Debt Ceiling Crisis Spotlights Democracy’s Dilemma

“Are you just gonna sit there and pick and choose?” Chuck Todd wondered.

He was querying Janet Yellen on the prospect of payment prioritization in a scenario where Congress fails to raise the US debt ceiling.

Yellen’s “Meet The Press” cameo came on a day when Kevin McCarthy suggested the White House would rather force a US default than compromise with House Republicans pushing what the Biden administration insists is an unrealistic set of demands. Talks broke down late last week and went nowhere over the weekend.

“[Or] are you gonna pay all of our debts and essentially let the courts tell us you shouldn’t have?” Todd pressed.

“Well, we take the debt ceiling seriously as a constraint,” Yellen, who seems increasingly unable to hide her disdain for this charade, began. “My assumption is that if the debt ceiling isn’t raised, there will be hard choices to make about what bills go unpaid.”

Todd put the question directly to Yellen: Is Biden really willing to sit idly by and allow the US to default if Congress doesn’t do its job? Yellen walked through the stakes — principal and interest payments on US debt, obligations to seniors, military salaries, government contractors and so on. “Some bills have to go unpaid,” she said.

When asked by Todd if she’s decided which bills wouldn’t be paid, Yellen was understandably evasive: “There can be no acceptable outcomes if the debt ceiling doesn’t get raised.”

That raises (no pun intended) this question: Why, if there are no acceptable outcomes in the event the debt ceiling isn’t raised, is that outcome (i.e., not raising the debt ceiling) acceptable? Joe Biden claims it isn’t. And senior congressional leaders on both sides of the aisle say the same. Yet here we are still talking about it and crucially, it feels more “real” this time, something I discussed at length in the weekly+.

In “What Janet Yellen Sees As Debt Limit X-Date Looms” I walked through Treasury’s dilemma. If you haven’t read that short article, I encourage you to do so. But the simple figures below, from Goldman, capture the gist of it. They show what the US has to pay and when.

Goldman’s projections suggested it’s at least possible that Yellen could make payments through next month even without a deal, but she indicated Sunday that’s unlikely. It’ll be “very difficult” to make it to June 15 (when “substantial” tax receipts are expected) without an increase, she remarked, calling June 1 a “hard deadline.”

Having written voluminously on every angle of this debate (and not just in 2023), I won’t subject readers to another recitation of the familiar, but I do want to point out an underappreciated aspect.

By now, everyone’s written a lament for what a default would signal to America’s allies and pseudo-allies about Washington as a bastion of stability in an increasingly unstable world. After January 6, 2021, and with the de-dollarization narrative gathering adherents even among those who support the decision to seize Russia’s reserves (you can be weary of the implications even if you believe it was the morally right thing to do), the last thing the country needs is a self-inflicted financial and economic crisis.

But consider this: Xi Jinping and other autocrats depend on the notion that over time, democracies will become too fractious to function. They believe the quest for compromise, along with overlapping checks and balances, will paralyze the US. That’s one reason why propaganda campaigns orchestrated by autocratic states seek to polarize electorates across Western democracies. The more polarized the populace, the more difficult consensus becomes, and the more calcified a country thereby is.

The debt ceiling deadlock, were it to result in a default (or even just a few late payments) would constitute powerful validation for that idea. There’s a vociferous debate currently about whether America’s courts would be willing to countenance a default by allowing executive action on America’s financial obligations to be challenged. If the courts did accept challenges, it’d be dangerous, and emblematic of the same democratic paralysis.

Some might suggest, albeit certainly not in public, that in the unimaginable event Congress forced a prolonged default wherein the US missed payments of all sorts — so, seniors stopped getting checks, the military stopped getting paid and America missed principal and interest payments leading to financial chaos — and the courts accepted challenges to executive action, a president would have no choice but to resort to the unimaginable him or herself. Biden is the commander-in-chief, and my guess is that America’s finest wouldn’t be enamored with the idea of missed paychecks, which could lead to missed mortgage payments and so on.

And that gets us right back to the paradox which confronted senior US officials across various government agencies, including those at the Pentagon and the FBI, at regular intervals from 2015 to 2020, and may confront them again in 2024: What does it say about democracy when the only way to save it from itself is to resort to undemocratic measures?


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17 thoughts on “Debt Ceiling Crisis Spotlights Democracy’s Dilemma

  1. Time for 14th ammendment. If that is overturned mint the platinum coin. Congress authorized the tax and spending plan. The debt limit legislation is clearly unconstitutional. Get rid of it.

  2. I’m beating my dead horse here, but there is a fundamental difference between US Treasuries and every other US Government obligation.

    The Federal Reserve is mandated to protect Treasuries (the critical foundation of the US financial system) and the Federal Reserve has a printing press. If Treasury needs $50BN to pay UST interest/principal, the Federal Reserve can buy $50BN of Treasuries, freeing up a like space under the debt ceiling.

