Congress Won’t Let The US Default on Its Debt. Right?

In twenty eleven, just like now, Republicans and congress were demanding big spending cuts from a Democratic president, Barack Obama in exchange for voting to increase the limit and avoid a debt default. Right now, the House of Represented is still trying to pass a bill that a majority of Republicans and Democrats in the Senate have already said they won't vote for, holding our economy captive to Washington politics

once again. What's clear now is that any solution to avoid default must be bipartisan, and in the end, under enormous pressure from the public and Wall Street to take action, they reached a deal at the very last minute. Senate Democrats and Republicans say they've struck a deal to avoid a looming economic disaster. The agreement will temporarily raise the

debt ceiling through early December. Variations of this same script have played out again and again since then, and in each case a deal was struck in the nick of time to prevent the unthinkable, the US not making good on its debts and all the global economic mayhem that

would result. If the US doesn't raise the borrowing limit and defaults on its debt for the first time in history, it could have devastating consequences for the economy, including a possible recession and a lot of people thrown out of work, and it would shake the world's faith in US treasuries

as safe and reliable. This time, Republicans in the House, led by Speaker Kevin McCarthy and urged on by a group of hard right members who say they'll risk a debt default, are once again refusing to budge unless President

Joe Biden agrees to spending cuts. I don't know if you have any children, but if you hadn't a child, and you gave him a credit card and they kept raising it and they hit the limit, so you just raised it again, clean increase and again and again, would you just keep doing that, or would you change the behavior? Why wouldn't we sit down now and change this behavior. Biden says he won't cave to their demands, and the very notion that we would default on the safest, most

respected debt in the world is mind boggling. I'm not going to get into their reckless threats to take the economy hostage. I won't let that happen. And yet the general action and much of Washington in the financial world this time around, has been kind of a collective shrug. Many people just seem to assume Biden and McCarthy will ultimately pull back from the brink, so there's no need

to get tied up in knots worrying about it. I think the market should be more worried, thinking, oh, we've seen this movie before, but they're not putting the pieces together. The risks are higher this time around. That's my colleague Liz McCormick. She's Bloomberg's chief correspondent for Global macro markets, and she says the widespread assumption that all will be fine in the end means politicians in Washington aren't feeling the pressure to act like they did in past showdowns.

Liz and Bloomberg congressional correspondent Eric Wasson have been closely following this story, and they're here with me now to explain why this lack of urgency about the debt limit could have the opposite effect and possibly raise the likelihood of a default. Liz, we're talking about how disastrous it would be if the US to fall sign its debt. Before we get into the details, can you just tell us what is the US debt, how big is it

and who does the US owe it too? Well, the US debt is over thirty trillion, and the US owes it to a lot of people. You know, we have big foreign borrowers that help fund our deficit, like China and Japan. We do have a large swath of domestic buyers institutions, you know, the big mutual funds, the asset managers. They buy a lot of treasuries. Of course, mom and pop can go to treasury direction buy some treasuries. But we have a lot of foreign nations and big investors

are the largest buyers of our debt. The majority of the debt the US issues is at auctions as we call it. They have you know, set regular predictable auctions of their different maturities of debt, bills, the shortest notes and bonds. So they go into the marketplace and they issue.

Majority of this is bought by the private sector. The Fed of course, you know, through the years through their quantitaties and helps buy some debt, but most of treasuries are done at auction for these big institutional buyers, foreign central banks. That is the primary means that they are borrowing to fund the deficit. And eric, just as long as we're defining our terms from the start, the debt is different from the national deficit. Yeah. Deficits are the

annual shortfall between revenue and spending. For two decades, we've basically spent more than we've taken in. That's been exacerbated by both tax cuts and spending, especially during the recent pandemic. And so what happens is each year the government spends more than it takes in in tax revenue, and so that shortfall gets piled onto the national debt in year after year it grows with interest and everything else. And

