How Much US Debt-Ceiling Risk Is Lurking?

The answer relies heavily, perhaps completely, on political calculations. In other words, trying to forecast how the tortured path ahead evolves is only a bit easier than trying to grab fish in a barrel.

House Speaker Kevin McCarthy on Monday dropped some fresh clues for thinking through what may lie ahead. In a speech at the New York Stock Exchange, and interviews later in the day, he clarified, at least in his mind, what lies ahead.

“Let me be clear: A no-strings-attached debt-limit increase will not pass,” he said.

Democrats, however, rejected the idea, suggesting that the road to a political compromise in Washington is as elusive as ever. The Biden administration continues to urge that Congress pass legislation that raises the debt ceiling (to pay for previously enacted legislation) while leaving budget details for separate bills. McCarthy, by contrast, outlined an alternative plan.

The speaker says that House Republicans will vote “in the coming weeks” on legislation that will raise the debt ceiling through next year while freezing spending at last year’s levels and cutting spending in some areas that Democrats favor. If enacted, McCarthy’s plan would only postpone the current debate to next spring, when the presidential campaign will be in full swing and political factors will be far more influential.

In any case, the idea seems unlikely to pass the smell test in the Senate, where Chuck Schumer, the Democratic majority leader, responds: “Amazingly, one of the few specifics McCarthy has presented is his terrible idea to kick the can down the road for just one year and undergo the same crisis again. Why would anyone want to undergo this crisis again, again and again?”

Rather than trying to parse the firehose of comments from both sides of the political aisle in trying to evaluate the risk ahead, I’m focused on two events as proxies for deciding how to estimate the probability that the US will hit its debt ceiling, which may trigger a default in US Treasuries.

First, let’s see if the GOP in the House can pass the legislation that, per McCarthy’s comments yesterday, will lift the debt ceiling, albeit temporarily. Although this alone would hardly be a solution until/unless Democrats in the Senate, and then the White House, agree to the particulars. But if the GOP can pass the bill it would at least indicate that the internal divisions in the party are manageable on the debt-ceiling issue.

A bigger sign that the Republican House caucus can muster more discipline than it appears would be if the party publicly presents a formal budget, as the White House recently did. But that’s a high bar, given the unusually extreme internal divisions within the House conference.

Forecasters say that sometime in the summer the US Treasury will run out money to pay the government’s bills. If that point is reached, without passing a new budget, the US could miss payments on Treasuries, which in turn could destabilize global financial markets and the economy.

The longer that the GOP 1) doesn’t present a bill that temporarily raises the debt ceiling, per McCarthy’s plan he discussed on Monday; and/or 2) doesn’t publicly release a budget proposal, the higher the odds that a debt-ceiling crisis is approaching.

Tick, tock, tick, tock.


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