The game of chicken in Washington over raising the debt ceiling—the maximum that the federal debt can be—may look like politics as usual, but it's not. It's far worse and puts livelihoods at risk.
Agreed. Though it did not garner much attention, outright elimination of the debt limit was discussed by some Democrats in Congress last year (https://jamesekeenan.substack.com/p/debt-ceiling-crisis-has-the-biden), but the White House and Congressional leadership did not give this idea serious consideratoin.
Powerfully persuasive and well written. Probably beyond the bounds of your economic argument, but we must not overlook the massive actual concrete immediate harms inflicted on individual Americans across the board by a government halt and default.
Interesting! I am interested in how you parse who is benefiting and who is hurting from the national debt and if there is data to support your opinions.
Also do you think the country and all of us would be better off if we avoided debt financing altogether?
Hi Claudia thank you for the very important and well written piece. Apologies in advance if this seems pedantic, but I think it’s important to set the record straight regarding the following passage:
“Even though there was no default, that first one led to a downgrade of the US credit rating from AAA to AA+, making it more costly to borrow and worsening the federal debt.”
This isn’t correct. In fact, treasuries RALLIED on the day of the downgrade. This is one of the most overlooked and misunderstood realities of our monetary system: the “cost of borrowing” is set by the Fed. If the Fed wants to lower the cost of funds for the US Treasury, it has the power to do so, across the entire curve. The 10yr yield bottomed at around 50bp in 2020 despite the massive fiscal stimulus boost from the CARES act. The 2011 downgrade is largely symbolic/political. Paying our bills is a political choice, not a financial one, and operationally the US can’t run out of funds needed to make its payment obligations.
That said, a default scenario would be catastrophic for American businesses and families, as the cost of borrowing would explode as fear sets in to credit and capital markets.
True, but important to note this is a purely legal/political construct. Operationally, there’s no reason the Fed can’t process Tsy payments as they come due. For example, the Fed could book a negative balance at the TGA to offset the increase in reserves to keep the accounts in balance. However, this would be in violation of the federal reserve act bc the Fed would be in effect lending money directly to the government. To get around this, in the normal course of operations, the Fed would advance the funds to the commercial banks, increasing supply of reserves; then the Tsy would issue securities to drain the reserves and enable the Fed to hit its target policy rate.
There’s no pile of cash sitting in a vault somewhere that would “run out,” the constraints are merely political/legal.
I have zero faith nor respect for congress to agree on this and I actually think minting the coin isn't that terrible of an idea. But again all this drama comes from a horrible misunderstanding of the national debt and a horrible misunderstanding of the idea that our nation will run out of money. Once more, our leaders in DC are failing us, this is a political choice and that choice will end up being catastrophic for the US economy.
How we find ourselves here is a long story, but not nearly as fun as some alternative solutions. I know that Sec. Yellen is not in favor of this, but I would like to see the minting of the $1T platinum coin to force a decisive decision that either the debt ceiling is raised, or it is meaningless and we end this fictitious restriction on already approved spending and the negative consequences of federal government shutdowns.
"The Biden administration apparently did have a plan to deal with this situation. It was to close their eyes and hope it was still 2011. The Washington Post quotes a top Obama official from that time — during a previous debt limit standoff — as saying their playbook had been 'really getting business leaders in key districts to lobby their congressman to tell them how important it was that the U.S. doesn’t default on its debts.' However, 'This is not the Republican Party of George W. Bush or his father. Most of them do not care if Fortune 100 CEOs are freaking out.' Finding this out has apparently flummoxed the Biden team and left them with no other ideas except trying the same thing again."
