debt, then do that.
Steve
As I say, Biden already poisoned the well. Flipping your example around, that taught Republicans that the only way to deal with him was to give him no other alternative.
The great policy triumphs the president is planning on running on are the source of our present problems. Do you really expect him to walk those back?
Steve,
Both parties have used the debt ceiling for political games and advantage. Every Democratic politician now demanding a “clean” bill – including President Biden – has, in the past, specifically opposed a clean bill to try to leverage other things into it.
The circus is no different today, only the roles have changed.
Did Biden really renege on “commitments” to Manchin.
Or did Manchin pretend he heard what he wanted to hear and using the “I was swindled” excuse for supporting risky (for him) legislation.
To take the phrase, “how the sausage gets made” — Manchin is a master sausage maker considering he’s been a state legislator for 20 years, Governor for 6, and Senator for 10. I have a tough time believing Manchin doesn’t know when someone is “lying” to him.
There’s no way for me to determine that.
I guess it’s a diplomatic way of throwing the towel in by saying both parties call for the same thing when they are in power – wanting or opposing a clean debt ceiling, all depending on who is in power at the time. However, what always seems to be off the table is “solving the problem†for the long term. Instead, their calls to act are framed in for “the sake of our children and grandchildren,†a warm-and-fuzzy phrase politicians pull out in order to graciously punctuate whatever they are trying to sell to the people.
It’s ironic, though, when a family is over their skis in debt, the age-old advice is to pare back on your expenditures. If you don’t maybe something bad will happen – a house will be foreclosed on or a car repossessed (a lot of that is already happening). However, when a government’s debts exceed their ability to pay for them, the government remedy is to artificially raise more monies, permitted by raising the debt ceiling, entirely manifested by simply printing more money. I’m told, however, if our reserve currency status suddenly is upended – which Biden’s policies seem to encourage – this will surely take away the edge we have on not being immediately accountable for our irresponsible fiscal policies.
FWIW I think the budget proposal McCarthy hammered out is at least a financial gesture that our debt has to be acknowledged and honestly addressed. The howls of default from the dems are disingenuous and distract from the real problems facing this country. There is nothing in their ideological agenda providing economic growth. Their constant servitude to expensive green energy schemes is hitting the low and middle classes the hardest. Their support of insane reparation policies, waving millions of government-dependent people across the border, and turning a blind eye to the crashing commercial real estate sector is a recipe for disaster. But, hey let’s raise our debt ceiling, rationalize our troubles away, and not face the music until all is lost!
@jan
Please do not get sucked into the de-dollarization fantasy. There is no “reserve currency”, period. That went away with Brent Woods. Today, there is no other currency or financial assets as widely available as the dollar.
The everlasting US trade deficit means that the dollars used to purchase foreign goods and services have nowhere to go. Except dollar based financial securities, there are no goods or services foreign holders can purchase, and there is no currency in a large enough supply to use for trade.
Since most countries have excess dollars, supply and demand ensures that they are the cheapest to use. The only way to de-dollarize is to reverse the US trade deficit, and “US default” will not do it.
“At this point it is not unreasonable to conclude that President Biden will honor no commitments on spending cuts unless forced on him.”
I don’t think it is only President Biden. Democrats in Congress and Republicans in Congress will also have to be forced into spending cuts (including the tax expenditure variety).
To use James Carville’s analogy; spending cuts happen when the bond market comes back and intimidates everybody. Despite the current high nominal rates, the treasury market is quite orderly still.
https://www.wsj.com/articles/stop-printing-money-how-voters-would-solve-the-debt-ceiling-standoff-96e36a03
Tasty, interesting to read your opinions on de-dollarization and the “reserve currency†vulnerability. Below is another read on it which slightly varies from your own.
https://www.kitco.com/news/2023-04-19/USD-is-suffering-stunning-collapse-as-world-s-reserve-currency-warns-Eurizon-SLJ-Capital-s-Jen.html
Analysts who continue to ignore the de-dollarization trend are being too complacent. “If the U.S. makes more policy errors and abandons the culture of self-examination, there will likely come a time when much of the rest of the world will actively avoid using the dollar,” Jen wrote. “While the Global South is unable to totally avoid using the dollar, much of it has already become unwilling to do so.”
