The White House and the House of Representatives appear to be digging in their heels. Will we raise the debt ceiling and does it matter?
The White House and the House of Representatives appear to be digging in their heels. Will we raise the debt ceiling and does it matter?
We always do, but have to – for some reason – play a bunch of political chicken first.
Failing to raise the debt ceiling is not in any way default. The government can still roll over existing debt. Unfortunately, with the budget deficit running at $1 trillion per year, there would have to be an equal amount of spending cuts. That’s equal to the entire defense budget plus the VA. I can’t see that happening.
But raising the limit also matters, because the annual interest payments also increase, and other spending still gets squeezed. This is especially important, because we are transitioning from a period if historically low rates (actually zero here and negative in the EU) to more normal rates.
We also have the Social Security and Medicare problems. SS assets (as fake as they are) are being drawn down, and will be exhausted by 2035. After that the shortfall between FICA revenues and benefits will have to from general revenues. And, no, no, NO! Benefits will NOT be cut!! Put that fantasy away.
The Green agenda of zero carbon emissions will result in much lower manufacturing and agriculture output and much larger operating cost for every person, enterprise, institution, and government agency. There will be a much smaller economy in absolute terms and greatly reduced tax revenues.
Add to that trade wars as the EU tries to impose its internal regulations on the rest of the world.
And then there is the neocon effort to get a war going with China to match the one we have with Russia.
The debt limit is in a way simply irrelevant, mere smoke and noise.
bob skykes: Failing to raise the debt ceiling is not in any way default. The government can still roll over existing debt. Unfortunately, with the budget deficit running at $1 trillion per year, there would have to be an equal amount of spending cuts.
Once Congress has appropriated the money, if it doesn’t get paid, that’s a default. You can’t order a new fighter jet or a box of paperclips, then stiff the vendor without repercussions in the credit markets.
Yes. Its only about when, how much, and what else will be log rolled with it.
But is there a tipping point where the borrowing is unsustainable?
When the government has to borrow money for interest payments?
Does anybody actually know?
No. Look at Japan. Go back through the predictions and there are plenty suggesting we would already have fallen apart at lower debt levels than we have now.
Steve
Japan has been successful only because they’ve been able to keep interest on the debt near zero. That works only so long as interest rates don’t significantly rise.
Here in the US, interest rates are going up and as new debt gets created and rolled over, the cost of servicing the debt will also rise. The CBO estimates that costs this year just in interest payments will be $640 billion, up from $475 billion in 2022. The CBO estimates these costs will continue to grow over the next decade and cost a total of over $10 trillion over than time span and exceed spending for defense and other major programs.
By definition, increasing the debt is unsustainable – the only question when and how it stops.
“Will we raise the debt ceiling and does it matter?”
Yes and yes. Andy has it right. We will print cash to pay, and inflation will result.
“Go back through the predictions and there are plenty suggesting we would already have fallen apart at lower debt levels than we have now.”
Pretty selective reasoning.
Go back through the environmental catastrophe predictions of the past 50 years. There are plenty suggesting we should already have starved, become extinct or be underwater at lower CO2 levels than we have now.
The question was if we know when borrowing i unsustainable, not if it was bad. You can easily find predictions about major problems when debt as a percentage of GDP went over 100% which didnt happen.
Just FTR there was no scientific body suggesting we would starve, be underwater or extinct by now. What was predicted is that if we hadn’t made headway by now that the pathway to limiting warming to some target would close.
Steve
As the “fact checkers” put it, needs context. The conclusion that GDP over 100% was catastrophic was found to be incorrect due to a mathematical error. However, the balance of the same paper is still accepted. It found that economic growth decreases as the percentage of debt rises.
When that slow growth becomes “catastrophic” depends on your assumptions. For example, if you assume that you can always increase the total percentage of income taxed away, it would never be “catastrophic” until you reach taxes of 100%. If you assume that there’s a practical limit to the percent of national income taxed away, you reach a different conclusion.
MMT correctly explains the correct debt limit, but there is no way (theoretical or practical) to determine that number. Increasing production capacity will increase debt capacity, but while related, there is no correlation. There is a loose causation, but like matter and energy, they can switch.
There is a relation between the amount of minimal production capacity and debt capacity, but it is not a simple relationship. US production capacity includes financial production, but as with a perpetual motion machine, but it eventually stops.
My opinion is that a catastrophic failure would require a sudden catastrophic event(s). As the government approaches its maximum debt capacity, the financial system will react to counter a possible catastrophic failure. As long as the financial system can remain mostly balanced, it will not collapse.
The problem is that sudden catastrophic event(s) are not predictable. So, it will be impossible, until it happens.
A catastrophic event can be quite subjective.
9-11 was considered at the time to be an economic event requiring federal intervention.
Would we need a trillion federal dollars to shore up California in the event of a major earthquake?
Two trillion?
A fairly limited nuclear exchange?
Ten trillion? Twenty? Would dollars at that point become irrelevant?
IMHO, dollars are fated to become irrelevant because precedent treats them as infinite.
Whatever the precedent if something can’t go on forever, it will stop.