I do enjoy the discussion how we all comment on Congress and it’s seemingly obnoxious behavior not to act to (agreed) eliminate the useless debt ceiling. Realistically, Congress does represent all Americans and the minority crazies from the far right of our political spectrum, Trump, Pence, Goetz, mccarthy, gomert, mtg and the rest of the soon to be felons represent (though quit gerrymandered districts) millions just like them or wish they could be like them. Claudia’s forum and all who work to educate the masses regarding our global fiat currency will prevail in the end to continue to illuminate these people have hurtful policy ideas (no policy ideas for certain). That’s not just my optimism but my right wing friend’s’ perspectives have changed through The Deficit Myth and the like. Let’s not just call them out but call them in, calmly and firmly educate them accordingly, and we’ll ease their fears and boogie man perspectives to one day see everyone as they truly are...human. Sooner would be better.
Eliminating the debt limit is absolutely correct, but that would require a new statute. And that may be unlikely given that all bills that raise revenue (I’m assuming the debt limit rises to that definition) originate in the House.
The Republicans should not object to a debt ceiling increase. But here is what they want to do so— making it more difficult to obtain food stamps while the lines at food banks are growing due to the huge food price increases. So what are liberals doing? Yellen is saying it’s up to Congress meaning an agreement with the Republicans will be “necessary”. This is precisely how the Dems lose elections. Biden should just invoke the 14th Amendment and cut the Gordon’s knot. Let the Republicans push themselves over a cliff with the public. Because if you cut food stamps while those lines are growing you won’t be able to hide behind what the Republicans should have done. All the public will see is what the Dems went along with.
Does this have anything to do with macro economics? Only in the absolute sense that under a capitalist economic system the circulation of capital is interrupted by non-productive investments. Digging a hole and filling it in may stimulate consumption but it doesn’t result in more instruments for efficient production. The Rs want to reduce government spending so let’s reduce the number of aircraft carriers, fossil fuel subsidies and the endless corporate welfare subsidies that bog down our economy with entropy.
On the day Biden orders the deposit of the Trillion dollar coin, he should ALSO appoint a commission to recommend ways of reducing structural deficits.
I'n not sure it would count as non-debt, but what if the Treasury issued a security that at some future date paid a fixed 0.000x% of GDP? It ought to be useful for the Fed in any case, to get a market estimate of future income.
I recall reading that the “Free Market” doesn’t exist. It is designed to serve either the public or monied interests. The statement missed one. The debt limit serves only political interests.
Krugman has used the right words. That is - "Republicans want to carry out financial version of Jan 6". We have to get political on this because there is no other way around it. Republicans have control of the house and they wanna weaponize it against the Biden WH. Debt ceiling is a nonsensical arbitrary self imposed self defeating thing on US fiscal authority. Debt ceiling has become a means to impose baseless austerity policies and settling political vendetta. Is this how a modern nations governs itself?
And Republicans. What can i say about them? They are the same bunch that stormed the Capitol Hill to overturn a legitimate election, they support twice impeached indicted insurrectionist 45th Prez Donald Trump, a grave embarrassment to US high office.
I think US should use national security doctrine, US shall not negotiate with hostage takers. Republicans are taking economy as hostage and so it's Biden's constitutional duty to nuke the Debt ceiling and settle this issue forever. Dark Brandon should deliver dark justice against these hostage takers and liberate US fiscal policy from this archaic Debt ceiling law forever.
Never negotiate with blackmailers. Not only would this hurt everybody from the lowest-tier workers to Wall Street, Banana Republicans would turn the U.S. into an unstable financial system and partner. China and Russia would benefit without having to fire a single shot.
Forget raising the debt limit. Eliminate it. It serves no purpose except to be weaponized by Congress.
Agreed 100%
Agreed. Though it did not garner much attention, outright elimination of the debt limit was discussed by some Democrats in Congress last year (https://jamesekeenan.substack.com/p/debt-ceiling-crisis-has-the-biden), but the White House and Congressional leadership did not give this idea serious consideratoin.
Powerfully persuasive and well written. Probably beyond the bounds of your economic argument, but we must not overlook the massive actual concrete immediate harms inflicted on individual Americans across the board by a government halt and default.
My POV, MMT doesn't consider who is really benefiting or hurting from our enormous debt.
