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Raise the roof: the politics of the US debt ceiling crisis

The US government shutdown is in its second week, but attention in the country has shifted elsewhere: to the looming debt ceiling crisis. On October 17, the US runs out of money to pay its bills. Both…

While the US government remains shut down, the long game for Republicans like Speaker John Boehner remains the debt ceiling crisis. EPA/Jim Lo Scalzo

The US government shutdown is in its second week, but attention in the country has shifted elsewhere: to the looming debt ceiling crisis. On October 17, the US runs out of money to pay its bills.

Both crises share root causes: they have been created by House Republicans as leverage in policy fights. Unlike the slow, grinding pain of the shutdown, however, the debt-ceiling crisis carries the possibility of truly catastrophic consequences.

There was some movement on Capitol Hill on Thursday, but president Barack Obama has reportedly failed to agree on an offer from Republicans that would extend America’s borrowing authority for six weeks.

While we wait to see if the immediate crisis is averted, here’s a guide to the debt ceiling and the dysfunctional American government.

To start things off, what’s the debt ceiling?

The debt ceiling is simply a cap on the amount of money the US Treasury can borrow.

Congress, because it controls the “power of the purse", determines what that cap is. The current debt ceiling is US$16.7 trillion.

When does the US hit that debt ceiling?

It already hit the ceiling back in May. Since then, the Treasury has been using “extraordinary measures” to continue to meet its obligations.

October 17 is the day the Treasury says those measures run out.

What happens then?

Various levels of economic catastrophe, depending on which bills don’t get paid and how long it takes to restore the borrowing power of the government.

The US economy would immediately contract, and world markets would likely suffer as well. On Wednesday, Christine Lagarde, the head of the International Monetary Fund, warned:

Failure to raise the debt ceiling would cause serious damage to the US economy, but also to the global economy as a result of the spillover effects.

Even the threat of default has real economic consequences. Stock prices have been tumbling in the US over the past month (rallying on Thursday when rumours of a potential short-term deal began to circulate), and bond markets began showing signs of trouble on Tuesday as the cost of short-term borrowing rose sharply.

That sounds pretty awful. Why would anyone want that to happen?

This is the craziest aspect of the whole debt ceiling crisis: Almost everyone agrees the US has to raise its debt ceiling before the deadline, even the Republicans who are refusing to raise it.

But then again, most Republicans didn’t want to shut down the government either, understanding (rightly) that it was going to cost their party a great deal of political capital with very low chances of victory.

Wait. If the Republicans don’t want a government shutdown and don’t want a default, why is all this happening?

The short answer is the Tea Party.

The longer answer is that the Republican Party is split between conservative hardliners who will brook no compromise and conservative pragmatists who will. The pragmatists outnumber the hardliners, but the hardliners exercise more power for two reasons: they have a more vocal base, and they have shown an ability to effectively remove from office (via primary challenges) Republicans who don’t go along with them.

It was the hardliners who pushed the US to the brink of default in 2011, costing the country its AAA credit rating. Their refusal to compromise also led to sequestration with its deep, inane cuts to the federal budget.

Republican leaders’ unwillingness to cross this group ultimately led to the government shutdown, which a number of GOP politicians and strategists considered a strategic error. And it’s proven to be as much: in the past week the Republican Party’s approval ratings have hit historic lows.

But if it’s such bad strategy, why do it?

For a few reasons. First, this type of “crisis government" - though harmful to the GOP’s national reputation - has allowed them to gain concessions from Democrats they would never have been able to achieve through normal legislative order. Not only did the Budget Control Act that ended the 2011 debt ceiling crisis deliver major spending cuts, the showdown over the shutdown resulted in Democrats agreeing to continued reductions in spending without increased revenues.

President Barack Obama failed to agree to a deal from Republican leaders that would have extended the debt ceiling by six weeks while keeping the government shut down. EPA/Shawn Thew

Second, self-interest and national interest have begun to diverge widely for Republicans. Speaker John Boehner faced a serious Tea Party revolt that nearly cost him his position earlier this year. Part of his continued capitulation to the hardliners comes from that battle.