More and more countries, led by China and Russia, are making bilateral trade agreements that exclude the U.S. dollar. The yuan is already the most traded currency in Russia, according to data compiled by Bloomberg. This happened only in February after the yuan surpassed the dollar in monthly trading volume for the first time.
China recently completed the first yuan-settled LNG trade. China also struck a deal with Brazil to trade in their own country’s currencies.
At the same time, China and Malaysia are discussing the creation of an
Asian Monetary Fund to reduce reliance on the U.S. dollar, while India and Malaysia announced that they abandoned trading in U.S. dollars and can now settle in Indian Rupees.
Also, central banks have been flocking to gold as a preferred reserve asset, buying record amounts in 2022.
I agree the hype over de-dollarization is overblown in the short-term (i.e the next 10 years).
The Chinese aren’t angling to replace the dollar with the renminbi (for one thing, its not freely convertible). Chinese goals are much more limited, build up enough infrastructure and agreements that they can trade for critical resources even if the US sanctions China like it did to Russia, like energy from the Middle East, or food from South America.
A good example of why de-dollarization is overblown was the recent report that Russia settling for US dollars from India after accumulating too many Rupees, refusing to accumulate more after finding not enough things Russia could buy from India.
In the long term, irresponsible US fiscal and monetary policies will damage the dollar. I don’t think the world enjoyed the yoyo policies of the Fed and Congress which led to a wave of inflation around the world despite many countries having followed far more responsible fiscal and monetary policies.
Andy- Jaywalking and first degree murder are both crimes. Both Democrats and Republicans have made demands in the past when it came time to raise the debt limit. No one has ever done it before at this scale, except maybe the GOP in 2011.
The threat of de-dollarization is overblown but I think it happens in the long term. We keep doing stupid stuff like we are now with debt limits that will help drive it but our saving grace is that other countries are mostly worse. I would expect some more diversified option.
Steve
George: Give me the car keys.
Martha: You’re drunk.
George: Give me the car keys, or I’ll kill the children!
Martha: You’re a brute! Let the children go!
George: Why won’t you compromise?
The idea that hitting the debt limit equals default just won’t go away. It is, of course, a lie intended to stampede the voters.
Hitting the debt limit merely means no new additional debt. Existing debt can be serviced and even rolled over.
However, no new debt means a balanced budget, and that requires cutting over $1 trillion in spending, about 15% of the total. That’s the rub.
Cutting that much spending means all sorts of pet projects and some necessary project go unfunded and cancelled. It probably also means a deep, deep recession.
So the limit will be raised yet again, merely to allow increases in spending.
PS. The BRICS are trying to set up an alternative payment system. They currently consist of Brazil, Russia, India, China, and South Africa. Saudi Arabia and Iran have formally applied for membership. Argentina, the UAE, Algeria, Egypt, Bahrain, Indonesia, and three African countries have expressed interest in joining. All these countries and several others are exploring membership in SCO, EAEU, BRI/OBOR and other organizations set up by Russia and/or China.
The combined economies of the current member is somewhat larger than that of the G7. Expansion will make it much larger.
A major reorganization of the world order is underway, the West vs. the Rest. One goal they Rest share is replacement of the US dollar as the international settlements currency. The only real alternative is the renminbi (yuan), this morning worth $0.14. Whether or not China wants that to happen is a question.
bob sykes: Hitting the debt limit merely means no new additional debt.
It also means not paying vendors or anyone else as required by contract or law. Which vendors would get paid is not discretionary. Picking and choosing would result in lawsuits.
bob sykes: However, no new debt means a balanced budget, and that requires cutting over $1 trillion in spending, about 15% of the total.
Cutting the budget requires an act of Congress.
“George: Give me the car keys.
Martha: You’re drunk.
George: Give me the car keys, or I’ll kill the children!
Martha: You’re a brute! Let the children go!
George: Why won’t you compromise?”
That’s always been how the debt ceiling game was played, including when Democrats played the role of George.
