Make America Pay Its Bills. Again.

be taxes. Now. Critical to that market is a thing called the debt ceiling, strict limits imposed by Congress on how much debt the United States can have, and as Congress typically isn't great at balancing its books, there have been exceptions every couple of years that debt ceiling has to be raised. No one loves voting for it, but they do love the things that government programs can deliver for their districts and states, and they know it has to be done and that time is just about with

us once more. Welcome to Benchmark, a podcast about the global economy. I'm Daniel moss I cover global economics for Bloomberg View in New York. Our two special guests today are Alex Harris and Brian Shappatta, who cover the US bond market for Bloomberg News. And a special shout out to Alex, who once worked in the bond market. So why is this problem coming at this particular time? Isn't this just a Washington ritual that always ends up getting resolved.

They walk up to the line, then there's a deal, and then the issue goes away. You know, Dan, it's not you know, it's the walk out to the line. But I think given the year we've seen new administration, Republican Congress, and they have both the House and the Senate, you know, the expectations they get more done. But now after the dysfunction of healthcare, people are just assuming now that we're going to see the same dysfunction as we walk up to the debt limit, and they don't want

to take that risk. They investors don't want to risk being caught off guard. Um if Congress cannot get a deal done in time. And just so we clear of Brian, we have had situations such as during the George W. Bush administration where there was a Republican in the White House and Republicans controlling at least one chamber of commas. Again, let me press you on this. We've been here before, haven't we, And it's been resolved yes, And I think the expectation is, of course that ultimately it will be

resolved again. But the issue that is, you know, confronting traders right now is how do we how do we play this? I mean, we do have an administration that has been especially volatile um and hasn't really gotten a lot of things done that even with the goop control of the legislative chambers, uh, they still manage to get anything through. So there is this concern that you know, ultimately warring factions within parties will make this time different.

What does this mean for me? Well, Betty, yet, what does it mean for our producers? Eighty year old mother? What does it mean for the person standing in front of you in the line at Starbucks? Why should't they care? So leading up to it, there's a series of major payments that Trugury has to make every month. This includes um, a large Social Security payment on you know, the first week of the month of every month. This also includes

veterans payments, military payments, civil service payments. If Tarugury cannot borrow that money, they don't get their checks. So now Congress's biggest concern is having these constituents, our producers, eighty year old mother, you know, calling and saying, why can't I get my Social Security payment? Why is this not coming through? If this is so imperative to things like Social Security payments and paying salaries for our men and women in uniform, why on earth does Congress even hesitate.

I think Congress enjoys having the power of accountability. I think that they really feel like this is in the Constitution. It says we have this power, we can authorize borrowing on the U s is dime, and they don't want to do away with that because there is this concern that in the future, you know, maybe an executive or future congressional officials would not be as accountable as they are, and it's something that is important to a lot of constituents.

Let's take a step back. Not every major economy is in this situation. How did we get to a situation where we have this debt ceiling and oh my god, there's this saga or oh god, it's just a Washington ritual. I mean, many countries in Europe don't go through this. Canada doesn't go through this. Why US, you know, and initially started back um under Woodrow Wilson with the war and you know, you had to authorize all this spending, so they impose this debt ceiling in order to keep

the costs under control. And I think then you just have this history of politicians believing that this is the way to help keep deficits in check, to keep our spending in check. Unfortunately, now it just seems like it's come down to this you know, biennial song and dance from Washington, where they posture about it and they gripe about the deficits exploding and then they raise it anyways.

So um, you know, it's one of those pieces of our history that we can't seem to abolish, even though former Treasury Secretary jacklou issued a paper earlier this year, you know, advocating for the elimination of the debt ceiling altogether. So what a market's telling us about what's going to happen this time? Same old, same hold or is it white?

