Updated Jan 19, 2023 - Economy

Debt ceiling fight set to "cross the Rubicon"

Illustration of a stack of bills crushing Uncle Sam's hat.

Illustration: Shoshana Gordon/Axios

White House and congressional Republicans are drawing battle lines in the fraught and perilous debt ceiling debate — with each side becoming more entrenched in their refusal to negotiate with the other.

Driving the news: The U.S. is expected to hit its borrowing limit on Thursday, meaning the Treasury will resort to "extraordinary measures" to stave off a potential default.

  • That move's becoming increasingly common in the nation's polarized capital.

Why it matters: The perennial fight to hike Uncle Sam's $31 trillion credit limit — a charade that Wall Street abhors — is being amplified by a Congress with a narrow GOP majority that's digging in against hiking the debt limit, which the Biden administration on Wednesday branded "economic vandalism."

  • Normally, investors see a gridlocked government as a good thing, preventing either major party from implementing dramatic changes.
  • But this time, the stalemate raises the prospect of the world's largest economy defaulting on its debts, igniting a firestorm in global markets at a time when a U.S. recession seems like a growing possibility.

The deadlock is expected to last into the summer. Among the challenges:

  • House Speaker Kevin McCarthy has a tenuous hold on a GOP caucus dominated by Republicans who reject the normal mechanics of governing.
  • The Biden administration is unwilling to negotiate substantive concessions in response to what it sees as threats that may wreak havoc in global markets.

Between the lines: The debt ceiling debate is an avatar of what some have argued is a U.S. democracy that's become increasingly polarized, ungovernable, incapable of tackling major challenges — and could be on the verge of outright destabilization.

  • For years, markets have presumed that a U.S. debt default "is unthinkable, and we have agreed. But this time … the threat will become a major market concern within months," Greg Valliere, chief U.S. policy strategist at AGF Investments.

The intrigue: Washington's partisan skirmishes over the debt limit have been the norm for years. Financial blogger Josh Barro noted on Wednesday that extraordinary measures have been deployed at least nine times in the last 20 years.

  • It's also sparked lots of speculation the government will need to rely on some very creative accounting in order to do an end-run around default.
  • The Treasury isn't expected to exhaust all its options for at least several months, at which point a technical default — or a credit downgrade from Wall Street ratings agencies — will loom large.
  • Some of the (long-shot) tools at Treasury Secretary Janet Yellen's disposal include minting a trillion-dollar coin (unlikely) or issuing bonds with an above-market interest rate, which would reduce their face value.

What they're saying: Bank of America noted last week that "failure to raise — and breaching — the debt ceiling could bring far more economic pain and is the fiscal policy equivalent of crossing the Rubicon."

  • Once the clock runs out, the government could miss interest payments or cut spending on key programs.
  • "This would likely trigger a downgrade by credit rating agencies, as was the case in 2011 during the last debt ceiling showdown," BofA added.

The bottom line: Global bond yields have already been spooked by the Federal Reserve's fight against inflation, which has driven up borrowing costs.

  • A game of chicken between Congress and the White House is the last thing an addled market needs.
Go deeper