so now we're north of thirty trillion dollars in debt. Yeah, the US hit it's thirty one point four trillion dollar debt ceiling in mid January, and ever since then, Treasurary Secretary Yellen is used so called extraordinary measures to prevent a payment default. These are basically stopping payments on intergovernmental transfers his accounting moves that essentially allow them to continue paying all the outside obligations, but at some point they

will run out. Yellen told Congress it would be sometime after early June would be the date when that comes into effect, and the Congressional Budget Office, the nonpartisan scorekeeper for Congress, has said it could come sometime in the summer or fall. And one way that the US could avoid defaulting is if they simply borrowed more money, but

they can't do that because of the debt ceiling. And this is an artificial cap put on lending that the Congress enforces so that the US can't just keep spending and spending. How actually does that work? Well, The point of thing about the dead ceiling is it's about paying for spending that's already been authorized, obligations that have been incurred already through spending bills, through laws, whether it's the Social Security Act which has been around for decades, or

medicare that they're just on autopilot. A hundred years ago, the debt sailing was actually instituted, and it regularly gets run up against the issue is that, and we saw in twenty eleven was the most prominent of this, is that the opportunities used by politicians to try to have a debate about future government spending. And that's what we're

running into now. Republicans have asked for deep spending cuts to be agreed to in order to get their vote to raise the debt sailing, and because they control the House representatives, their opinion on this matters greatly. And what has come into play a lot of times is that Treasury officials through the years, and even the many at the rating agencies have said, this is making Treasury having to finagle and wrangle for what Eric just said, spending

that's already been approved. They're not coming up with new spending. So the whole thing creates a problem. You know, Treasury

just wants to fund what's already been approved. But because of Eric was saying, the long history of creating this debt ceiling, the government has to lift it or resuspend it, which they've done many times, and The really important point here, I suppose, is that when the US issues debt, it's the full faith in credit of the United States saying we're good for it, we're going to pay it back. And never in its history has the US defaulted, So if it does, it would have enormous shocks to markets

around the world, right exactly. I mean, treasuries are seen as the global risk free security. The question is if the US were to default and you lose that kind of confidence, it's a long road to get it back right, and that's the risk. We saw in twenty eleven that one of the rating agencies even did downgrade from triple A US debt, even though back then treasury yields actually

went down. But there's a different environment, and people have warned that you can't kind of expect everything to happen the same. Some have said expect the unexpected. You know,

there's other securities available globally that are more appealing. So I think that is the big risk that if there was a default, it could be catastrophic, hurt the economy at a time where we don't need this, and risk you losing the safe haven status of treasuries, which is what helps the government fund itself at the least cost possible. One thing I think we shall also talk about is that while default is one thing, coming up even to the brink, as we did in twenty eleven also has effects.

We saw a large equity market drop at that time. We did see the downgrade from standard and Poor's first ever downrade from the Sterling triple A rating of the US at that time, and those do have costs. And I think what I'm hearing from Capitol Hill is that we're going to go up against the brink again. It's going to look very similar to twenty eleven or even more dicey. So even if the payment default is ultimately avoided, going up to the brink does have consequences on financial markets.

Our conversation continues after the break. Eric. Before the break, you were talking about what happened in twenty eleven, which is when we had the last really big showdown over the debt ceiling. Can you remind us what happened there? You know, in some ways it was very similar to the current situation. We had a democratic president, President Barack Obama, and a Republican House. The newly empowered Republican House had come to power on a wave of Tea Party activism

about federal spending. And at that time President Obama had already empowered a Deficit Commission and was entertaining ideas about reducing deficits. And he entered into negotiations with the new House Republican majority led by a Speaker John Bayner, and ultimately, after lots of wrangling, coming right up against a deadline, they came to an agreement and this set into place budget caps on annual government spending. A set empowered a future super committee, so called to come up with longer