Actually this time it could be different. You know, we're actually starting to see a little bit of miss pricing in treasury bill markets, and what we're seeing is you know, investors do not want to hold Treasury bills that are maturing in October because they feel like if Congress can't get a deal done, that's when you might see Treasury say we can't we can't pay, we can't pay out, we can't retire that debt, we can't pay principle. And

you know, so everyone's leaving those Treasury bills. They prefer to hold securities maybe you know that mature in November, mature in September because they just don't want to be vulnerable to any sort of default on our debt. And because of all the dysfunction we've seen in Washington, these concerns have sort of appeared earlier than normal. Usually what you'll see is the bill market and investors start to

get nervous around middle the middle of September. It's at the end of September, and now we're starting to see in July because after that Healthcare um vote, people just don't trust Washington. And it's the idea being that if the White House and Congress controlled by the same party,

then legislation ought to be a slam dunk exactly. And you know, when I spoke with people, you know, after Donald Trump was elected last November, and then before the debt ceiling was reinstated in March of this year, analysts on Wall Street said, this is going to be really easy. You know, we have Republican controlled Congress, we have Republicans in the White House. There's no way they're going to fight over this. And now everyone's sort of having a

rethink about about this attitude, Brian. Has any of this ever come to pass? Has the US ever missed a payment as a result of the debt ceiling standoff? That's a funny story. In nineteen seventy doesn't sound too funny, well not to some people. In nineteen seventy nine, the federal government did briefly default. They blamed it on a technical book keeping glitch and not a true default, but technically they did, uh fail to pay interest on some

of their debt at that point. And then there's also, you know, obviously the sort of gold bug wing does feel like the US has sort of backed off of its obligations several times in the past. When you know, we used to have some sort of you know, fixed gold to dollar ratio, and you know, generally that was abolished over the course of you know, from the thirties to the seventies. Now, when you talk about that incident in nineteen nine, you might could sound like that was

distinct from the issue of the ceiling. I mean, it was due to a delay in raising the debt ceiling um, but they did blame it on word processing problems. And uh so these bills maturing in April six, May three, and May ten were the ones that were affected by that. But you know, there is a concern that that could happen again this time, if you know, even if they don't raise the debt ceiling by you know, a week, it's a big issue for four week bills, even if

it's delayed, you know, by a week. Could you imagine having a four year bond that you get paid after five years. I mean, it's basically the same thing. You know, days matter for people who are invested in short term debt. Okay, now it sounds like the the end of the world didn't happen. Most people remember the eighties as a pretty good year for financial markets and for the US economy in many ways. Yeah, I mean, some people argue that borrowing costs did go up after that episode of brief

technical default. And that's sort of an outstanding question in this sort of new macro environment, where there's so much more central bank intervention and yields are so low across the world, whether borrowing costs will go up. But again, that matters for anybody that's living in the US, because higher borrowing costs mean ultimately a squeeze on other types of social programs. Yeah, I was gonna say to Brian

talks about nine. But actually, during the two thousand and fifteen debt ceiling episode, Treasury actually had to delay its two year auction by a week. They were so concerned that they weren't going to be able to borrow that money that they delayed it just to cover themselves and make sure that they were okay. Issues surrounding the debt ceiling US sometimes equated with the broader issue of a government shutdown. Are they the same thing or do they

sometimes just coincide? What's the distinction between them? They sometimes happened to coincide. The last time we had a government shutdown coincide with the debt ceiling issue was in two thousand and thirteen. UM. But really what it is is the government shutdown is related to the new budget and future spending. The debt ceiling is usually related to previous spending.

I think Treasury Secretary Minution you know, says quite succinctly, we're just trying to borrow or payback what we've already spent. And and that's really the difference is that it's it's the future against past, past spending. Now, one thing you often here is when people advocate an increase in the ceiling, they say, this doesn't mean we're going to spend more. This merely pays full of spending authorizations that Congress has

already made true or false. Oh, I think that's that's false, because what happens in the way these debt ceilings have been resolved since in the last few years is they go into what's called the debt ceiling suspension, where they say, Okay, we're just going to suspend the debt ceiling. We're an authorized you know, payments, and you can keep borrowing, but at a later date, we're going to reinstate it at

the level in which we've already continued to spend. So, for example, when the debt ceiling was suspended and a deal was reached in November early November, I think our debt limit was about eighteen point I think we're about eighteen point one trillion. When the debt ceiling was reinstated, the new limit was nineteen point eight trillion. So they

keep spending. So you know, that's why I think. You see, you know, former Treasury secretaries such as Jack Lewis, and this is just a ridiculous exercise at this point because we're still spending that money. Again, Brian, to come back to something that you mentioned earlier, Congress, under a Republican president and with Republican majorities in one or both houses, has time and again increased the debt ceiling, no matter what they may have said when they were in opposition.

