Get smart about the debt ceiling


As a possible Congressional breakthrough nears, here’s what you need to understand about the Treasury’s debt ceiling for now — and next time. Photo courtesy of Flickr user Tyler Merbler.

Senate leaders have announced a bipartisan deal to reopen the government and avert defaulting on U.S. debt, but even if Congress manages to pass a deal before Thursday, at some point soon, we’ll be again racing against the clock of another self-imposed deadline.

The NewsHour is rounding up some of its coverage from the past two weeks to explain the United States’ borrowing structure, what are the risks if the debt limit isn’t raised and how the economy responds to the recent battles in Washington.

The debt ceiling, who authorizes it and what it means, is inherently confusing. Voting to raise the debt ceiling is not, as it’s often misunderstood to be, a vote to spend more money; the money has already been spent.

In this Oct. 3 segment, the New York Times’ Annie Lowrey explained how U.S. debt works.

According to Lowrey:

So what happens is, every year, Congress decides the amount of deficit or surpluses they’re going to run by deciding how much they will spend and how much they are going to take in, in taxes, and in the event that they’re running in the red, as they generally are, Treasury takes them sum and sells bonds on the bond market. So the debt limit is the cap on the total value of bonds that Treasury can sell.

But the issue is that, if — Treasury can’t raise that limit by itself. It needs Congress to do it. If they don’t have enough money to pay all the bills, they need to issue those bonds. They can’t right now, so it looks like they might have some kind of a cash crunch.

But exactly when that cash crunch would hit, and which payments would be put off first, isn’t clear. As Lowrey told Judy Woodruff, delaying payments to Social Security recipients or states “would be awful.” But the U.S. not paying back its bondholders would result in “the mother of all financial crises, because treasuries are so important to the functioning of financial markets.”

So are the interest rates the U.S. Treasury has to pay to borrow money going up? That brings us to Paul Solman’s latest Making Sen$e report, shot Tuesday on the floor of one of the country’s largest bond-trading companies, RBS, in Stamford, Conn.

While interest rates had not, in fact, soared, investors were particularly concerned about a short-term (three-month) Treasury bill coming due on Oct. 24 — the first bill that would not be paid were the Treasury to run out of money. Interest rates for that security have gone up when deals in Congress have faltered and gone down when they’ve looked more promising, and Tuesday certainly didn’t bring much cause for optimism. But rates on T-bills were falling Wednesday with a Senate deal in the offing.

So if, as Annie Lowrey told us, defaulting on bonds would “throw a lot of sand into the gears of the entire financial system,” how do world economic leaders feel about the U.S. economy? For that, we spoke to Zanny Minton Beddoes, economics editor of The Economist magazine and a former economist with the International Monetary Fund, to tell us about the mood at this weekend’s World Bank and IMF conference.

It seems these world leaders, like the U.S. bond market, are clued in about the style of America’s legislating. In other words, they’re not yet going off the deep end because they know that Congress has a propensity for forging last-minute deals.

“And that’s why I think you haven’t seen a big reaction,” Beddoes explained.

That doesn’t mean the international community isn’t seriously concerned. “If, for some reason, this emerging deal were to fall apart,” Beddoes said, in reference to an earlier deal in talks on Monday, “and we were to get to Thursday the 17th or beyond, I think then you would start seeing some very serious movements in financial markets.”

She continued:

To most people from outside the U.S., it’s kind of bizarre. You just can’t really understand that a country’s politicians could take a standoff to a point where they might voluntarily default. So they couldn’t understand it, but they were worried about being part of really cataclysmic consequences.

And I think Christine Lagarde of the — the managing director of the IMF, she put it rather well, and she said that people were bemused, confused, but amused.

Previous 11th-hour deals haven’t shaken confidence in the U.S. dollar as the world’s reserve currency, Beddoes said, but that doesn’t mean that won’t happen.

We’re in this — this seems to be the new normal that we go from one artificial deadline to another. One huge drama is solved at the last minute, temporarily. And if that is the way that the U.S. conducts business, I think that not only does it make it hard for U.S. policy-makers to tell other countries how to — what sensible policy is like, it also reduces their standing, and the uncertainty is bad for the world economy and bad for the U.S.

But we’ve set — and passed — shutdown deadlines before, as Gwen Ifill recalls, writing about the 1995 shutdown.

On day one of this shutdown, USA Today’s Susan Page and the Rothenberg Political Report’s Stuart Rothenberg explained how Congress allowed government funding to go over the cliff and why “nobody blinked,” in Page’s words.

The NewsHour has also explored the effects of the ongoing government shutdown on local communities, first in this segment with regional public media reporters, and in this OETA report on the fallout in central Oklahoma.