Likewise, many House members hail from solidly Republican districts in which retaining their seats means staying firmly on the right to ward off a primary challenge. And finally, a number of Republicans have their eye on the 2016 presidential primaries, where they believe their conservative credentials will make or break their chances for the nomination.

If no governing gets done in the meantime, so be it. They’re not exactly fans of a functioning government anyway.

So what does all this mean for the possibility of default?

President Obama is hoping that the divisions between hardliners and pragmatists will allow him to wedge Republicans. Pragmatists are pretty frustrated with the shutdown and the debt ceiling showdown. Representative David Nunes called fellow Republicans “lemmings in suicide vests” for allowing the shutdown. Senator Lindsay Graham, commenting on Republican attempts to defund Obamacare by shutting down the government, lamented:

We took an unpopular law and chose a more unpopular tactic to deal with the law.

Boehner now seems to recognise he’s bitten off a bit more than he can chew. On Thursday he offered the extension to the debt ceiling to allow time for negotiations on major issues like entitlement spending and tax increases. Republicans and Democrats have been unable to broker a deal on these issues for several years now, so it’s hard to see this as anything more than kicking the can that much further down the road. But it would end the immediate crisis.

Boehner’s offer, by the way, didn’t include opening the government.

So that’s it. We meet back here in six weeks and do it all again? And the government stays shut down?

Welcome to Washington in the Tea Party era.

Join the conversation

35 Comments sorted by

  1. Marc Hendrickx

    Geologist: The Con is a bad Monty Python sketch, for climate sense see: http://www.thegwpf.org/

    Of interest Judith Sloan at Catallaxy posts the following....

    Obama voted against raising the debt ceiling in 2006

    I guess that was then and now it’s now.
    But here are his fine words from the speech Obama made in 2006:

    The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure… that we now depend on ongoing financial assistance from foreign countries…. And over the next 5 years, between now and 2011, the President’s budget will increase the debt by almost another $3.5 trillion.

    Increasing America’s debt weakens us domestically and internationally. Leadership means that “the buck stops here.” Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren…. I therefore intend to oppose the effort to increase America’s debt limit.

    http://catallaxyfiles.com/2013/10/10/obama-voted-against-raising-the-debt-ceiling-in-2006/

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    1. Greg Young

      Program Director

      In reply to Marc Hendrickx

      Did Obama threaten to shut down the government and cast the world into chaos over the debt ceiling, or did he merely cast a vote according to Congressional norms?

      There is a pretty big difference, you know.

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    2. Marc Hendrickx

      Geologist: The Con is a bad Monty Python sketch, for climate sense see: http://www.thegwpf.org/

      In reply to Greg Young

      sorry, hypocrite seems to fit the bill.

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    3. Greg Young

      Program Director

      In reply to Marc Hendrickx

      To the blinkered, I suppose you're right. Of course there has never been any inconsistency on display from any politician on the right over this issue, ever.

      Again, the whole issue is about a matter of degree, and the implications ensuing from this action. Obama never did anything remotely as serious, and may have voted a different way in these circumstances. You simply don't know.

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  2. Stephen Ralph

    carer

    Is the debt level (at $17 trillion or more) a real worry for America.
    Is there need for panic?

    How did they as the supposedly wealthiest country get into such a debt situation, and can they get out of it?

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    1. John Crest

      logged in via email @live.com.au

      In reply to Stephen Ralph

      It seems that $17 trillion is only a worry in the sense that it's too small.

      I wonder what amount is too big?

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    2. Greg Young

      Program Director

      In reply to Stephen Ralph

      You need look no further than the USA's unbridled enthusiasm for uncapped military spending to realise how they got into this situation. Cutting back their military to global norms would see them swimming in cash.

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    3. Michael Shand
      Michael Shand is a Friend of The Conversation.

      Software Tester

      In reply to Stephen Ralph

      George Bush racked up more debt in his presidency than all previous presidents combined.

      Obama is set to do the same, ie. Obama will have racked up more debt than all the previous presidents combined including george bush

      It is obviously complicated but the short version is our economy's is based on debt - therefor unless your economy grows you are actually loosing ground

      say you reach an equilibrium in your GDP where it remains stable for a few years - this is a massive disaster in our economies

      our economy requires infinite growth which is impossible

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    4. Stephen Ralph

      carer

      In reply to Michael Shand

      So basically we/they are stuffed?

