Good morning. A political fight is again putting the economy at risk.
Routine crisisThe U.S. government hit the legal limit on how much money it can borrow yesterday, prompting fears that the country soon may not be able to pay its bills. The fight over the debt limit, which is now more than $31 trillion, can sound technical, but it could affect everyone. If the U.S. defaults on its debts, it could shatter financial markets. Your 401(k) and other investments could follow. As the flow of money dries up, businesses could be forced to close or downsize, taking jobs with them. “While no one really knows what would happen if you breach the debt limit, not many people would speculate that good stuff happens after that,” Christopher Campbell, a former Treasury official, told my colleagues Jim Tankersley and Alan Rappeport. “It’s a cascade of how bad it gets.” It’s a grim scenario — one the country has flirted with repeatedly since the 1990s. The good news: The government has time to act. Analysts estimate that the Treasury Department can use so-called extraordinary measures to avoid a default until the summer, giving Congress the next several months to pass a bill increasing the debt limit. The bad news: Democrats and Republicans are divided. House Republicans say they want to use a debt-limit increase — and the threat of default — as leverage to cut government spending. Top Democrats have likened the Republican stance to a hostage-taking situation. The sides can’t agree even on whether to negotiate. Today’s newsletter will explain the debt limit and how it became a constant source of near-crisis in the U.S. Self-imposed limitsThere is a lot of confusion around the debt limit, largely because it’s so odd. But it’s relatively uncomplicated. Congress regularly passes government spending bills. Since this legislation typically spends more money than it brings in, it adds to the debt. In most countries, that would be the end of the spending process, and the government would simply take on more debt. After all, Congress is effectively saying that it’s willing to add to the debt when it passes spending bills that do just that. If Congress wanted to reduce spending, those bills seem like the most logical avenue to address such concerns. But the U.S. has an extra step in the process: a congressionally set debt limit. This caps how much money the U.S. can borrow, which is, essentially, a ceiling on spending. (“Debt ceiling” is another term often used to refer to the congressionally set limit.) If the U.S. breaches the debt limit, it can no longer borrow money, and has to default on its existing debts. (Denmark is the only other country with a similar debt ceiling, although it raises its cap well in advance of nearing it.) For most of the debt limit’s century-long existence, increases were largely uncontroversial. But that has changed over the past three decades. Republicans, in particular, have used the passage of bills increasing the limit as leverage to try to force spending cuts on Democratic administrations. Democrats, too, have used it as a political tool: In 2006, Joe Biden, then a senator, joined his Democratic colleagues in opposing a debt ceiling increase to protest the cost of tax cuts and the Iraq war. A crucial ingredient in this brinkmanship is divided government. Raising the debt ceiling is less of a problem when the same party holds power in both chambers of Congress and the White House. But when the government is divided, it makes the current scenario possible: A Republican-controlled House threatens to block a debt-limit increase that Democrats who control the Senate and White House would like to pass. “The fastest way to guarantee that we have debt rating problems is to keep spending money we don’t have, and keep piling up debt, and that’s what we’re doing,” Representative Chip Roy, a Texas Republican, told CNN. In short: If lawmakers have a problem with spending, the debt ceiling offers a way to protest. But the willingness of some Republicans to risk going into default poses potentially dire consequences. A central roleWhy does this matter? Because of the crucial role that U.S. debt plays in the global financial system. When the U.S. borrows money, it issues U.S. Treasuries. (Heard of bonds that help pay for wars? Treasuries are like that.) Because the U.S. always pays its debts, the financial system treats Treasuries as a very safe investment. Governments, companies and people around the world buy American bonds and other securities as a way to ensure that their money is safe. They are so widely purchased, in fact, that they support much of the financial system — giving investors a backstop to take on riskier opportunities. But if the U.S. can no longer pay its debts and defaults, the reliability and trust that make Treasuries such a safe investment vanish. Money once considered secure is now seen as precarious. That realization could spawn the equivalent of a bank run, as people rush to get their money out of the financial system. The system would then buckle, crushing everyone’s investments, big and small. It’s as bad as it sounds. Mark Zandi, chief economist at Moody’s Analytics, has said a U.S. debt default “would be financial Armageddon.” So what can seem like a technical, political squabble can suddenly become very important to everyone. The TV show “The West Wing” captured this reality in 2005: “So this debt ceiling thing is routine, or the end of the world?” “Both.” For more
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The pangram from yesterday’s Spelling Bee was uncloak. Here is today’s puzzle. Here’s today’s Mini Crossword, and a clue: 2.54 centimeters (four letters). And here’s today’s Wordle. Thanks for spending part of your morning with The Times. See you tomorrow. — German P.S.: A.G. Sulzberger, The Times’s publisher, discussed the problem of disinformation at the World Economic Forum in Davos, Switzerland. Here’s today’s front page. “The Daily” is about crossing the Darién Gap. Matthew Cullen, Lauren Hard, Lauren Jackson, Claire Moses, Ian Prasad Philbrick, Tom Wright-Piersanti and Ashley Wu contributed to The Morning. You can reach the team at themorning@nytimes.com. Sign up here to get this newsletter in your inbox.
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