- The Washington Times - Thursday, March 2, 2023

Raising the debt limit always seems to elicit an existential moment among American politicians concerned about the sustainability of our financial trajectory. It also elicits (usually on the other side) an enormous amount of propaganda about how paying our debts and ensuring the “full faith and credit” of the United States is a bedrock principle of the American polity.

No word so far from the current purveyors of the propaganda as to when not incurring so much debt in the first place stopped being a bedrock principle of the American polity.

Unfortunately, the debt limit is almost always subject to childish politics. This time around, in an attempt to pressure the new Republican majority in the House, the Department of the Treasury announced that the debt limit had been reached in January, or about six months before it is actually likely to be reached. The hedge there is, of course, those always pesky “extraordinary measures” which are, of course, by now completely ordinary.

Does anyone care? Does anyone really watch this kabuki anymore?

Everyone can pretty much predict the debt limit story will get a little livelier before it is settled. Both sides have political interests in increasing the volume on the issue. So, it is probably wise to anticipate more headline risk in the immediate future.

We can also predict with some confidence that we will probably wind up with a deal (as we always do) that will include raising the debt ceiling for a year (or maybe two), and spending reductions of about $1 trillion (or maybe $2 trillion) spread over the next 10 years. If history is any guide, those reductions will eventually be waived or overwhelmed by other spending, or just ignored.

Given Congress’ preference for theater, it seems likely that the ultimate deal will come together at the very last minute as our “leaders” snatch victory and prosperity from the very jaws of defeat and economic ruin.

Spare us.

You know who doesn’t seem to be watching this anymore? Those in the financial markets. Lots of financial people have been through this song and dance before, so they are mercifully immune to this nonsense. Not surprisingly, yields on four-month Treasury bills for the May and June auctions (when this particular clock is supposed to strike midnight) aren’t rising. If anyone believed that the full faith and credit of the United States were really at risk, that would have been priced into those auctions.

Finally, and most disturbingly, the entire spectacle is based on a mischaracterization (or, if you prefer, a falsehood). Equating reaching the debt limit to a “default” is nonsense and wrong and probably purposefully wrong. In the event the limit is reached, Treasury will still have more than enough incoming revenue to meet the full faith and credit obligations of the federal government. Meeting those obligations first has been the historical preference of the Department of the Treasury and the New York Fed (which would actually be paying creditors).

Reaching the limit should not be minimized; it’s a symptom of political and societal decline. Nor should it be considered the end of the world. The immediate result of not increasing the debt limit would look more like a slow-motion government shutdown, with nonessential activities and agencies being suspended for a time.

Ridiculous? Yes. Pointless? Absolutely. Catastrophic? No.

As always in Washington, it’s best to ignore the propaganda and try your best to focus on the facts. Unfortunately, the entire debt limit song and dance are more likely to distract than inform.

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