    The Fed has no such mandate to protect Social Security, Medicare, defense, etc.

    Looks like Treasury has around two months before the Fed would need to take such a step. That’s two months for a federal govt shutdown and missed Socially Security/other entitlement payments to call McCarthy’s bluff.

    1. The debt ceiling fixes amount us treasury can issue. It does not matter who buys it, the federal reserve, China or the street. That’s why there is talk of a platinum coin. The Fed could give us treasury cash for the coin. Would you like to testify in front of congress if you were Jerome powell in that case though? Congress regulates the federal reserve. It is unlikely this would happen. Too bad.

      1. The Fed can buy Treasuries as they mature, effectively paying the principal to the holders in lieu of Treasury doing so. It can even buy Treasuries as coupons are due, effectively paying the interest in lieu of Treasury doing so. Treasury would not be issuing new debt, but the immediate cash flow effect would be as if it was.

        The Fed mapped out this and similar options a decade ago, during the Obama debt ceiling crisis. See below, starting page 15. Note Powell’s positions.

          1. My main takeaway is 1) the Fed has tools that it has never used but could use in extremis, and 2) Powell is very aware of those tools.

  3. The one person with the most ability to initial compromise is Joe Biden (he effectively has more control over all congressional democrats than McCarthy has over all congressional republicans). Given this, I anticipate Joe Biden will be the first to “cede ground” on this issue.

    Also, while I haven’t been closely monitoring all debate on this debt ceiling issue, couldn’t the Fed sell some of its $8+billion balance sheet to provide funds to bridge any funding needs?

  4. The media seems to either support the blame it on Biden narrative or willfully ignorant of their continued role in propagating it. Biden is not the guy who’s creating a problem here. But they continue to act as if he’s the one allowing this all to happen. Why isn’t McCarthy getting this pressure and blame? He’s literally the guy who’s decided to demand concessions or force a default.

    1. This point is well taken, but it appears that a struggling or otherwise significant proportion of the populace is receptive to the narrative or even propaganda that illegal immigrants are mainly sex traffickers and drug mules, that climate change is just normal weather dressed in Soros’ clothes, that elections are rife with fraud and completely unreliable, that increased crime is a police matter rather than an economic one, that LGBTQ issues and properly gendered bathrooms are existential, and that the answer to gun violence is more guns.

      But the biggest disappointment to me is that the media has decided the best approach is to mostly “both sides” everything, not necessarily in the interest of fairness, but to maintain access to the maximum TAM. I find it ironic that the media is bending over backwards to provide alternative viewpoints and perspectives of current events at the same time Republicans seem hell bent on preserving the most comfortable possible version of history for themselves and our children’s curricula as a matter of LAW.

      It can be empirically shown that both the stock market and the budget deficit tend to do better under Democrat administrations, yet the conventional wisdom seems to be the complete opposite. In the end, however, I must blame Democrats who despite, IMO, generally having the higher moral ground AND a greater facility with the language, are just awful when it comes to messaging and labeling (i.e., defund the police). They also seem to have a terrible knack for timing and “own goals” (RBG dying, finding Biden had classified documents too, etc). I like the notion of “when they go low, we go high” in theory, but in practice, it sucks.

    2. I watched the show because Janet Yellen was a guest. I have a sense that Chuck Todd is unwittingly taking the Republican side of the argument and treating it as if it’s a fair and reasonable proposition to threaten default. It isn’t, of course. But he renders his contribution in the discussion as if it actually has some value.

      I doubt Todd fully understands his own question. I believe he thinks he’s just taking the other side of the argument for the benefit of the circus, making the discussion more scintillating. But it actually served no useful purpose. I have seen him pull that shtick too many times and prefer not to see his show anymore.

      His treatment of the discussion was a waste of time.

      1. There really are no actual news shows left, only the opinions of some some b-list paper pushers who get to have opinions because they look nice and have followers. Walter Cronkite mostly told the truth and gave us the news. In the middle of the night he was live as he described Armstrong’s moon walk. He cried when he told us. What we get now just doesn’t cut it.

  5. The Senate is sitting on their hands. They could resolve to rescind the law and pass it along to Congress.
    It could be the beginning of the end of this ridiculous stalemate, created by the two party system.

  6. And all of that because of one man, Rupert Murdoch (two, if you include Roger Ailes)…

    Am I the only one to find it… revealing? that his name rhymes with Moloch? It’s enough to make an atheist believe in the supernatural… 😉

  7. Illiterate, innumerate and viscious- that’s what a significant percentage of America wants. Ignorance is so expensive and so dangerous- and not just in America…I personally favor the 14th amendment, because I think eliminating the debt ceiling is a simple honest thing to do…Having said that, our current supreme court is so devoid of genuine logic or principle that there is a real risk that they would do something crazy….

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