In preparation for a recent meeting with my financial advisor, I had to do a little research. While most of that research was irrelevant to a political blog, one big economic topic we discussed was more than relevant: the looming U.S. debt limit. In this case, the politics is personal. What Congress does with the debt limit will directly impact our national economy… and our national economy will largely dictate whether or not my retirement years will be spent selling pencils under a bridge.
First, a disclaimer: While I’d like to think that my Public Finance professor from college would be impressed with this post, I fully suspect that she’d already be in cardiac arrest. I’m quite certain that she only passed me to avoid my constant questions the following semester. So PLEASE don’t take anything herein as investment advice. You’ve been warned.
I’ve touched on this topic numerous times, from back in 2019 to as recently as this past November. While nothing has really changed, I need to rant once again since this is once again a problem.
To be perfectly clear: The national debt limit is a totally made-up number. It’s a completely arbitrary dollar limit beyond which the U.S. government says that the U.S. government can’t borrow any more money. It’s a totally meaningless concept – equivalent to my saying that I have a two-drink limit and I can’t have a third drink… until I order a third drink.
The United States is about $31T in debt and anything measured in “trillions” undoubtedly deserves some attention. The problem, however, isn’t some random debt limit. The problem is that Congress keeps passing budgets and tax laws where expenditures regularly exceed revenues. As a result, our national debt keeps growing. This really shouldn’t come as a big surprise to anyone. Even someone in Congress.
The previous Congress did manage to pass a bipartisan budget. It again exceeded projected revenues (imagine that) but failed to include an associated debt limit increase. We’re thus stuck with hoping that our current Congress will separately pass one. And I’m skeptical that it can.
In order to win the Speakership, McCarthy agreed that the House would not even consider a debt limit increase without spending cuts. On Fox, McCarthy argued that “If you had a child and you gave him a credit card, and they kept hitting the limit, do you just increase the limit or change their behavior?”
Wow. It’d be tough to construct a more asinine analogy.
I’ll first note that the “child” in question is Congress itself – which includes McCarthy. He and his party are equally responsible for our existing national debt over multiple legislatures and multiple administrations. Also, the charges he questions are already on our “credit card”. Refusing to increase the credit limit to match those charges has no impact at all on the debt. It’s still there.
If McCarthy was arguing that we should tie future debt limit increases to future budgets, well, that’s a discussion that we should have during the next budget cycle. It’s remarkably easy for Republicans to vote against a separate, conceptual debt limit increase – particularly when they don’t understand and/or care about the economic ramifications. It’s quite hard to vote for an unpopular tax increase or to vote against a popular budget item. Budget fat in one Congressional district is another district’s bread and butter.
For example, the Navy’s 2023 budget request was for 9 new ships and they also asked to decommission 24 old ships to avoid excessive maintenance costs. Congress, however, decided that the Navy needed 12 new ships and only approved 12 ships to be decommissioned. Why would Congress allocate more money to the Navy than they requested? Look no further than the Congressional districts where the ships are based. Like it or not, that’s the way that budgets are negotiated.
Congress eventually needs to grow a pair and have serious debates over specific budget line items rather than debate an arbitrary debt limit that is unburdened by actual spending and taxing details.
Note to Kevin: Tell your inner child next year that he can’t plan to spend more than you make. Let’s see how that goes.
McCarthy, however, wasn’t arguing on Fox about next year’s budget. He was arguing for simply not paying our existing credit card bill. That’s called a default.
When the U.S. Treasury runs out of money collected from taxes, it borrows money to continue paying its obligations. Unfortunately, the United States will technically reach its statutory debt limit on Thursday, January 19. Treasury can take “extraordinary measures” to keep the U.S. afloat for a few months but those band-aids will fall off by mid-year. At that point, the United States of America will no longer be able to pay its bills.
Once again, we’re not talking about money that we’re thinking about spending. We’re talking about money that we’ve already spent. We have bills. They’re due. If we don’t pay them on time, the United States will be in default. Our country will be no better than a deadbeat dad who refuses to pay child support.