So again, what's different this time? Does it concern the current occupant of the Oval Office? Is that what's different? I mean I think it does. I mean, you have people who can't get out of their minds. You know, hearing Donald Trump say that maybe the US needs a good shutdown on Twitter. You know, Alex has just told us that's not necessarily the same thing. No, it's not, but it sort of gives you a sense of his

frame of mind. Um, he's willing to you know, throw chaos out there and hope that something better comes of it. He's also floated, you know, more directly to the debt ceiling. You know, he's talked about potentially restructuring debt. He's called himself the King of debt, and he said, you know, we can get a better deal on our treasuries, which is just something that you don't hear ever anywhere in markets.

So we talked in our intro about how the US bond market has the most depth and the most breadth and is the most credit worthy of any in the world. Now, if that is true, don't people have a few other choices where to go? Even if the debt ceiling isn't raised in time to avoid the US skipping its obligation to be it for a couple of weeks, a couple of days, a couple of hours. Ultimately, isn't there nowhere else for people to go? I think that's about right.

And what you hear from investors is that you know, and the reason there's such a delayed reaction, or there's a what we'd call a non reaction in other parts of the treasury market is that, you know, they're confident that even if there's the slightest technical to fault, be it for a couple of days or a couple of weeks, that other parts of the bond market are going to be okay, that as long as you know, they receive interest payments, you know later they'll be fine, you know.

So it's there is so much depth to your point that they can go elsewhere. And that's also what you're seeing from money market managers who are saying, well, we don't have to be in October treasury bills. And in fact they're telling clients that they're not in October treasury bills.

But they said, you know, we have the repo market, you know, which is an overnight funding market, and they have the Federal Reserve has what's called an overnight reverse rebo facilities, So they and go there and they can they can borrow and get securities from them as well to stay invested in to keep earning that yield for their investors. Now, Paul Krugman, in a recent column has talked about this stand off potentially illustrating a crisis in

US governance. And that's ultimately what this is about, not whether it ultimately passes or not, and not whether investors keep coming into treasuries or not that it could be something deeper and more insidious, more corrosive. Yeah, I mean, I do think that it's uh fairly open secret that compromises sort of a dirt become a dirty word in

in Washington. And that's sort of why we've seen a lot of these, you know, initiatives and sort of promises that were made coming into uh the year not really come to pass, whether that's tax reform, whether that's healthcare legislation,

or whether that's infrastructure spending. And that's something that the markets have to take notice of because they moved tremendously in the back half of on these expectations that this time would be different, that with the GOP and control of the House, the Senate, and the White House, that things would get done. And yet here we are, same old, same old, And you know, the debt ceiling is just

another manifestation of that. What is the current drop dead dit the diate by which this absolutely has to happen, all the US is at risk of not paying its bills. Well, there's actually a little bit of a debate on that um. In a letter to Speaker of the House, Paul Ryan Uh Treasury Secretary Manustion said, you know, September nine, visit um. There was a Congressional Budget Office report published at the end of June that says it's probably early to mid October.

Wall Street analysts have sort of suggested it's going to be the second week of October. So the jury is still really out on that. And you know, right now the bill market is saying it's probably somewhere around October twelve. That's where they're concern lies at the moment. Well, if this standoff really intensifies and really becomes something critical, we'll have you back on the show. I hope you'll forgive me for saying I hope we don't have to have

you back on the show. Benchmark will be back next week and until then, you can find us on the Bloomberg Terminal, Bloomberg dot Com, our Bloomberg app, as well as Apple Podcasts, Pocketcasts, and Stitcher. Why you're there, take a minute, rate and review the show so more listeners can find us and let us know what you thought of it. You can follow me on Twitter at Moss Underscore Echo, and you can get Brian at at beach Padder. Benchmark is produced by Sarah Pattison. The head of Bloomberg

Podcast is Alec McCabe. See you next week. Four