Not to too purist, but surely you mean deficits. They drive resource flows; debt does not except for interest payments.
Interesting! I am interested in how you parse who is benefiting and who is hurting from the national debt and if there is data to support your opinions.
Also do you think the country and all of us would be better off if we avoided debt financing altogether?
Hi Claudia thank you for the very important and well written piece. Apologies in advance if this seems pedantic, but I think it’s important to set the record straight regarding the following passage:
“Even though there was no default, that first one led to a downgrade of the US credit rating from AAA to AA+, making it more costly to borrow and worsening the federal debt.”
This isn’t correct. In fact, treasuries RALLIED on the day of the downgrade. This is one of the most overlooked and misunderstood realities of our monetary system: the “cost of borrowing” is set by the Fed. If the Fed wants to lower the cost of funds for the US Treasury, it has the power to do so, across the entire curve. The 10yr yield bottomed at around 50bp in 2020 despite the massive fiscal stimulus boost from the CARES act. The 2011 downgrade is largely symbolic/political. Paying our bills is a political choice, not a financial one, and operationally the US can’t run out of funds needed to make its payment obligations.
That said, a default scenario would be catastrophic for American businesses and families, as the cost of borrowing would explode as fear sets in to credit and capital markets.
Thank you for all that you do.
If congress does not increase the debt limit, the US WILL run out of the funds needed to make its payment obligations
True, but important to note this is a purely legal/political construct. Operationally, there’s no reason the Fed can’t process Tsy payments as they come due. For example, the Fed could book a negative balance at the TGA to offset the increase in reserves to keep the accounts in balance. However, this would be in violation of the federal reserve act bc the Fed would be in effect lending money directly to the government. To get around this, in the normal course of operations, the Fed would advance the funds to the commercial banks, increasing supply of reserves; then the Tsy would issue securities to drain the reserves and enable the Fed to hit its target policy rate.
There’s no pile of cash sitting in a vault somewhere that would “run out,” the constraints are merely political/legal.
The Fed can do lots of stuff, but their Masters won't allow it.
I have zero faith nor respect for congress to agree on this and I actually think minting the coin isn't that terrible of an idea. But again all this drama comes from a horrible misunderstanding of the national debt and a horrible misunderstanding of the idea that our nation will run out of money. Once more, our leaders in DC are failing us, this is a political choice and that choice will end up being catastrophic for the US economy.
A very willful "misunderstanding" on the part of the Republicans in the US House of Representatives.
Just because we can't theoretically run out of money, does NOT mean it's good for all the people.
How we find ourselves here is a long story, but not nearly as fun as some alternative solutions. I know that Sec. Yellen is not in favor of this, but I would like to see the minting of the $1T platinum coin to force a decisive decision that either the debt ceiling is raised, or it is meaningless and we end this fictitious restriction on already approved spending and the negative consequences of federal government shutdowns.
What the heck? Isn't it a bit more realistic, and less worn-out left-right dynamic, to suggest a trillion one dollar coins?
"The Biden administration apparently did have a plan to deal with this situation. It was to close their eyes and hope it was still 2011. The Washington Post quotes a top Obama official from that time — during a previous debt limit standoff — as saying their playbook had been 'really getting business leaders in key districts to lobby their congressman to tell them how important it was that the U.S. doesn’t default on its debts.' However, 'This is not the Republican Party of George W. Bush or his father. Most of them do not care if Fortune 100 CEOs are freaking out.' Finding this out has apparently flummoxed the Biden team and left them with no other ideas except trying the same thing again."
