Quick Bites | US Debt Ceiling – The Height of Political Nonsense

Watching US President Biden’s State of the Union speech last week, I was reminded how much of politics is pure theatre rather than substance. The debate in the US about the so-called “debt ceiling” is a perfect example of this trend.

Source: Financial Times

What is the debt ceiling and why does it matter?  

The debt ceiling is the legal limit on how much the US federal government can borrow. The cap is set by Congress and was last extended in December 2021 to USD31.4 trillion. Total public debt has increased to USD31.38 trillion, rapidly approaching the statutory debt limit.

With Republicans having recently gained control of the House of Representatives (the Democrats still have a slim majority in the Senate), and with the ceiling needing to be lifted again if the government is going to keep honouring its payments and avert a default, an agreement has to be reached soon.

While leaders from both parties insist that they will work to avoid the worst-case scenario, fears of a default have risen amid threats from some Republicans to use the debt ceiling debate as leverage for other policy changes, namely big budget cuts.

US Treasury secretary Janet Yellen has warned of the tremendous damage that could be done to the US reputation for paying its debts if the debt ceiling is not lifted. Theoretically, if the US government is legally unable to borrow money to pay its financial obligations, this would result in a debt-payment default. This is, of course, highly improbable, and the debt limit is very likely to be increased again, but there are some crazy and weird Congress members these days – just read about the bizarre character Congressman George Santos, who has lied about virtually every aspect of his past. So, nothing should be taken for granted.

Once before, the theoretical prospect of a US default led to S&P’s first ever downgrade of the US credit rating in 2011 – during a previous debt-ceiling showdown between Republicans and the Obama administration.

Expect more theatre ahead as the debt ceiling discussions approach. And it’s worthwhile remembering the wise words of HL Mencken: “No one ever went broke underestimating the intelligence of the American people.”

P.S. No offence to my many American friends and relatives!