This Is What Happens if the US Actually Hits the Debt Ceiling

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:16)

Joe, debt ceiling.

Joe Weisenthal (0:18)

Oh, I'm so excited, we're doing a trillion dollar coin episode.

Tracy Alloway (0:21)

I knew you were gonna say that.

Joe Weisenthal (0:24)

Anyways, I just said that to annoy you.

Tracy Alloway (0:26)

To annoy me, yes. This is not an episode on the trillion dollar coin. If you are interested in that particular piece of finance thought experiment, you can check out our previous episode on the topic. I think it was over an hour long, all about the trillion dollar coin.

Yeah, okay.

Check out that episode if you wanna talk about the trillion dollar coin. But today, we're gonna be discussing something slightly different. We are going to be talking about what exactly happens if the US actually does default.

Joe Weisenthal (0:59)

Right, because I think there's just a lot of uncertainty about this question of like, okay, what happens if they don't raise the debt ceiling? And what are the constraints?

What are the various things that could happen? Like, how bad would it be if we actually like didn't pay the debt? Does the White House have ability to pay some debts, but not others? Like, it's pretty uncertain. Like, it seems bad, right? Like, layman defaulting was bad. Russia defaulting in 1998 was bad. And Russia is like this like tiny, you know, how big was Russia debt? Nothing.

So like, it seems bad.

Tracy Alloway (1:34)

It is a moving feast of uncertainty. Like, a twirling whirlwind of chaos and uncertainty and open questions over exactly what happens.

And there are all these moving parts that I think we really need to sit down and discuss them and kind of talk about it in an almost sequential way. Like, this is what happens if this happens and then that happens.

So, we really do have the perfect guest for this. We are going to be speaking with George Pearkes and Odd Lots' favorite, of course. He is also global macro strategist over at Bespoke Investment Group. So, George, thank you so much for coming back on Odd Lots.

George Pearkes (2:10)

Hey, all. Thanks for having me.

Tracy Alloway (2:12)

Let's start with the basics since we're talking about this as a sort of primer episode on the debt ceiling and the debt limit. When we talk about limits on US debt, what do we mean exactly?

George Pearkes (2:25)

So, the US is really unique in a very frustrating way in that not only do we have restraints on spending in terms of Congress authorizing and the president signing into law bills that create government spending and then appropriations processes after that, you know, throughout the year, we also have this break on the total amount of debt that can be issued.

So, Congress can at the same time instruct the government bureaucracies to go out and spend money, but at the same time say, oh, well, you can't actually issue debt to do that spending we've told you to do. And oh, by the way, you can't collect any more in taxes because we also control that. We've told you the amount you can collect in taxes. So, it's this contradiction in terms of instructions to the executive branch and to various federal government bureaucracies from Congress and from the president. And it's a thing that's been around in US politics for a long time, but I think the most important thing to understand about it is that it's just, it's nonsensical. It doesn't make sense for there to be this extra restraint on top of the existing safeguards against, you know, in a representative democracy where people are elected and then they authorize the spending on behalf of the population. We also have this thing where there's a debt, there's a debt limit that serves as sort of a secondary veto point on government spending.

Joe Weisenthal (3:45)

Defenders of the debt ceiling law would say, look, kind of, that's true, but it is good to have this debate every couple of years about our level of indebtedness. This can be used as a break of sorts for constraining spending.

In the 2011 debt ceiling fight, there really was cuts and the cuts to the growth of federal spending. You know, you're saying like, okay, like this is like the sort of like maddening law, it makes no sense. Does the debt ceiling have a history of like being used to sort of regroup and retrain our thoughts about how much we're spending?

George Pearkes (4:20)

The short answer is no. I think that the more consistent way to think about it historically is that it's used by one faction or another in US politics against whoever happens to sort of be the party in control. So, you know, this is a bipartisan thing. It's used both ways. Both parties have declined to get rid of the debt ceiling on a permanent basis when they've been in power. So I don't mean to say that this is a red versus blue, you know, one side's an abuser of this versus the other, but what it does is it just, it creates a veto point and allows the legislative minority to extract what it wants from or some of what it wants from the legislative majority. Now, that's not necessarily the end of the world, but there are a couple of things to think about here. First, the US system of government is already full of veto points, right? Whether it's process of bills through committees, process of bills through the House, process of bills through the Senate, judicial checks on all that, the executive branch, the high requirement in the Senate to sign things in the law. There are some exceptions, but basically you need a supermajority in the Senate to get things signed into law. So there's just, we have a replete number of veto points. Adding just one more, the benefits are pretty negligible.