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Illustration: Shoshana Gordon/Axios

No one wants to test the strength of the debt ceiling. The current Treasury Secretary, backed up by many of her predecessors, says that it's so rock-solid that running into it will be catastrophic.

Why it matters: The brinkmanship we're currently seeing over the debt ceiling is the kind of dance that no sane person would perform on the edge of a real cliff. One possible explanation is that the cliff isn't quite as vertiginous as politicians are being warned it is.

What they're saying: The official stance on hitting the debt ceiling, from Treasury Secretary Janet Yellen, is positively apocalyptic:

Doing so would likely precipitate a historic financial crisis that would compound the damage of the continuing public health emergency. Default could trigger a spike in interest rates, a steep drop in stock prices and other financial turmoil. Our current economic recovery would reverse into recession, with billions of dollars of growth and millions of jobs lost.

Between the lines: The U.S. hasn't defaulted on its debt since Richard Nixon took the dollar off the gold standard in 1971.

  • No one can be certain about the consequences of a default — and in fact there's no indication that the markets are concerned about such an event, with stocks near record highs and interest rates near record lows.

Where it stands: The two-year debt ceiling suspension enacted in 2019 ended on August 1, 2021. Since then, Treasury has been spending down its reserves. Absent another hike or suspension of the debt ceiling, then at some unknown point in the next few weeks it will be forced to default on all or some of its obligations.

Be smart: Most debt defaults are damaging because they cause financial harm to creditors. It's far from clear that a U.S. sovereign default would have that effect.

  • In times of uncertainty, investors often turn to safe assets, and specifically to Treasury bonds. Moreover, when there's any problem with liquidity in the Treasury market, as there was in March 2020, the Fed has proved that it's willing and able to use its unlimited firepower to step in and buy as many Treasury bonds as the market wants to sell.
  • A U.S. default, in contrast to most other defaults, would cause no losses: The recovery value would be 100 cents on the dollar. In that sense it would be akin to the technical defaults by Fannie Mae and Freddie Mac when the two agencies were placed into conservatorship in 2008. No creditors suffered losses when that happened.

Reality check: Hitting the debt ceiling would almost certainly cause harm to individuals who rely on timely checks from the government, from members of the armed services to people living on Social Security to anybody receiving the monthly child tax credit.

The bottom line: Congress often waits to see market panic before acting. In a weird way, the worst outcome for the United States might be that the country defaults and the market barely wobbles. That could push the brinkmanship — and individual hardship — to even more ludicrous extremes.

Go deeper

Nov 17, 2021 - Podcasts

Taking on the debt ceiling with a trillion dollar coin

Treasury Secretary Janet Yellen warned in a letter to lawmakers on Tuesday that the federal government will run out of money to pay its bills as soon as Dec. 15 if the debt ceiling is not suspended or raised.

One idea to ensure the government does not default, even if the debt ceiling is not raised, is to mint a trillion-dollar coin. Yellen has called this a gimmick, but some economists insist it’s a legitimate finance trick that can be used to stave off a default. 

Axios Re:Cap host Felix Salmon is joined by former U.S. Mint Director Philip Diehl to discuss the idea behind the trillion-dollar coin and whether it’s remotely likely to be minted in the next month.

Signs of stress in the Treasury market

Illustration: Aïda Amer/Axios

A who’s who of financial regulatory agencies are convening Wednesday to talk about how to ensure the $22 trillion Treasury market functions properly.

At issue: Fixing liquidity problems that have, at times, exacerbated price swings.

6 mins ago - World

Scoop: Iran preparing to enrich weapons-grade uranium, Israel warns U.S.

Iranian President Ebrahim Raisi holds a press conference. Photo: Presidency of Iran handout via Getty

Israel has shared intelligence over the past two weeks with the U.S. and several European allies suggesting that Iran is taking technical steps to prepare to enrich uranium to 90% purity — the level needed to produce a nuclear weapon, two U.S. sources briefed on the issue tell me.

Why it matters: Enriching to 90% would bring Iran closer than ever to the nuclear threshold. The Israeli warnings come as nuclear talks resume in Vienna, with Iran returning to the negotiating table on Monday after a five-month hiatus.