      Hope for James Hill's sake that isn't Adam Smith economics at work.

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    5. Michael Shand
      Michael Shand is a Friend of The Conversation.

      Software Tester

      In reply to Stephen Ralph

      Pretty much, in our current economy money is debt, debt is money and there must by definition always be more debt than money

      so if everyone everywhere paid off all the debt they owe...there wouldn't be enough money to cover the debt

      it is insane, the US derivitives market is something like 10 times the size of global GDP and if something goes wrong in this market, ie, if the house of cards starts to fall it would collaspe the world economy

      US Derivitives market is 10 times the size of global GDP - the whole thing is an insane pyrimad scheme

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    6. Mike Swinbourne

      logged in via Facebook

      In reply to Michael Shand

      I think you all need to take a deep breath and understand what the debt ceiling actually is.

      Despite its name, it is not an authorisation for any new expenditure. It is an authorisation to raise funds to pay for things that have already been approved. Yes - that's right. Congress has already approved the spending that the debt ceiling is designed to pay.
      http://www.treasury.gov/initiatives/pages/debtlimit.aspx

      In other words, Congress has authorised this expenditure - its just that there are a few extremists who don't want to pay for it. Is there any wonder that the President is telling them to GTFOH? It's like a bunch of spoiled little brats who didn't get their own way, and rather than accepting the decision they have decided to break everyone's toys.

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    7. Greg Young

      Program Director

      In reply to Mike Swinbourne

      This is exactly right Mike; the need for a debt ceiling increase flows directly from the last House budget put together and passed by the Republicans. Conveniently ignored by almost everybody.

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    8. Michael Shand
      Michael Shand is a Friend of The Conversation.

      Software Tester

      In reply to Greg Young

      "the need for a debt ceiling increase flows directly from the last House budget put together and passed by the Republicans. Conveniently ignored by almost everybody."

      This isn't the case, it is widely reported and understood

      Who exactly is ignoring this except the republicans/tea party?

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    9. Greg Young

      Program Director

      In reply to Michael Shand

      Pretty much every article I have read on the subject fails to point this out. Many articles imply wrongly that it is Obama's budget and Obama's spending that requires a debt increase.

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  3. Peter Ormonde

    Farmer

    Good if depressing summary.

    The picture tells it all really ... could he fit any more flags in there?

    I always worry when I see folks speaking in front of flags ... all a bit Patton isn't it? Like a patriotic wrapper on a toxic pill... and the more flaggery the more toxic.

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    1. Mike Swinbourne

      logged in via Facebook

      In reply to Peter Ormonde

      Its an American thing Peter.

      When I was a student at War College I had my official photo taken in front of an Australian flag. And that was the one and only time I have ever had anything like that done.

      But, as you say, its a bit of a worry. Americans see themselves as exceptional and always wave the flag and loudly proclaim that they are the greatest country on Earth. That despit the fact that most of the loudest haven't spent much time outside their own state, let alone having visited any other country, and would have difficulty pointing to Canada on a map.

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  4. robert roeder
    robert roeder is a Friend of The Conversation.

    retired

    What we are seeing is play school for grown ups, the US has been in financial decline for the last 30 years, over that time they have relied more and more on debt in order to keep the wheels turning. Like other western nations they have allowed manufacturing job to be transfered to Asia. Alvin Toffler in his books described his vision of the future; Future Shock 1970 The Third Wave 1980 Powershift 1990. In Future Shock he noted the decline of the American workforce in jobs associated with actually…

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    1. Stephen Ralph

      carer

      In reply to robert roeder

      The Americans in decline - don't tell them that.
      My guess is that it will be a long and lingering decline, with more twists and turns than a Miley Cyrus concert.

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  5. Dale Bloom

    Analyst

    Much of what is in this article is already known, and can be read in newspapers.

    More important to know what the public or governments of countries such as Australia should be doing about it.

    Do we buy gold, sell stocks before a stock market collapse, sell US bonds, buy Australian bonds, postpone buying a new car, or what?

