GOP Debt Ceiling Battle Could Lead to Historic Financial Crisis in 2023
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Republican lawmakers could torpedo the economy if they don't act soon.
Drama has been infiltrating the halls of Congress over the past few weeks. Due to squabbling among the GOP, it took some late nights and 15 ballots to elect Kevin McCarthy as Speaker of the House. But it appears that was the easy part, as Republicans are now contending with a bigger, and much riskier challenge: raising the debt ceiling and keeping America on top of paying its bills.
Treasury Secretary Janet Yellen has warned that the debt limit is looming, with the US projected to officially reach the statutory limit for borrowing on January 19. That's when the Treasury will step in with "extraordinary measures" shuffling around some spending related to federal employee pension plans until it's either funded again orruns out of options and becomes unable to pay its bills.
"Failure to meet the government's obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans, and global financial stability," Yellen wrote in a letter to McCarthy.
Those "extraordinary measures" are expected to run out sometime this summer, at which point the US could find itself in a dire economic situation. The country and world could plunge into a financial crisis, destabilizing global markets and leaving millions of Americans jobless.
This isn't a new dilemma for lawmakers. Raising the debt ceiling means increasing the legal amount of debt the federal government is able to allocate to keep paying for programs already mandated by Congress, and it's something Republicans managed to do three times under former President Donald Trump.
But with a Democratic White House, this time around is different because Republicans are planning to use the debt ceiling as leverage to accomplish their own policy priorities largely significant spending cuts on things like Medicare and Social Security. The White House, and Democratic lawmakers, have blasted the GOP using the debt limit as a bargaining chip.
"Failure to raise the debt limit will not reduce our debt, but it would wreck the economy if it led to a default. Unfortunately many Republicans seem determined to find out how catastrophic a default would be through experience," Rep. Don Beyer, a Democrat from Virginia, said in a statement to Insider.
He added: "Republicans accorded President Trump clean, bipartisan debt limit increases to cover the costs of debts which many of them voted to incur, and there is no reason for them to refuse to do the same under President Biden other than pure partisan politics."
"In exchange for not crashing the United States economy, you get nothing," Hawaii Sen. Brian Schatz previously told The Daily Beast. "You don't get a cookie. You don't get to be treated like you're the second coming of LBJ. You're just a person doing the bare minimum of not intentionally screwing over your constituents for insane reasons."
Michael Strain, the director of economic policy studies at the American Enterprise Institute, a center-right think tank, wrote that the Biden administration and Democrats have to accept the reality that "House firebrands" are not bluffing about not reaching a deal.
"All responsible politicians must get to work immediately, with the goal of raising the ceiling this winter," Strain wrote. "The closer we get to the as-yet-unknown day this summer when the government will run out of borrowing power, the worse the market reaction will be."
If the challenge to raise the debt ceiling sounds familiar, that's because Congress was in a very similar situation two years ago.
Senate Minority Leader Mitch McConnell initially refused to help Democrats raise the limit in 2021, leading the US dangerously close to defaulting on its debt before agreeing to a short-term agreement that raised the debt ceiling to its current level.
That obstruction harkened back to 2011, when delays in raising the ceiling amidst negotiations between the Obama administration and Republicans resulted in $1.3 billion more in borrowing costs and the US's S&P credit rating getting downgraded. In 1995, a standoff between President Bill Clinton and Republicans over spending cuts led to a government shutdown and Moody's saying it would potentially downgrade Treasury bonds leading Republicans to acquiesce.
This time could be different, however, as the new GOP House majority appears particularly insistent on playing hardball. "I think in the past, the assumption or the strategy was we want the Republicans to yield," Rohan Grey, an assistant professor at Willamette University College of Law, said. "We want to play a game of chicken with them because we think they don't actually want to be responsible for blowing up the whole economy."
But, Grey said, while Mitch McConnell did ultimately blink, this group of Republicans is a "fundamentally different group of people."
Goldman Sachs' Alec Phillips wrote in a January 9 analysis that the debt limit is now "a greater risk than at any time since 1995 or 2011," when the government shut down, or came close to shutting down, to avoid missing payments.
Phillips explained that passing a bill to raise the debt limit, along with spending cuts McCarthy conceded to, would be difficult to implement because the cuts "would primarily impact seniors, a Republican-leaning demographic."
"This could be the most economically irresponsible backroom deal in Republican history (even conservative economists are warning that the consequences could include a stock-market spiral and significant job losses)," Robert Reich, the Secretary of Labor during the 1995 debt ceiling crisis, wrote in a piece on the current situation.
Zachary D. Carter, the author of "The Price of Peace: Money, Democracy and the Life of John Maynard Keynes," told Insider a default on the national debt would throw the country back to some of the worst days after the Great Recession in 2008, he said, but with even more severe risks.
The US Treasury bond "is the basic unit of global finance," Carter said. "We are talking about every single financial institution in the world having to suddenly revalue the price of a basic asset that is used to settle balances every day."
"We'd just be setting off a global financial crisis. What happens after that? No one knows," he added.
If Biden ultimately decides he wants to avoid the risky debate in Congress, another solution is waiting for him in the form of a $1 trillion platinum coin. Through a process known as "minting the coin," Biden could sidestep Congress by depositing a $1 trillion platinum coin in the Federal Reserve, keeping the US afloat without having to formally issue any new debt.
The coin concept comes from a loophole in the type of coins the Treasury Department can mint. The Department has the jurisdiction to mint"platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary's discretion, may prescribe from time to time." Under that wording, the platinum coin could be any value so, theoretically, Treasury Secretary Janet Yellen could mint a platinum coin, say it's worth a trillion dollars, and use that to resolve the issue.
"When you talk about the trillion dollar platinum coin, it sounds very silly and it is really silly!" Carter said. "But a silly thing is much better than a catastrophic thing."
Obama even considered the idea, saying in 2017 that there "were all kinds of wacky ideas about how potentially you could have this massive coin." (The coin does not have to be physically large, just worth a trillion dollars).
While it may seem like a radical solution, "the really radical thing about this is the Treasury Secretary and others saying, we are going to ignore our constitutional responsibilities to spend the amount that Congress has told us to spend because we don't like the tools that they've given us to do it," Grey said, referring to the contradiction between Congressionally-mandated appropriations and the debt ceiling.
But at this point, Biden has rejected going that route and his administration maintains that Congress must act to ensure the US continues paying its bills, and doing so should not be a matter of negotiation.
"This is just another attempt by congressional Republicans to force unpopular cuts on programs critical to seniors, the middle class and working families," White House Press Secretary Karine Jean-Pierre said on Tuesday. "Congress needs to act and do so quickly. There is no excuse for political brinkmanship."
Additionally, The Washington Post reported last week that McCarthy and House Republicans are preparing a "payment prioritization" plan that would tell the Treasury what to do should Congress fail to raise the debt ceiling. Jean-Pierre called the plan "a recipe for economic catastrophe."
Widespread job losses, coupled with a roiled global economy, could take place if Congress doesn't act.
"We would see a financial crisis and massive job losses without aid from the federal government to deal with it," Carter said. "You would see very serious material hardship, very widespread, very quickly."
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GOP Debt Ceiling Battle Could Lead to Historic Financial Crisis in 2023