“Catastrophic” Consequences of the US Defaulting on Its Debt

Dave:
Hey, what’s going on everyone? Welcome to On The Market. I’m Dave Meyer, your host. Today, we have a super cool new format for you. We are going to be bringing in a CBS News reporter to talk about an economic issue that has been making a lot of news recently, and that is that the United States just hit its debt limit. It’s this wonky but fascinating situation that’s playing out in Washington right now and could have potential impacts for real estate investors, all sorts of investors and just ordinary Americans. We wanted to help you all understand this issue in-depth so we’ve brought on Sarah Ewall-Wice, who is a reporter in Washington who covers this sort of thing in Washington DC and is going to teach us about the history of the debt limit, what’s going on in Washington right now, and what some of the implications could be for you and other investors. I really hope you like it.
We would love your feedback on this type of show. You can always go on the BiggerPockets forums and tell us about it. Or you can hit me up on Instagram where I’m @thedatadeli and let me know what you think of this show. With that, we’re going to take a quick break and then we’re going to welcome on Sarah to talk about the debt limit. Sarah Ewall-Wice, thank you for joining us On The Market today.

Sarah:
Hello. Good to be here.

Dave:
All right, Sarah, well, let’s start by having you introduce yourself to our audience and explain why you are here talking to us about this exciting, important, and somewhat nerdy topic.

Sarah:
Sure. I am a reporter for CBS News based in Washington DC. I cover both economic policy and also politics. The debt ceiling conversation is one that both hits on the economy big time depending on how long these talks go and also is a huge political talker for folks here in Washington, lawmakers, policymakers, experts all across the board. But we are back at that point where we’re talking about the debt ceiling again because the United States government hit the debt limit. So this becomes a conversation where members of Congress need to act now to avoid calamity.

Dave:
Okay. Well, that is definitely on my mind and many people’s minds. We’re going to get to that, but let’s just start at the beginning. Can you explain to us what the debt ceiling even is?

Sarah:
Sure. The debt ceiling, also referred to as the debt limit, is how much the United States government is allowed to borrow to pay the bills. This is very important to note. This is not how much the United States government is allowed to spend. This is the spending that’s already gone out the door across the board, across the federal government. It was actually first really saw the debt limit, it was back in 1917. There was a law and then it was expanded to cover all government debt right before World War II. But basically, Congress enacted this law and continually, every few years, they have to come back to it as the national debt grows and up that balance so that the United States government could continue paying the bills without going into default, which has never happened before in US history.

Dave:
Over the last couple of years, we are all hearing more and more about the debt ceiling. Has it always been of public interest?

Sarah:
It feels like it’s becoming more frequently and frequently talked about, and that’s because it’s become more of a political battle in the past couple of decades. Essentially, we’ve obviously always had this national debt and we’ve always really had a deficit depending on a few times where they’ve been able to balance the budget, but it does need to be addressed every so often. With that said, lawmakers have started using the debt limit to really come out as a tool to negotiate spending in Washington. We get to the point now every few years where we are hitting this limit and so that is when they come to the table and some lawmakers say, “Well, we need to cut spending.” Others say, “We just need to raise the national debt.” But the idea is is we get to this crisis point where it really needs to be addressed and then we kick it down, the can down the road rather than addressing the actual issue. And I say we, talking about Congress, rather than addressing the actual issue, which is how much the United States government is spending.
You keep in mind, the United States government has always really been borrowing to pay the bills. It comes down to tying the debt limit to the budget as they go, whereas these are two separate conversations that aren’t happening together. Then we get to this point where there’s a real freak out and a lot of concerns across the economy about what this means if the US stops paying the bills or is unable to pay the bills. So it’s become more frequent. It’s been used more of a tool lately. We saw in 2011, Republicans use this in negotiations with the Obama administration, and now we’re back here with the Biden administration, Republicans in a showdown over the exact same issue over a decade later.

Dave:
I do want to get into current events in just a minute here, but I just want to make clear. From my understanding, the debt limit has been raised dozens of times over the last couple of decades. The fact that it’s getting raised is not actually new. It’s just the political climate about it has changed a bit.

