Challenging Joe Biden’s Debt Ceiling: Appeasing the Bond Market


So it came down to this: another debt-ceiling crisis.

This is the fifth encounter I have covered as a reporter. he was there big in 2011of course, but then 2013 confrontation related to Obamacarethe least known Showdown in 2015And the 2021 battle that required Temporary change to disable the Senate. I am 32 years old. As I tell myself in the mirror every morning, this is not old. I am experiencing my fifth debt ceiling crisis. All of this has happened before and will happen again.

The first best solution to the confrontation between President Joe Biden and the new Republican majority in the House of Representatives would be for the latter to revise and pass legislation that would eliminate the debt ceiling, or at least raise it without restrictions. House Speaker Kevin McCarthy clearly won’t. He got his spokes specifically He promises to the less responsible members of his caucus that he will hold the debt ceiling hostage. But previous speakers in his position, notably John Boehner in 2013, have done just that She blinked and ended up billing a “clean” debt ceiling. In any case. We hope he does the same.

The absolute worst solution to confrontation is for the federal government to default on its debt: to stop paying interest on its loans, or to pay for programs from Social Security to the military, sending the economy into recession and plunging the world into a financial crisis.

Somewhere in the middle are the two most likely outcomes. One is for Biden, like President Barack Obama in 2011, to come to the negotiating table and strike a deal with McCarthy to raise the debt ceiling in exchange for spending cuts. This would avoid stagnation however It is likely to include cuts in important programs from education to health researchwhich could have significant negative repercussions in the long run.

The final option is for Biden to use executive action to make the debt ceiling moot. There are several ways to do this, i ran into this piece. The funniest includes Mint a platinum coin Hundreds of billions or trillions of dollars. The most boring involves issuing A new kind of debt to government funding. Somewhere in the middle are options Invoking the Fourteenth Amendment and claiming that the debt ceiling is unconstitutionalor to demand it Obedience to spending and tax legislation previously passed by Congress forces the president to ignore the debt ceilingwhich some experts consider the least unconstitutional option.

Debates about these options often devolve into discussions of legal secrets and political imaginings: Would Biden look bad for a more power grab like this? Would it be ridiculous to mint a trillion dollar coin? And while the legal and policy details are important, I think much of the discussion of these options gives short attention to their biggest challenge: the bond market.

The bond market’s challenge to the debt ceiling

“I was thinking if there was a reincarnation, I wanted to come back as a president or a pope or a 400 baseball bat,” political consultant James Carville Once cynical. But now I want to come back as the bond market. You can scare everyone.”

Bond traders obviously love this quote, but it’s not just gas for their egos. Modern governments rely on international bond markets to fund themselves, and while at the same time Governments control of their currencies gives them some protection From the fluctuations of the markets, this force is hardly absolute. History is full of instances in which governments were forced to abandon their policies due to bond market outbursts. Just a few months ago, A.J Crowd selling by currency and bond dealers The UK Conservative Party government forced this She abandons plans for a massive tax cut that will inflate the deficit and Treasurer Kwame Quarting faxed, before Prime Minister Liz Truss herself was forced to resign after only 45 days in office. Banks like Citigroup was explicitly stating That unless the UK gets a different prime minister the markets will continue to punish them.

We know how bond markets respond to routine increases in the debt ceiling unrelated to any other policies: they don’t at all. At first glance, the controversy surrounding October And December 2021 Debt ceiling increases, which have been challenged but there is not much question given Democrats control of Congress, have not caused any significant changes in interest that investors have been calling for. shortAnd middleAnd The long-term Treasury bonds. The yields of these bonds did not rise as this debate progressed.

We also know how bond markets respond to already serious debt-ceiling standoffs, even if they eventually lead to an increase in the cap. the Government Accountability Office It is estimated that the 2011 battle that came Is that true Close to disaster, it raised interest rates enough to cost the Treasury $1.3 billion in 2011. That’s nothing, but it’s very small in the federal budget scheme. By far the biggest costs of that confrontation were the budget cuts enacted in the deal Boehner and Obama cut.