term budget cuts. Super committee ultimately did fail, and many of the budget caps were later overridden by future Congresses. However, there was ultimately a trajectory bent on spending. By one estimate, one million US jobs were lost because of less government spending, at least that's the liberal point of view. So this deal was struck. The problem we have now is that

that deal is hated by both parties. You would think, if it was a great solution, we could just reach into the briefcase and pull that out and do it again. The reason we can't is because Democrats felt it was too costly that the Great Recession that started in two eight two thousand and nine was prolonged because of that deal, and Republicans felt it was too easy in later years to override that. It didn't put into permanent law these spending cuts, and they didn't get a lot of bang

for their buck. So neither side wants to go back to that deal. We want to remember now the markets are kind of on tenderhooks for other reasons. Right We've had the most aggressive federal reserve tightening in decades. Inflation and is still a problem. Last year was a horrific for investors, both in their four O one case, stocks

and bonds did terrible. We don't need another dilemma of this debt ceiling getting down to the wire, risks of them not getting it in time, Like Eric said, even if they get a deal in the final hours, it can create a lot of volatility in the markets, and the markets don't need it. The Chairman of the Federal Reserved Jerome Powell, has also warned that a default on the debt would do a lot of damage to the

US economy. What is he saying? Chairman Powell has several times talked about how important it is full stop that they just need to raise the debt ceiling, and to not think the FED can just rush in and cure any ills that happen if there was a default. Just that Congress raising the death ceiling is really the only alternative. There are no rabbits and hats to be pulled out on this. It creates issue for the Fed as well.

They're trying to bring inflation under control. There's just so many risks in the marketplace now that adding this to it is kind of the last thing people need. Eric and Liz, you report in a new story that you've written about this topic that there is this kind of feeling of fatigue, a little bit of cynicism, that we've been down this road before. Just what you were saying, Eric, that in twenty eleven we came to the brink but pulled back, and we're gonna pull back again because no

one is going to allow the US to default. Certainly, that's the prevailing feeling here in Washington. When you talk to people and Liz on Wall Street, there seems to be a feeling like they're gonna solve the problem. It's all a bunch of drama. But that's kind of a dangerous thing. You found out. Yeah. I think that's the thing. It's like you could do a psychological analysis and say, like when you're not worrying about something, or you kind of put it off that can't happen, that's when you

really have to worry about it. And I think to the credit of traitors, they're keeping up with as much as they can. So you want to say, we've seen this death ceiling movie before. We know it's going to be messy and ugly. They'll work it out. I just got too much to worry about it. I got the FED, I got inflation, my trades are underwater, or whatever it be. But I think we've had several people like you mentioned in our story saying that's when you have to worry. Eric.

How concerned should Wall Street be? And I guess everyone else looking to avoid a default about this group of hard right members in the House. They're the ones who tried to block McCarthy from becoming speaker, and they've indicated they're willing to test the limits on the debt. I think Wall Street should be concerned, and I think that was really driven home by the election of Speaker McCarthy.

It took fourteen ballots for Speaker McCarthy to become the speaker, he had to do a lot of deals with the hard right conservatives in his conference to get that. This was a real surprise, and I think that the debt ceiling situation is going to look very similar. In making this deal, he basically gave veto power over his own speakership to just a handful of members. Because the margins are so close in the House a four seat majority, he can basically be ousted potentially by just those four

or five members of his conference. Who would you know if they're angered by any concessions he makes on the death ceiling. Maybe people aren't processing, like Eric saying, I think the market should be more worried, thinking, oh, we've seen this movie before and they know the speaker vote was such a mess, but they're not putting the pieces together. That that means McCarthy is up more against a wall and that the risks are higher this time around. And

it's also coming from the other side. Biden. You know he said he won't negotiate. Now he's tried to do this docy dough. I would call it of a parallel negotiation with McCarthy on budget, but it can't be connected to a clean debt ceiling increase. You know, we could see that go different ways. Perhaps they come to an agreement. That's enough of a face saving agreement from McCarthy, I can see where we can find common ground. There's nothing

in there but me walking away. That does not believe at the end of the day we can come to an agreement. Can you tell us what does that clean? Just a bill that just says the debt ceiling will be raised by x amount or the debt ceiling will be suspended until a certain time, without any other things in that bill, like budget caps, like cuts to Medicare social Security, which some people have raised. Recently, talked to Brendan Boyle, the top Democrat on the House budget committees,

that we're going to the mat. This is going to go to the brink because we are not going to give in. And the only way this ends is McCarthy folds. Kevin McCarthy has to put the bill on the floor to allow a clean increase in the debt ceiling period.

