Feb 11, 2023 - Economy & Business

Why the debt ceiling drama is so hard to gauge

Illustration of a hundred dollar bill featuring drama and comedy masks in place of Benjamin Franklin

Illustration: Sarah Grillo/Axios

A lot of politicians are going to be talking about the debt ceiling this spring. Ignore them. Their words — a small part of negotiations that are mostly private — should almost never be taken at face value.

Why it matters: At stake is the full faith and credit of the United States of America.

  • Conversations about something that globally important should ideally be as clear and transparent as possible. Instead, we're going to face a barrage of half-truths and tactical equivocation.

The big picture: The debt ceiling, from its inception in 1939, has practically served only one purpose, which is to be a political cudgel. It doesn't stop Congress from spending money, and it's probably unconstitutional. But it's a powerful bargaining chip in high-stakes negotiations where neither side has any incentive to be fully honest about their intentions.

Between the lines: Congress generally waits until the last possible minute to do a deal, and the same is entirely possible this time around, too. Someone who threatens a debt default gets a certain degree of leverage; someone who actually causes a debt default becomes a world-historical malefactor.

  • On the other side, the executive branch has various possible tools it can use to prevent a default. If it were to become clear that the Biden administration intended to use one of those tools, then the Republicans in Congress would have almost no incentive to vote to raise the debt ceiling.

The intrigue: Markets aren't really paying attention to the debt ceiling for the time being, even though it has already been reached and we're now in the realm of "extraordinary measures" being taken to avoid it being breached.

  • Markets are a key forcing mechanism, however. So long as they remain sanguine, there will be less pressure on Congress to reach a deal.

My thought bubble: It's natural to expect an issue this fraught and momentous to cause significant market volatility. There's a good chance, however, that markets won't move very much.

  • Normally, bonds decline in price when the risk of default rises. In this case, however, Treasury bonds might actually rise in price, and fall in yield, as part of a flight-to-quality trade during risky times. That's what happened during the last big debt ceiling fight, in 2011.

Be smart: The argument is not about whether the debt ceiling should be raised. It has to be, by sheer mathematical necessity.

  • The core of the argument is always the same, and is pure power politics: "Since you need me to do this, I should be able to extract large concessions from you" versus "Since you have to do this anyway, I don't need to give you any concessions at all."

The bottom line: The debt ceiling serves no policy purpose whatsoever. But its sheer legislative voltage tends to electrify politicians, making its abolition effectively impossible.

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