The last time we even came close to a default due to an impending debt limit was in 2011. Just the possibility of that future default caused the S&P to decrease the U.S. credit rating which in turn caused all three major U.S. stock indices to immediately drop about 6%. It took months for our economy to recover from even the threat of a default. The ramifications of an actual default would have been almost incomprehensively bad and any recovery would have been measured in years.
Thus far, the markets haven’t seriously reacted to our current game of debt limit chicken. I hope I’m wrong, but I think it’s just a matter time before the markets negatively react to the possibility of a default sometime this year. At that point, our government would have to act quickly. And “quickly” isn’t a term that usually applies to government.
So are there any ways out of this quagmire? There are a few possibilities, but each has its own degrees of difficultly and probability. None are easy with a high chance of success. To wit:
Assume Sanity
For the sake of completeness, I have to include a scenario where everybody decides to be an adult, the debt limit is increased before the market panics, the sky is filled with rainbows, and Pinocchio becomes a real boy.
Use a Discharge Petition
While this option seems to be getting some press, it just ain’t gonna happen.
A discharge petition is a seldom used means by which a bill can get to the floor of the House without the consent of leadership. It’s a complicated process and the hurdles are immense. First, a majority of the House would have to support a bill increasing the debt limit – implying that several Republicans were willing to commit political suicide by joining Democrats in opposing their leadership. Then the bill is required to go through months of waiting in two different committees. Then the bill can only be brought to the House floor on specific days – which may or may not be days when the House is actually in session. In short, even if there was the political will to use this option, it can’t be completed quickly enough.
Prioritize Payments
This stupid option is also getting some press on the right. It presumes that Treasury can simply prioritize some types of payments over others.
In addition to being a logistical nightmare, this option has major flaws. First, it assumes that there is money to make even the prioritized payments. If we’ve reached the debt limit, there’s no money for anything. Second, and most important, the act of paying “some” of our bills simply doesn’t cut it. We’d still be in default on the bills that we didn’t pay and the economic consequences would be mostly the same.
Mint a Coin
This is a weird option but I can find no logical or legal flaw with its use.
An obscure 1997 law gave the Treasury Secretary the power to issue platinum coins of any value. It was only intended to make it easier to produce coins for the collector market, but no usage or amount limitations were stated in the law The Treasury could thus simply mint a $1 trillion coin which the Fed would then be legally required to accept as a deposit. That money could then be used to fund the government.
Such a usage of the law would certainly be challenged in the Supreme Court and, given the current makeup of the Court, it’s unclear what they would do. However, it would be difficult for the textualists on the Court to argue with the crystal clear language of the law as written.
It’s also unclear how the markets would react to this approach, but it would certainly be better than a default.
Just Say No
The administration could simply ignore the debt limit. The 14th Amendment states that:
The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.
Since the validity of our debt is a constitutional requirement and since any limit imposed on that debt could threaten the debt’s validity by creating even the possibility of default, any debt limit is thus unconstitutional and the administration cannot be forced to abide by it. Heh.
This approach would, of course, go to the Supreme Court and this iteration of the Court would definitely claim for themselves the power to decide the constitutionality of the debt limit. It’s unclear, however, how they would rule and I’d be loathe to put the full faith and credit of the American economy solidly in the hands of five people who are accountable to no one.
Even a recent opinion piece in the conservative Wall Street Journal noted that a debt limit increase is a terrible issue upon which a paper-thin Republican House majority should attempt to extort a Democratic Senate and White House. To quote the op-ed: “The first rule of political negotiation is never take a hostage you’re not prepared to shoot.”
My fear is that the House itself will be held hostage by the Crazy-Right-Wing of the Republican party. This set of idiots doesn’t give a crap about the impact of breaching the debt limit. They are nihilists and are, indeed, fully prepared to shoot the American economy. I sincerely hope that sanity will eventually prevail or that the administration will eventually take unilateral action to avoid a default. However, my current prediction is that we’ll at least go to the brink before that happens.
So, back to my discussions with my investment advisor with respect to my portfolio allocation. While this stalemate progresses, I personally think that cash is looking pretty darn good.