Sarah:
Yes. The debt limit has been raised dozens of times, many times in the past two decades. Just thinking back, we feel like we’ve had this conversation recently. It was raised in 2021, in December 2021. We had to reach a deal. Of course, it was raised or suspended three times under President Trump while he was in office over four years. So it’s an ongoing conversation. It’s raised multiple times in the Obama administration. Every time there’s this larger growing debt, they come back and they look at it and they move forward and they either raise or suspend it. Suspending it means they just kick the can down the road and it kicks back in later with the number at a higher level than it was when they suspended it.

Dave:
Okay. That makes sense. Obviously, we know during COVID, there was a lot of spending, but has the debt increased recently faster than it has historically?

Sarah:
I think it’s tricky really to say whose debt it is specifically. I think you can absolutely say during the coronavirus pandemic, the government, both under President Trump and then under President Biden, put out a lot of spending really to help save the economy from tanking, and that has added to it much more rapidly in the past few years. I would avoid saying, well, who’s added more to the debt, because it really is hard to tell because there’s been this accumulation of debt for so many decades in the United States. It’s tricky, but yes, I would say the coronavirus pandemic definitely did not help in speeding up the rising debt.

Dave:
Okay, great. You mentioned something earlier, which is that we have hit the debt limit. What does that mean?

Sarah:
Treasury Secretary Janet Yellen sent a letter to congressional leaders a little over a week ago, around January 19th. She said, “Hey, we’re starting to use these measures to move around money because we’ve hit the limit,” the limit being $31.4 trillion. That was the decide upon number back when they negotiated this last time in 2021. So they’ve hit that limit and now the Treasury Department is moving around funds to keep paying the bills. They call them extraordinary measures. It’s funny because these are not extraordinary anymore. We’ve used them many times starting in 1985 and onwards. We’ve heard it time and time again, but they’re so-called extraordinary measures still. Essentially, it means moving around money to keep paying the bills. But she did say that essentially, the ability to pay the bills would run out as early as June. There’s a lot of uncertainty because we do have revenue coming in, and as revenue comes in, the Treasury puts it out and pays the bills and is able to move things around. Starting in June, she says that could completely run out.
When it runs out and the United States government is unable to pay the bills, it’s the so-called X date. As we get closer to that timeframe, more policy experts will start to come out with their estimates on exactly what that date is. The Treasury Department will get a better idea of exactly what that date is. But when that date hits, the United States unable to pay its bills, and that is when the United States could go into default for the first time. That is where the real uncertainty happens. We’re in this period of this needs to be addressed and it’s a pressing issue, but we are not really sounding the red flags and the alarms aren’t going off at this stage. But of course, you know that Congress doesn’t do anything quickly, and so that is why it’s a pressing issue now rather than waiting till the last possible minute. Even if they reach a deal at the last possible minute, there could be repercussions.

Dave:
Yeah, absolutely. Let me just summarize that by saying basically, you’re saying that we have technically hit the limit and the implications in the long term are that if we can’t borrow more money, we can’t pay our obligations. As you said, the debt that we are financing is for spending that has already been approved.

Sarah:
Exactly.

Dave:
So that is the concern. But because the Treasury has some accounting tricks up their sleeves, they can continue to pay the debts of the United States even though we have technically hit the limit. Now, I think we were both about to just go to an idea that basically, I think it was 2011 where there was a negotiation over the debt ceiling and the United States did not default, but there were repercussions for it. Is that correct?

Sarah:
That is correct. There was a last-minute deal that was reached, and this was something that was negotiated between the Obama administration and House Republicans, which is a similar makeup to what we have now, where the White House is a Democratic president, but the House is run by Republicans. We have a Democratic senate currently. But they had to reach a deal and it came down to the wire where they were negotiating spending cuts to make this happen. Even though they were able to reach a deal, leading up to it, there was so much uncertainty that the stock market took a plunge and the US credit score or excuse me, credit rating was downgraded by S&P. So that had repercussions. There’s estimates that cost the US economy about $20 billion over a decade, which is one estimate that was done, but the S&P dropped about 6% leading up to that.
They were able to reach that deal, and we avoided a greater financial catastrophe, but that just goes to show that even leading up to this, as the clock ticks down to that so-called X date, or in this case, sometime in June as we’re seeing it, there are challenges and uncertainties that could lead to problems in the economy.

