5 reasons why hitting the debt ceiling would be disastrous – Washington Post
President Trump and Senate Majority Leader Mitch McConnell (R-Ky.) are courting an economic catastrophe with a standoff over how to raise the debt limit.
Unless Trump and Congress pass a law raising the U.S. debt limit — a legal cap on how much the U.S. government is allowed to borrow — the Treasury Department will soon run out of money to pay its bills, triggering a first-in-modern-U.S.-history default that threatens to turn the world economy on its head. A default would crack the world’s faith in the United States’ ability to pay its bills and repay its loans, and that faith serves as the underpinning of the entire global financial system.
“Failure to raise the debt ceiling would … likely push the economy into a recession if the situation persisted,” Barclays warned in a note to clients on Thursday.
The overriding belief in Washington and on Wall Street is that a default is highly unlikely. But there’s still a chance it could happen. Greg Valliere of Horizon Investments puts the odds at 5 percent. Given what’s at stake, that’s not comforting.
The most recent estimates suggest Congress has until early October to take action before the government literally runs out of money. It’s called the “X” date, and it could occur as early as Oct. 2, according to the Bipartisan Policy Center. A large ($81 billion) payment is due to the Military Retirement Trust Fund that day. If there aren’t enough tax dollars left in the Treasury to make that payment and the others due that day, the Trump administration will have to pick who goes empty-handed.
With time running short, Trump is bashing McConnell, and the two leaders are involved in a prickly feud.
While both leaders are blaming each other, each has their own complicated history with the debt ceiling that brought us here. Trump’s administration has sent a divided message on how to proceed. Treasury Secretary Steven Mnuchin has been telling Congress to pass a simple increase as soon as possible that isn’t linked to anything else, while Mick Mulvaney, Trump’s budget director, has been hinting to conservatives that they could push for spending cuts by threatening to withhold their votes for a debt ceiling increase.
McConnell has his own complicated history with the debt ceiling, as he was part of a Republican effort in 2013 to withhold a debt ceiling increase from President Barack Obama unless the president agreed to spending cuts, the same tactic that his fellow conservatives are threatening to use now. What’s different this time is that Republicans are fighting each other, not a Democrat.
The danger of this ongoing game of chicken, however, is that at some point someone will miscalculate and the government will actually hit the debt limit, sparking a default, intentional or otherwise.
Here are five reasons that would cause global panic.
First, it would trigger a wild ride for stocks and bonds. Wall Street doesn’t like bad surprises. This would be a big one. It would be “unprecedented in the modern era,” says Shai Akabas, economic policy director at the Bipartisan Policy Center. There would probably be an immediate, negative reaction in the markets, especially for U.S. stocks and bonds. It’s hard to predict how ugly it would get, but investors would be digesting both the shock that the “full faith and credit of the United States” is tarnished and the fact that Trump and Congress probably won’t get tax reform done if they can’t even accomplish a “must do” item.