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Wednesday, October 6, 2021
It's true: We are 'in trouble no matter what'
We’ve now entered the phase of the (perpetually) tortured debate over the debt ceiling that invokes apocalyptic economic imagery, namely “recession” and “default.”
With just under two weeks to go before the pivotal Oct. 18 deadline, Treasury Secretary Janet Yellen told CNBC on Tuesday the U.S. economy could spiral into a full-fledged downturn if Congress doesn’t raise the government’s statutory deficit limit.
“Once the U.S. hits its borrowing limit, set by statute, it will be unable to issue new debt and be in a technical default,” Eurasia Group’s Jon Lieber explained recently. And with no obvious way out for the warring parties, “the odds of this happening are unusually high, at 20%.”
The ex-Federal Reserve chair’s interview dovetailed with increasingly dire language used by her boss, President Joe Biden, to describe the ensuing calamity if Uncle Sam’s credit limit isn’t raised. It also affords us the opportunity to examine a paradigm former President Donald Trump floated last week.
In a nutshell, frequent fights over the debt ceiling have become a Catch 22 between paying bills the government has already incurred — or continuing to spend money it doesn’t actually have.
Trump articulated that idea — however inartfully — when he told Yahoo Finance that “we’re in trouble no matter what … if you raise it, bad and if you don't raise it, bad. It's a bad situation to be in.”
To be certain, the Trump administration’s own checkered record on deficit spending leaves the former president open to accusations of hypocrisy and political opportunism. Also, Democratic and Republican stances on the question of fiscal responsibility always seem to be contingent upon which one controls the White House.
However, Trump's remarks underscores the extent to which “discretionary” spending has become anything but, with the political class running up huge bills — only to summarily demand the right to spend even more.
In speaking to Yahoo Finance, Trump also referenced the massive infrastructure bill and President Joe Biden’s omnibus spending plan, which are currently stalled in Congress.
Andrew Busch, an ex-CFTC official told Yahoo Finance Live recently that if “both of these bills pass, even a smaller social infrastructure spending bill of ... between $2 [trillion] to $2.2 trillion, … you’re going to get extended inflation all over the place in the U.S. economy.”
A textbook lesson from Economics 101 is that government spending almost invariably stimulates demand, which leads to higher prices. And in an economy where both are running pretty hot, the impending fiscal boost from Washington could lead to an inflationary tipping point, the likes of which nobody is prepared to confront.
To sum it up, the consequences of not raising the debt ceiling will most likely lead to financial and economic calamity. But the consequences of doing so all but guarantee the government will show no restraint in its decades-long debt binge, and the costs of doing so will eventually catch up with everyone.
By Javier E. David, editor at Yahoo Finance. Follow him at @Teflongeek
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