What we don’t know is how bond markets will respond to Biden making the debt ceiling, whether through a platinum coin, an invocation of the Fourteenth Amendment, or some other means. I certainly don’t know, but people more experienced than me don’t either. “I would stick to the answer, ‘I don’t know,’” Shai Akabas, director of economic policy at the Center for Bipartisan Policy and an expert on the debt ceiling, told me. The unpredictable market reaction, he said, “was what worried me most about all of these approaches, not that The material would by itself create some significant economic disruption.”

David Kamen, a New York University law professor and former economic advisor to Biden, He said the same thing: If Biden announces that he is ignoring the debt ceiling, “Republicans will surely shout that he is acting illegally and that the debt issued by the limit is invalid. … It is conceivable that the market will react badly – and raise interest rates on Treasury bonds.” Coinage might lead to the same result. Kamen does not say this will It just so happens that we’re in really uncharted territory which is may be Happen or occur.

If only that means inflation-adjusted interest on Five-year Treasury bonds It goes from, say, 1.42 percent to 1.75 percent (to use GAO higher end rating (for what happened in 2011)… Honestly, that sounds good. It’s not great but it would be a small price to pay to end the debt ceiling.

But this madness will be longer than it was in 2011. The matter will be taken to the courts. It is possible that some lower courts will rule against the Biden administration, which would spook the markets even more. The Supreme Court may ultimately rule against the administration, stating that its bond payments since announcing it would ignore the debt ceiling have been illegal. This can really raise interest rates, as investors realize that some of the bonds they own may have been issued illegally and may not be paying them.

And not just the government debt! Economist Filippo Gouri looked at how the 2011 crisis affected the cost of loans Not just for the government, but for the banks. It found that about half of the increased borrowing costs were transferred to the banks. And if bank interest rates go up, everyone else’s interest rates go up. Other businesses borrow their money from banks, and banks will only lend them money if it is profitable, which means that banks have to charge more than they themselves paid to borrow the money they lend. So all of a sudden everyone’s interest rates are increasing. Federal Reserve Sometimes it increases interest rates (as has happened in recent months) precisely in order to get people to spend less money and slow down the economy. The debt ceiling crisis could have a similar effect, and perhaps an even greater one. It is easy to imagine that this would lead to a widespread recession.

This is not a problem unique to ideas such as the Fourteenth Amendment Option or coinage. If the United States were to hit the debt ceiling and choose the Treasury Department (as it was prepared to do in the Obama years) Prioritize payments, paying interest on debt and select government programs, but otherwise skipping trillions of dollars in government bonds, the bond markets will almost certainly go into a frenzy. If the Treasury stops paying interest on the debt, and it defaults, it will be bad or worse. Compared to these options, anything from minting coins to issuing new types of debt is much preferable.

I also think these are risks worth taking for the option of making spending concessions to House Republicans. The more than $1 trillion spending cuts enacted in 2011 were damaging. that they Hurt millions of real people deeply. They undermined our ability to prepare for pandemics, before we experienced the worst pandemic in a century. Worst of all, they have taught congressional Republicans that they can take the debt ceiling hostage and extract major concessions, a lesson they are now learning in earnest. The only way to break this precedent and prevent the ceiling from being used as a pawn for decades to come is to end the debt ceiling—by legislation if possible, by legal passage if necessary. You have to They shoot the hostage.

But I think it is incumbent on proponents of these options, like myself, to think harder about how to respond to the challenge of the bond market. I can imagine Biden and his advisers making the choice between a deal with McCarthy and something like mint, default because there is less risk in the bond market, and therefore less risk of crisis and recession. I think they’d be wrong, but it’s really true that a spending deal would have more predictable consequences in that regard. The 2011 deal did a lot of damage but did not lead to a recession that could have been worse.

Persuading the administration to take another course requires finding some way to reassure markets in the wake of Biden’s cancellation of the debt ceiling, and prevent the legal risks inherent in this measure from causing economic disaster. I don’t know how to do it myself; If I did, I’d say something. But fortunately, there are many people who know these markets better than I do and who will hopefully work out ways to make this option more attractive to management. If Biden is not persuaded, we could be in for another decade of retrenchment and a lifetime of debt-ceiling crises to come.





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