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You want to borrow money. The bank will grant the loan because you have an excellent credit history and valuable assets to support your repayment capacity.
Later, you tell the bank that you won’t be making any more loan payments. The bank says your credit is so good that you can even borrow more. But you decide that you have too much debt and prefer to stop paying off your existing loans.
The bank is stunned. It warns that you will destroy your top credit rating and won’t be trusted the next time you apply for a loan. Even if the bank lends you money in the future, it will charge a much higher interest rate, perhaps even placing a lien on your property.
You’re torn between ending debt repayments until you can cut your personal expenses or avoid destroying, perhaps forever, the good credit rating you’ve earned over the years.
Now replace the United States with yourself in this story and you have the Great Debt Ceiling Crisis of 2021.
Congress and the President enact spending bills that commit the United States to paying for government programs. The Treasury pays the cost with tax money and, if necessary, borrows the rest. Repayment of borrowed amounts plus interest is now part of the federal budget.
When passing spending laws, if Congress doesn’t cut some other spending or raise taxes, it will inevitably require more borrowing. He may unrealistically assume that economic growth will send Washington more tax revenue, but he accepts the likelihood of increased debt to foot the bill.
Congress also adopts a debt ceiling, intended to impose a limit on total borrowing. When the outstanding debt reaches the ceiling, it is increased. The debt ceiling serves as an easily overlooked opinion that Congress can overspend without the necessary taxes.
Republicans in Congress want Democrats to take responsibility for the increase in the national debt, even as it has accumulated over decades. They want to block President Joe Biden’s economic plans, although he says it would depend less on debt than on tax hikes for the richest people. So the GOP blocked an increase in the debt ceiling, except for a short-term extension approved by the Senate on Thursday.
The debt ceiling is purely political.
Republicans controlled the federal government when Donald Trump was president. During those years, Democrats joined the GOP in raising the debt ceiling. The bills had to be paid.
The debt ceiling war is dangerous. If the cap is taken seriously and not raised, two major options emerge. The government would stop spending on normal operations and use tax revenues to pay down debt. Or he could stop paying off his debt and default on his debt.
Stopping would lead to a blame game. It could harm either party or both. But by default, it’s worse.
The US dollar is the world’s currency. Some currencies are not backed and their value may fall, but the dollar is not. It is used in most international transactions. The countries believe that the United States will support the value of the dollar and that its powerful national economy will always protect it. Some countries even use the US dollar as their national currency.
The role of the United States as a dominant world power is probably a result less of its military might than of the dollar, accepted even by America’s adversaries. The world has chosen to depend on the American economy and the certainty that the United States will support the dollar by paying off its debts.
If the United States is defaulting on its debt, it is also defaulting on its role as the world’s leading power. It is a lot to risk playing partisan politics in Congress. GOP Senate Leader Mitch McConnell takes too narrow a view of the game he’s playing. Even its current debt ceiling threats are undermining American might.
The 14th Amendment to the Constitution says, “The validity of the US public debt, authorized by law,… must not be questioned. President Biden could ignore the debt ceiling and make debt payments as “permitted by law.” Ultimately, the Supreme Court could either uphold the Constitution or steer clear of this blatantly political game.
In the future, each expenditure bill should include the sentence: “The debt ceiling is adjusted to the extent required by this allocation of funds.” This would put an end to the dangerous political games.
By the end of this year’s war, the now damaged dollar is likely to survive as the norm, at least for some time to come.