The Republican argument is Congress doesn't act unless there's deadlines, and the debt ceiling affords an opportunity to talk about long term fiscal health of the US, so the Congress won't actually get around to addressing the fact that under the Congressional Budget Office, we're looking at fifty trillion dollars in debt and after another ten years, but that this trajectory is unsustainable. At some point we're going to be in the area of developing country where our debt cannot

attracting buyers anymore. And this opportunity that the debt selling affords to talk about long term spending trajectory, maybe revenue as well, is why we should do this. So, you know, I think sometimes people on the left in the White House say this is a cynical opportunity that Republicans are taking. But I think there are true believers who say, look, the debt is not sustainable, and this is an opportunity to have this conversation when we come back. Is there

a way out of this mess? I guess one solution while all this fighting is going on, if they do go past the deadline and they don't have a solution, one idea that Republicans are putting forward is to selectively pay off parts of the debt. Is that a real possibility? Well, there are different proposals to prioritize the US bondholders and

beneficiaries of Social Security of others. But Janet Yellen and others have pressed back against this idea of debt prioritization, and outside experts like the Biparson Policy Center, which is a real leader on the debt ceiling issue and often issues its own estimates of when extraordinary measures will run out.

I've said, prioritization is just not really likely possible. It's too chaotic the payments that are coming in on a regular basis to really handle the deluge in the absence of the liquidity that allowing the US to borrow provides. So we have Republicans pressuring the White House pretty heavily for spending cons in order to pay for some of

the debt. And what is the White House's response. Biden, you know, really is not motivated to repeat the example of President Obama to engage in what was called a grand bargain. He is putting forth budget proposals to raise taxes, you know, two trillion dollars in deficit reduction over ten years. There's a billionaire surtax in his proposals, stock buyback increases, you know, the idea of a funding medicare by taxing those who make over four hundred thousand dollars a year

more heavily. These are non starters with the Republicans, so the two sides are very far apart. One thing I think we should bring up is that even like Eric has said, this could go down to the wire and

there would be consequences even if there's not default. The Government Accountability Office has done several good studies on these past episodes, and what tends to happen is people will avoid buying certain death that is, let's say, at risk treasury bills that mature around the time they're worried the treasury would run out of money, and that means interest rates go up, and the Government Accountability Office has showed

that this has costs the government money. Interest costs have gone up, and you know, we're a point with interest costs are a huge deal. With the Fed interest rates going up so much, interest costs, which had been a problem for a long time, have gone even higher. The CBO reports show the trajectory of or sixpence is troublesome already. There is a lot of consequences that you know, even the US taxpayers will ultimately pay for this if this, you know, is just a drawn out battle to the

bitter end. So Eric, do we get a deal in the end? The situation looks a little bit bleak. The Republicans are pushing for cuts. Biden is saying no, McCarthy doesn't have a lot of power against people who might be willing to go much further than Republicans have gone in the past. How do they get themselves out of this? You know, I don't have a clear answer to that, but there are signs they could get a deal. I interviewed Jody Arrington, the top Budget Committee Republican, and I

asked him, do you need ten year balanced budgets? You need these trillions of dollars in cuts? He doesn't think so. He is someone who said we can go for a compromise deal. One thing they've put on the table is one hundred and fifty billion dollars in cuts just to the agency budgets for the spending bill that's due in October. That's a size cut that's too large for Democrats, especially if you shield defense. This would cut everything from National