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    1. robert roeder
      robert roeder is a Friend of The Conversation.

      retired

      In reply to Dale Bloom

      Dale, you pose a difficult question, firstly financial adviser overall give competent advise as long as the status quo does not cross the boundaries of expectation or the algorithms used in trading don't breach set parameters. The GFC demonstrated that most advisers did not anticipate the event. I know someone who 18 months before was advising his family and friends to get out of the stock market this advice was repeated, one friend said he had a very good advisor and anyway what would he do with…

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    2. Dale Bloom

      Analyst

      In reply to robert roeder

      In a broad view, there is a theory that mature economies have low growth potential, and attempts to stimulate those economies with huge cash inflows usually results in high levels of debt.

      The US was a mature economy, and higher levels of growth were no longer possible.

      The Chinese economy is now maturing, and its growth will flatten also.

      The stock market in Australia has just begun to reach the same level as before the GFC, and it took a mining boom to do that.

      If something similar to the GFC occurs again, levels of growth in Australia will be negligible, or will be negative without another mining boom.

      All is not good.

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    3. robert roeder
      robert roeder is a Friend of The Conversation.

      retired

      In reply to Dale Bloom

      From history I perceive that successful economies become decadent after absorbing the product of countries of lesser power, countries of lesser power will learn the tricks of the trade or remain static as the largess of the powerful is bestowed on their puppets who allow the exploitation. The US has been plundering the world for at least 50 years, like Rome they have grown fat ( pun intended ) they gave up productivity and used the wealth gained to rig the financial game, money for nothing, they…

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    4. Dale Bloom

      Analyst

      In reply to robert roeder

      No, I don’t think the US plundered much, or if it did, other countries such as China are now doing the same.

      China gets raw materials from other countries, and also equipment from countries such as Germany, and produces cheap products that they sell to countries such as the US.

      Ironically, Wallmart has been recording decreasing profits recently, because too few people in the US can afford to buy stuff, even from Wallmart.

      Once the low hanging fruit has been picked, it becomes more difficult to get more fruit from the tree.

      Once the easy profits have been made by a company, it becomes more difficult to make more profits.

      So a mature economy finds it difficult to increase its growth.

      If a country with a mature economy increases its population, then eventually that population has decreasing wealth, as there are more people in the country for the same amount of profits and wealth.

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    5. Stephen Ralph

      carer

      In reply to robert roeder

      Some how Robert the sheep's back might seem a nobler place than blasting the earth to kingdom come.

      Perhaps we sold our soul to make a buck.

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    6. Allan Gardiner

      Dr

      In reply to Dale Bloom

      Should one have any large US treasury notes in their possession, it may pay[no pun] to offload those first, and before too much longer, especially if they look a bit on the dodgy side.

      Some years ago, during one of their many drug busts, the authorities in a small country found a rather large cache of counterfeit US treasury notes totalling circa $4trillion, 268billion...with the millions being just loose change. The quality of the counterfeiting per se was so high that it was generally considered…

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  6. R. Ambrose Raven

    none

    Capitalism, or if you prefer the “invisible hand”, provides a strong incentive for the Mad Hatter's Tea Party and the Republicans to continue with their late Sept ‘13 refusal to pass Supply. Decades of experience has made it very clear to the pimps and spivs of the financial sector and the class they represent that both will profit handsomely from bankrupting the American government.

    In just the last generation, the richest 1% almost quadrupled their incomes. The average wealth of the 1% has…

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    1. Stephen Ralph

      carer

      In reply to R. Ambrose Raven

      Ironically from what I read there are more millionaires and billionaires in Russia these days. And China has more billionaires in it's ruling elite than any other country.

      How things have changed.

      And they said Communism didn't work.

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  7. Allan Gardiner

    Dr

    To put a different slant on all of this, why should the Americans be so worried about their having to raise the roof in lean times when everyone knows that they've got $killions over and above any other nation? And they were so worried about the Wall Street crash...jumping from upper storey windows and such?!!

    As long as they can continue managing to keep all their trouble$ in-house, which will be no picnic for them, then they'll hamper the need of myriad those waiting to home-in on their p_un'$ound $tructuring of a ba$ket ca$e.

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