Illustration: Sarah Grillo/Axios
A lot of politicians are going to be talking about the debt ceiling this spring. Ignore them. Their words – a small part of negotiations that are mostly private – should almost never be taken at face value.
Why is this important: What is at stake is the full faith and credit of the United States of America.
- Conversations about something globally important should ideally be as clear and transparent as possible. Instead, we will face a deluge of half-truths and tactical misunderstandings.
The big picture: The debt ceiling, since its inception in 1939, has served practically only one purpose, which is to be a political cudgel. That doesn’t stop Congress from spending money, and that’s probably unconstitutional. But it’s a powerful bargaining chip in high-stakes negotiations where neither side has the incentive to be fully honest about their intentions.
Between the lines: Congress usually waits until the last possible minute to strike a deal, and the same is entirely possible this time around as well. Someone who threat a payment default obtains a certain degree of leverage; someone who actually causes a default in payment becomes a global historic wrongdoer.
- On the other hand, the executive power has various possible tools he can use to prevent a default. If it became clear that the Biden administration intended to use any of these tools, then Republicans in Congress would have almost no incentive to vote to raise the debt ceiling.
The plot: Markets aren’t really paying attention to the debt ceiling right now, even though it’s already been hit and we’re now in the realm of “extraordinary measures” being taken to prevent it from being violated.
- Markets are, however, an essential forcing mechanism. As long as they remain optimistic, there will be less pressure on Congress to reach a deal.
My thought bubble: It is natural to expect such a momentous and momentous issue to cause significant market volatility. Chances are, however, that the markets won’t move much.
- Normally, bond prices fall when the risk of default increases. In this case, however, Treasuries could actually rise in price and fall in yield, part of a flight to quality in times of risk. This is what happened in the last major fight against the debt ceiling, in 2011.
Be smart: The argument is not about whether the debt ceiling should be raised. He must be, out of pure mathematical necessity.
- The crux of the argument is always the same, and is pure power politics: “Since you need me to do this, I should be able to wrest great concessions from you” versus “Since you have to do this anyway , I do not do it. need to make any concessions to you.”
The bottom line: The debt ceiling serves no political purpose. But its mere legislative tension tends to electrify politicians, making its abolition effectively impossible.