Source: https://theintercept.com/2023/05/06/debt-limit/
I do enjoy the discussion how we all comment on Congress and it’s seemingly obnoxious behavior not to act to (agreed) eliminate the useless debt ceiling. Realistically, Congress does represent all Americans and the minority crazies from the far right of our political spectrum, Trump, Pence, Goetz, mccarthy, gomert, mtg and the rest of the soon to be felons represent (though quit gerrymandered districts) millions just like them or wish they could be like them. Claudia’s forum and all who work to educate the masses regarding our global fiat currency will prevail in the end to continue to illuminate these people have hurtful policy ideas (no policy ideas for certain). That’s not just my optimism but my right wing friend’s’ perspectives have changed through The Deficit Myth and the like. Let’s not just call them out but call them in, calmly and firmly educate them accordingly, and we’ll ease their fears and boogie man perspectives to one day see everyone as they truly are...human. Sooner would be better.
Why would Goetz and Gohmert and Taylor Greene soon be "felons?" I mean, what the heck?
Probably just wishful thinking on my part.
Mitch McConnell says the Dems could have raised the debt ceiling during budget reconciliation. Why didn’t they? And who is playing politics?
https://www.wsj.com/articles/jeffrey-epstein-documents-woody-allen-larry-summers-edb3e9b2
Eliminating the debt limit is absolutely correct, but that would require a new statute. And that may be unlikely given that all bills that raise revenue (I’m assuming the debt limit rises to that definition) originate in the House.
But correct me if my assumption is off base.
The Republicans should not object to a debt ceiling increase. But here is what they want to do so— making it more difficult to obtain food stamps while the lines at food banks are growing due to the huge food price increases. So what are liberals doing? Yellen is saying it’s up to Congress meaning an agreement with the Republicans will be “necessary”. This is precisely how the Dems lose elections. Biden should just invoke the 14th Amendment and cut the Gordon’s knot. Let the Republicans push themselves over a cliff with the public. Because if you cut food stamps while those lines are growing you won’t be able to hide behind what the Republicans should have done. All the public will see is what the Dems went along with.
Does this have anything to do with macro economics? Only in the absolute sense that under a capitalist economic system the circulation of capital is interrupted by non-productive investments. Digging a hole and filling it in may stimulate consumption but it doesn’t result in more instruments for efficient production. The Rs want to reduce government spending so let’s reduce the number of aircraft carriers, fossil fuel subsidies and the endless corporate welfare subsidies that bog down our economy with entropy.
Gordian knot is not understood by primitive AI
On the day Biden orders the deposit of the Trillion dollar coin, he should ALSO appoint a commission to recommend ways of reducing structural deficits.
I'n not sure it would count as non-debt, but what if the Treasury issued a security that at some future date paid a fixed 0.000x% of GDP? It ought to be useful for the Fed in any case, to get a market estimate of future income.
Maybe I’m being generous by including the debt limit as a part of the “Free Market” system. If it is, the design is tragically flawed.
We live in shareholder capitalism. But yes, the debt ceiling is bad.
I recall reading that the “Free Market” doesn’t exist. It is designed to serve either the public or monied interests. The statement missed one. The debt limit serves only political interests.
Krugman has used the right words. That is - "Republicans want to carry out financial version of Jan 6". We have to get political on this because there is no other way around it. Republicans have control of the house and they wanna weaponize it against the Biden WH. Debt ceiling is a nonsensical arbitrary self imposed self defeating thing on US fiscal authority. Debt ceiling has become a means to impose baseless austerity policies and settling political vendetta. Is this how a modern nations governs itself?
And Republicans. What can i say about them? They are the same bunch that stormed the Capitol Hill to overturn a legitimate election, they support twice impeached indicted insurrectionist 45th Prez Donald Trump, a grave embarrassment to US high office.
I think US should use national security doctrine, US shall not negotiate with hostage takers. Republicans are taking economy as hostage and so it's Biden's constitutional duty to nuke the Debt ceiling and settle this issue forever. Dark Brandon should deliver dark justice against these hostage takers and liberate US fiscal policy from this archaic Debt ceiling law forever.
Never negotiate with blackmailers. Not only would this hurt everybody from the lowest-tier workers to Wall Street, Banana Republicans would turn the U.S. into an unstable financial system and partner. China and Russia would benefit without having to fire a single shot.