Maybe Democrats have fundamentally changed on this issue to a principled stand on eliminating the debt ceiling, but that seems unlikely, especially considering they’ve passed up opportunities to do just that in the past.
And just to be clear, I strongly favor a clean bill – and generally always favor clean bills from Congress on most any topic. But I realize that’s not how the sausage gets made.
Andy: That’s always been how the debt ceiling game was played, including when Democrats played the role of George.
Even though there was posturing, leadership of both parties made sure there were votes to raise the debt ceiling. The exceptions in modern times were in 1995, 2011, 2013, and 2023; all when Democrats held the presidency.
Andy- Your focus is on the both do it. My focus is that both do it but there is a huge difference in scale and the Dems always had the votes to raise the ceiling. Do you think the GOP does now?
Steve
Steve,
So your complaint is that the GoP plays harder ball than the Democrats? That’s probably correct – at least it seems that way in recent years, but I never find subjective “less bad/less wrong” arguments very convincing. Point being, neither the Republicans nor the Democrats are acting on principle here.
And just to be clear here, I’m not defending Republicans – I disagree with them on their proposed bill and their brinkmanship. I support a clean bill. But I’m not blind to the hypocrisy of Democrats claiming to want a clean bill out of principle when it’s obvious that’s not the case.
Andy: So your complaint is that the GoP plays harder ball than the Democrats?
The problem isn’t the posturing, but the real threat of an economic collapse. In most cases (other than those mentioned above), either the debt ceiling was raised without fanfare, or the leadership made sure the votes were there, then allowed members in contested districts or those with political ambitions to posture. The political right is holding the economy hostage, meaning they are threatening to cause real hurt to millions of people if they don’t get their way, because otherwise they don’t have the votes to enact their policies.
The debt limit should be eliminated.
@jan
Most people, including economists, do not understand how currency trading, monetary systems, financial markets, and/or their interactions works. Once you throw out what you learned in Econ 101, it starts to make a lot more sense.
This is the key paragraph:
It could happen, but it would take decades or more. It would require a relatively stable financial environment during that time. Brent Woods provided that stability for the dollar. (The Marshall Plan helped.)
The reserve nonsense is addressed in the following link, and it has a link addressing Brazil nonsense. (SPOILER: Brazil is actually trying to save its dollars.)
Still More Fairy Tales of US Dollar Demise That Didn’t Happen
As long as there is a trade imbalance between two or more countries, there will be currency imbalances. Presently, that is the US and the dollar.
Reserve Currency Status Requirements:
1. Floating Currency
2. No Capital Controls
3. Large Liquid Bond Market
4. Property Rights
5. Willingness to Run Trade Deficits
6. Global Trust
The first three are absolute requirements. Five is a mathematical requirement.
With the exception of some bills & coins, fiat currency exists on accounting ledgers, and those ledgers must balance. Every unit of a currency must be balanced by an asset.
The dollar is the dominate currency by an order of magnitude or more, and it is those ledgers and their liquidity that make the dollar the most used currency. (This applies to cryptocurrency. as well.)
You can trade in whatever currency, but you will need to obtain it first. Since currency traders do not work for free, you will pay a fee each time you borrow another currency fo a trade. It is possible to hold another currency for trading your goods, but it needs to be balanced by an asset based upon that currency.
I apologize for the length. It kinda got out of hand, and it was even longer before I trimmed it. (I included @Mish’s link for brevity.)
The first five of TastyBits’s bullet points above explain why it’s safe to predict that the renminbi won’t replace the dollar as the exchange currency any time soon—those qualities are not seen as in the CCP’s interests.
Thanks Tasty. Your posts are a good learning tool.
@jan
Thanks. I was worried that I would sound like a condescending asshole.
“The problem isn’t the posturing, but the real threat of an economic collapse. ”
We hear that argument every time there is a debt ceiling crisis. And that “threat” is why politicians have loved using it as leverage for many decades now. And yet, we’ve never crossed that Rubicon, and there has always been some deal at the end. Maybe this time will be different, but I doubt it.
And just reading Matt Yglesias’ Friday mail news letter, he was asked then answered:
So a big reason why the debt ceiling doesn’t just get eliminated is because both Republicans and Democrats find it useful politically.