The U.S. government has officially hit the debt ceiling. Once again. Cue the political theater. Once again.
Beginning Friday, the Treasury Department started taking “extraordinary measures” to keep the government from defaulting on its debt limit, which now exceeds $18 trillion. Those measures include stopping investments in a pension fund for federal employees and suspending the issuance of special Treasury securities used by state and local governments.
"This thing has become somewhat of an embarrassment," says Pedro da Costa, an economics reporter for The Wall Street Journal. "Every few months it seems like we hear about the debt ceiling again, and internationally people are just kind of baffled at the largest economy in the world with the deepest bond market has the political debate over whether or not to pay debts it has already incurred.”
We've been spared political drama (over the debt limit at least) since February 2014, when Congress passed legislation—which President Obama signed into law -- suspending the cap on government borrowing until March 15, 2015. Until yesterday, the federal government has essentially been able to borrow as much money as it has needed to fund day-to-day operations.
“The debt ceiling, to be honest, is something that should just be done away with,” says da Costa. “Most economists agree that it’s more a political animal than it has to do with economics.”
Americans—and the world-- watched an ugly scenario play out over the course of 2011. In the fall of 2010, after Republicans took control of the House, many vocal GOP lawmakers vowed to tie the issue of raising the debt ceiling to cuts in federal spending. Democrats dug in their heels, and a nasty game of chicken followed. But eventually the debt limit stalemate was resolved in July. Despite the 11th hour agreement-- one that da Costa describes as "almost mocking the American public"-- a downgrade of the nation’s credit rating resulted. Consumer confidence took a hit as a result. The markets were turbulent.
In a letter to Congress on Friday, Treasury Secretary Jacob Lew warned against repeating that scenario (or worse): “Protecting the full faith and credit of the United States is the responsibility of Congress, because only Congress can extend the nation’s borrowing authority. No Congress in our history has failed to meet that responsibility.”
The Congressional Budget Office estimates that lawmakers won’t need to raise the debt ceiling until the fall of this year. Senate Majority Leader Mitch McConnell (R-KY) has said Congress will not allow the government to shut down or default on the nation’s debt. McConnell, however, has suggested raising the debt limit could be tied to other GOP-favored legislation.
But da Costa warns, "while...the Republicans in the Senate don’t seem to have an inclination to get to this fight, we’ll probably get a lot of noise around it," pointing to the often rowdier, and more headstrong House Republicans.
Indeed, as Politico's Ben White writes: "Will the U.S. default? Almost certainly not. Will getting the debt limit raised (or suspended again) be a terrible mess that ripples through markets and dents the economy? Probably. Why should this time be any different?"
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