Bill Dudley: This debt-limit standoff could be really disastrous

From the commentary: One can only hope that sanity will prevail (on debt-limit talks). But given the vast political divide and the narrow margins in the House and Senate, it’s not obvious how this will occur.

U.S. Sen. Jon Tester (D-Montana) talks to reporters about the debt limit at the U.S. Capitol on Monday, May 1, 2023, in Washington, D.C. Treasury Secretary Janet Yellen said the U.S. could default on its debt as soon as June 1 if lawmakers do not increase the debt limit.
U.S. Sen. Jon Tester (D-Montana) talks to reporters about the debt limit at the U.S. Capitol on Monday, May 1, 2023, in Washington, D.C. Treasury Secretary Janet Yellen said the U.S. could default on its debt as soon as June 1 if lawmakers do not increase the debt limit.
(Kevin Dietsch/Getty Images/TNS)

I have one message for those observing or involved in the standoff over raising the US federal debt limit: Be afraid, be very afraid. At this point in the financial and economic cycle, the consequences of failing to reach a deal would be particularly dire.

From the commentary: Casey DeSantis has three young children to raise while her husband runs for president. Anyone and everyone can find something to fault her for in how she chooses to balance her family and the campaign and on her roles as wife, partner and mother, which is why none of us should be sitting in judgment.
From the commentary: College grads not only make more money on average; they live longer, according to research.
From the commentary: The numbers: Republicans hold a House majority of only nine members, one of whom is the notorious George Santos. Biden won 18 of the districts currently held by Republicans. One can assume that many of their swing-voting constituents are most unhappy over the party's opposition to reproductive rights. They're sickened by its defense of lunatics' strutting through Walmarts with weapons of war.

The risks that a political impasse will force the US government to renege on its obligations keeps rising as time marches on with no negotiation or progress. Worse, both sides’ positions appear to be hardening. House Speaker Kevin McCarthy’s ability to pass a budget bill (by the thinnest of margins) has strengthened Republicans’ belief that they can win concessions from the Biden administration — concessions that are actually anathema to the latter.

The Republican legislation would undo several of Biden’s major policy initiatives, including student loan forgiveness and funding for the Internal Revenue Service to improve tax compliance. It would add new work requirements for programs such as Medicaid and slash domestic discretionary government spending. In return, it would raise the debt limit by $1.5 trillion or until March 31, whichever comes first — granting Republicans the opportunity to demand further concessions next spring.

Democrats don’t want to negotiate under duress. The Biden administration argues, reasonably, that the US needs to honor its obligations: If Congress doesn’t like the way its tax and spending policies increase the country’s indebtedness, it should deal with this through the annual budget process. This is why the debt limit has almost always has been raised (with the notable exception of 2011) without requiring budgetary concessions, including repeatedly during the Trump administration.

In the game of chicken, the idea is to hold out as long as you can, to scare your opponent into conceding. So the standoff will almost certainly go to the very last moment, when the Treasury runs out of capacity to keep paying its debts in full. That date will likely be either early June or sometime in late July or early August. The federal government gets considerable revenue in mid-June from corporate and personal income tax payments, so if the Treasury can make it that far, it will have enough cash for another 6 weeks or so.


A full-on collision is entirely possible, given how far apart the two sides remain on how to limit future budget deficits. The Democrats favor increasing taxes on the wealthy and improving compliance. The Republicans favor sharply cutting domestic discretionary spending. The only area of agreement is that Social Security and Medicare are off limits. Meanwhile, McCarthy has troublingly little room for maneuver: If he brought any legislation to the House floor that Democrats in the Senate had agreed to, he could lose his job as speaker.

If the debt limit ends up binding, the Biden administration is highly unlikely to resort to gimmicks such as issuing a $1 trillion coin or evoking the 14th Amendment (which states: “The validity of the public debt of the United States…shall not be questioned”). Instead, the Treasury would prioritize obligations — putting interest and principal on government securities first to avoid a sovereign default, and delaying other types of payments (for example, to government workers and contractors).

Even if prioritization averted an immediate default on Treasury securities, the damage would be vast. Markets — still dealing with the consequences of a rash of bank failures — would be shocked, having expected the usual last-minute deal. Stock and bond prices would decline violently, Treasuries would gyrate as investors worried about how long the payment prioritization would protect them, and money market mutual funds might pull out of government debt en masse.

More Opinion:
From the commentary: If Florida Democrats find an acceptable candidate, they might just recapture the governorship. America probably doesn't want to become DeSantis' Florida. Florida may not like that either.
From the commentary: For now, parents have no choice but to do the best they can to protect children based on insights from experts and researchers.
From the commentary: Not only must DeSantis effectively introduce himself in these and other states, he must overcome former president Donald Trump's large lead in the polls.
From the commentary: The leader of a Holocaust Center in South Florida made a similar point recently stressing: “The Holocaust, it didn’t start with guns and death camps. It started with words.” ... Well, words are precisely what Florida is trying to ban, censor and distort. In unprecedented fashion.
From the commentary: It's the "mini-me" factor that no one is even aware of and that leads people (men) to duplicate themselves. Then there is the "comfort factor," also unconscious but no less powerful, the measure of who the decisionmaker literally feels more comfortable with, generally someone like him.
From the commentary: Republicans preach people taking responsibility for their actions, decisions and mistakes. ... You first, folks.
From the commentary: America needs both parties to secure the border. Democrats have started, and Republicans are invited.
From the commentary: The president told the graduates the biggest threat to America is "white supremacy." Not China, Russia, the debt, or the open border? Nope. White supremacy.
From the commentary: The 2024 political season is just beginning. A great deal may change. But if you feel disenchanted and depressed by the choice voters may well be presented with, you are not alone.
From the commentary: Democracies require the vote for all citizens, or at least all who are capable of minimal levels of participation. We should err in the direction of extending the franchise, not restricting it.

The sudden stop in payments would also weigh heavily on an economy already on the verge of recession. If it happened in early June, it wouldn’t be as bad because there would be an immediate, temporary respite as mid-June tax payments came in. If it came in late July or early August, as appears more likely, the spending cut would be huge and sustained. Last July and August, the federal government’s monthly budget deficit was more than $200 billion. Cutting that amount would represent a fiscal tightening of about 10 percentage points of gross domestic product. If legislators didn’t relent quickly, the combination of market panic and forced austerity would send the economy off a cliff.

One can only hope that sanity will prevail. But given the vast political divide and the narrow margins in the House and Senate, it’s not obvious how this will occur.

Bill Dudley, a Bloomberg Opinion columnist and senior adviser to Bloomberg Economics, is a senior research scholar at Princeton University’s Center for Economic Policy Studies. He served as president of the Federal Reserve Bank of New York from 2009 to 2018, and as vice chairman of the Federal Open Market Committee. This commentary is the columnist's opinion. Send feedback to:

©2023 Bloomberg L.P. Visit Distributed by Tribune Content Agency, LLC.


This story was written by one of our partner news agencies. Forum Communications Company uses content from agencies such as Reuters, Kaiser Health News, Tribune News Service and others to provide a wider range of news to our readers. Learn more about the news services FCC uses here.

What To Read Next
Get Local