Park Service to cancer research. But maybe there's a middle number. Once you're just talking about a budget cap number. You know there could be some back and forth there. In the past, we've seen figures like Senate Republican leader Mitch McConnell kind of wag his finger and say we are not going to default on the debt and everybody is snapped to attention. Does he have that sort of influence

now the way he did in twenty eleven. The Senate is remarkably sidelined in all of this for several reasons, one of which is that McConnell has just said he's basically deferring to McCarthy. He's going to support McCarthy as the lead person on this and negotiating with Biden, well, I think it's entirely reasonable for the news speaker in his team to put spending reduction on the table. I wish him well and talking to the president that's where

a solution lies. Mitch McConnell and Joe Biden are old friends. Actually, McConnell went to Biden's son's funeral. They have a personal relationship, and they cut deals. Before they cut a deal to ward off a fiscal cliff on taxes in twenty thirteen, they did have a role in the twenty eleven deal finding out how to finagle the budget cap and its definitions at the very last minute in saving the deal

that Bayner and Obama were working on. So the fact that McConnell is sidelined, I think is very important here. He is also being challenged from members within his caucus, most notably Rick Scott. Rick Scott tried to run for majority leader. This is the Republican from Florida who put Medicare and so security cuts on the table. He has since walked that back. So you know, this is someone

who's under pressure and sidelined at the moment. Liz Bloomberg pulled financial professionals and in their opinion, there's less than a ten percent chance that the US will default. Are they right? Do you think Congress will reach a deal in the end? I agree with Eric that there's a lot of risks. I would hope the cooler heads prevail and ultimately know that the detrimental and long lasting effects of a default are just immeasurable that you just can't risk that. So I do. Maybe it's a little bit

of hope, but I think something will come. I don't know if it's going to come without some dire cost beforehand. But like I said, you would hope that cooler heads prevail, and there's an understanding that an actual default on the US Treasury debt would be catastrophic. Well, the proof will be upcoming. Steps that listeners should pay attention to is the House Republicans are going to develop their own budget in response to the Biden budget. What does that look like?

Do they all unify behind that? If there's a unified position, that sets off potentially real negotiations with Biden and McCarthy. If they can't unify, if they look like they're in disarray, I actually think this will drag out longer because Democrats will feel like they have the upper hand there. You know, there's going to be several months of wrangling over this, and it really depends on what Republicans, when they come

down to it, put forward as their next offer. I think Wall Street is going to get more religion on the concern as the months go on. I think what's making it harder for them Eric too, is they're not sure. This is how traders work. Where to gauge you know, what do I avoid? You know, like which exact bills should I not buy. And I don't mean this flippantly, but Wall Street has a lot on their plate. They're maneuvering. You know, China's reopening, is that adding to inflation. There's

so many things that the dead ceiling. They're concerned, but they need to have it be more crystal clear. Once we get through maybe tax season and Janet yelling can be more clear on the cash flows. And when they're going to hit that wall, then I think you're going to see and mass people avoiding any treasury bills or notes and bonds that have interest payments. Around that time, I think they're going to get more concerned. It's just, you know, among all the things, they can't quantify it

enough to price it and trade it. I think markets have a very important role to play here. And this is why we make up to the brink is because only when markets start to react, when the public start to react, and the deadline becomes clear, that Congress then acts. Congress. You know, I've covered it for more than a decade and they always act like a college student with a term paper. They don't finish it until the actual deadline,

and the markets will make that deadline for them. Liz McCormack, Eric Wasson, thanks so much for coming on the show, Thanks for having us, Thank you, thanks for listening to us here at The Big Take. It's a daily podcast from Bloomberg and iHeartRadio. For more shows from my Heart Radio, visit the iHeartRadio app, Apple Podcast, or wherever you listen, and we'd love to hear from you. Email us questions or comments to Big Take at Bloomberg dot net. The

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