The current conflict over the national debt ceiling is potentially one of the most self destructive games being played in our capital. Obviously, Kevin McCarthy has no idea of the destructive potential in the game he is playing.
The requirement for Congress to approve raising the national debt ceiling is an anachronism created in 1917 to solve problems with the procedures originally established for financing the government. Given the authority by the Constitution to control the government’s budget, the House of Representatives set up procedures for reviewing and approving the budget. Then, when it was necessary to borrow money, it was ruled that the House had to approve any bonds issued by the Treasury. This rule was arbitrarily established by Congress and was not a Constitutional requirement. The 1917 “Second Liberty Bond Act”1, replaced the need to approve the sale of each group of Treasury bonds with a single debt limit under which the Treasury was free to sell bonds up to the limit. Given the authority to approve the budget, the Constitutionality of the additional requirement to approve the sale of bonds or a ceiling on debt is arguable.
In recent years, the Republican party has used the debt ceiling as a tool to extract concessions from Democratic Presidents to cut future expenses in domestic spending.2 In the past, these debt ceiling fights have only lasted for short periods and had relatively minor consequences. A major default at this time, however, could have disastrous consequences. So why is this period any different?
What makes matters worse at this time is that 1) the debt is now up to 123% of GDP3 and 2) 30% of the debt held by the public is held by foreigners (54% by foreign governments and the remainder held by private investors)4. As the debt to GDP ratio increases, the risk of default increases and investor confidence decreases which, in turn, causes interest rates to rise. In our case, investor confidence has always been high because our government has never defaulted on its debt payments, and our present debt to GDP ratio is possible only because of that high confidence. Should there be a major default (not able to pay the debt service for an extended period of time), investor confidence will collapse and interest rates will skyrocket. Furthermore, because such a large percentage of the debt is owned by foreign investors, foreign confidence in the dollar will likely collapse and the dollar will likely lose its status as the world’s reserve currency. (It would be a major disadvantage if we had to trade in a foreign currency.) The U.S. dollar already has competition for the status of the world’s reserve currency (the euro, the Japanese yen, the British pound and the Chinese renminbi are all potential competitors for that position).
Loss of confidence in the U.S. dollar and our government’s ability to pay its debts combined with arrogant, bellicose and belligerent foreign policies (military invasions, abandonment of treaties, imposition of sanctions5) will seriously damage our national image and will probably harm our international relations, likely alienate more non-aligned nations and drive them toward the growing influence of the BRICS6 nations7. Chinese influence in the Middle East is rapidly growing with its Belt and Road initiative which was made very apparent in the recent Chinese mediation of the disputes between Saudi Arabia and Iran.
All of this adds up to the fact that our fiscal policies combined with our foreign policies have brought us to a very dangerous place in history, one in which we could lose a lot of friends and gain a lot of enemies very quickly8. Due to the size of our debt and our behavior towards other nations, a major default of our national debt payments is likely to spell disaster both politically and economically on a scale heretofore unimagined. Kevin McCarthy has no idea of the risks he is taking in the game he is playing.
1 Wikipedia, The Second Liberty Bond Act
2 Note that Republicans have never quibbled about the debt ceiling when raises were requested by Republican Presidents regardless of how much was requested.
3 United States Government Debt % GDP
4 The Peter B. Peterson Foundation
5 See U.S. Treasury, Office of Foreign Assets Control, Sanctions Programs and Country Information
6 Brazil, Russia, India, China, South Africa. These nations have established a separate trading block and plan to use their own currency backed by gold and other precious metals with intrinsic value.
7 Countries that have applied for membership in the BRICS include Algeria, Argentina, Bahrain, Egypt, Indonesia, Iran, Saudi Arabia and United Arab Republics.
8 Bear in mind, rich people always have a lot of friends, but when they fall on hard times, friends disappear like vapor in the wind.