The US Treasury is just days away from being unable to borrow any more to pay federal bills, and the stock market isn’t happy.
The good news: So far, at least, those two things don’t have anything to do with one another.
Whatever else investors are worried about – sending stock indexes reeling Monday – it’s not fear that the US will default on its national debt or be unable to make good on other obligations.
It’s not that the nation’s debt limit is unimportant for the wider economy. Rather, it’s that investors believe Congress will raise the debt ceiling without the kind of brinkmanship and uncertainty that dogged the issue since Republicans took control of the House of Representatives in 2011.
The widespread assumption: Republicans were burned after provoking a partial government shutdown in 2013 and, in an election year, they don’t want to risk being burned again.
If that assumption comes into question in coming days, the debt limit will certainly join Wall Street’s worry list.
Treasury Secretary Jacob Lew warned bluntly on Monday that after Feb. 7, when a temporary suspension of the debt limit ends, the government will be able to use various gimmicks for “only a brief span of time” to keep paying all bills, a span that will probably last essentially until the end of the month.
“Without borrowing authority, at some point very soon, it would not be possible to meet all of the obligations of the federal government,” he said, in an appearance at the Bipartisan Policy Center in Washington.
That would obviously be a problem for the government and its creditors. But it’s also a problem for the whole world economy, because any shaking of confidence in Treasury bonds ripples quickly through other financial assets.
For now, the turbulence in the stock market reflects debate about how strong the US economy's recovery is (a manufacturing sector report on Monday looked weak) and how bad a slowdown in emerging-market nations, driven by tighter financial conditions, will be.
On the debt limit, Secretary Lew echoed the optimistic view that many political analysts share. Even as he warned of the risks – “Time is short,” he said – he responded to a question from the audience by saying that to approach the brink of a default on US obligations is “not acceptable to the leadership on either side, which is why I’m confident [the issue] will be addressed.”
Many finance experts say it would be more rational if Congress addressed questions of borrowing, along with spending and taxing, as part of a regular budget process.
Instead, what’s evolved is a system in which lawmakers pass spending bills in excess of tax revenue at one time and then confront the need to borrow money separately, when they periodically confront a self-imposed borrowing limit on total public debt.
Both liberal and conservative finance experts say that simply refusing to raise the debt ceiling is not an option. If the goal is to restrain the growth of debt, then the right answer is the change spending or tax policy on the front end.
To not raise the debt limit would amount to refusing to pay bills that are already coming due – from federal salaries to Medicaid payments or money due to federal contractors. Although both parties have used debt-limit deadlines as leverage for negotiations over fiscal matters in the past, this is why it’s hard to sustain a strategy of brinkmanship on this issue – as Republicans found out the hard way last year.
A game of “chicken” holds suspense only if there’s some real uncertainty about which side will ultimately back down, said Paul Sheard, chief global economist at Standard & Poor’s Rating Services, at a debt-limit panel discussion Monday following Lew’s remarks.
After its tea party wing mounted an insurgency last year, seeking concessions from President Obama on health-care policy and seeking to use the budget or the debt limit as leverage, the Republican Party ultimately had to back down.
The bruising loss hasn’t left an appetite for another epic battle over the issue. Add the fact that it’s an election year, and it explains why no one seems very worried about an impasse this time around.
Still, a drama needs to play out somehow in coming days or weeks, with both sides seeking a public-relations edge on fiscal matters.
And somehow, one of these years, America will have to wrestle more seriously with how to curb the long-term rise of its public debt.
Lew, for his part, said current trends of decline in budget deficits (as a share of the national economy) give Congress at least some breathing room before that becomes a crisis.