Dave:
That is something I think real estate investors in our audience will understand. Basically, what happened is that the credit worthiness of the United States was downgraded by credit rating agencies. When that happens, the debt, usually the person whose credit is downgraded has to pay more to get loans in the future. It’s a similar to taking out a real estate mortgage. If you have worse credit, you are going to pay a higher interest rate. What happened in 2011 is that the US basically became less creditworthy and had to pay a higher interest rate among other things and economic repercussions. That seems like just the tip of the iceberg. That is the tip of the iceberg of things that could happen if the United States were to actually default on its debt. Can you tell us a little bit more about what the repercussions could be if not just the debt ceiling has reached because we have done that, but the United States is unable to meet its obligations?

Sarah:
Yes. If the United States defaults, we started to get into it, this could be a catastrophe for the stock markets. We could see the stocks plunge across the board, not just the United States, but we’re looking at this from a global scale because the United States really sets the tone for the rest of the world. With that said, when you mentioned it, being able to borrow, this would boost interest rates on borrowing for the United States moving forward and that would cost the United States billions more on top of the trillions it already owes when it goes to pay its bills in the future. So that is one thing. The United States government, they’re supposed to be the most confident. It’s supposed to be risk-free investments. If it’s no longer risk-free and we’re facing all these challenges, what does that mean for everything else?
So that also has further waves or repercussions when it comes to how much Americans are borrowing because that boosts interest rates. When you’re going to get a mortgage, when you’re going to pay a car loan, now you want to buy a car, when you’re paying for credit card bills, your interest will go up across the board and this is on top of the already challenging time power in where we know inflation is high and the Fed is boosting interest rates. We’ve seen record high credit card interest rates already. So those are different things that are happening. At the same time, we have the repercussions that happen in the government itself because the government pays billions of dollars on a monthly basis to different parties across the board. Different groups of Americans receive different things. So for instance, if the United States is unable to meet its debt obligations, it will be unable to pay veterans benefits, for one thing.
Social security payments, one of the most important things for our senior citizens, those could be delayed, not go out in time when many people need those payments and rely on those payments. There’s also the things like the SNAPs program, formerly Stamp, so food benefits for low-income Americans. Different types of benefits that people rely on are going to stop and be delayed should we reach that point. The military would go unpaid, of course. We just hope they just continue working on the job. But that’s the reality and that has repercussions in the economy me because when they are getting the money, guess where that money’s going? It’s going out to businesses when they go and buy things. It’s going out for housing. It’s going out and it has this long ripple effect across other sectors of the United States coming from the government. So that is important to keep in mind. This won’t just impact those who rely on government payments, it’s anyone who’s relied on people who get any kind of government payment. Who knows really where this could go, but all in all, it’d be really, really bad.

Dave:
Yeah. That’s a question no one wants to answer. Yeah, no one wants to know what happens if the United States defaults on its debt. I think people on both sides of the aisle have basically said, we cannot default on our debt. But it does seem that given the importance of paying our debts, that that is basically why it’s being used as leverage for this broader conversation about spending and fiscal policy in the US.

Sarah:
That’s exactly right. It’s funny because it’s being used as a negotiation tool in a way where it’s really something that there should be no conversations about even going there. It’s just too risky to even consider, but it’s been tied into this political battle here in Washington that happens over and over again, when the reality is is lawmakers are setting budgets and paying for things and putting money out the door and borrowing to do it regularly anyway on both sides of the aisle. They have to come up with a budget every year, every couple of months, depending on how they go about it and that spending is happening anyway. So this just becomes one tool that has really brought people to the table, but in a way that could be really brutal and catastrophic for all entities. It’s a poor way of looking at the situation, but it’s the way that it’s come about for multiple scenario or multiple years now in recent decades.

Dave:
Yeah. It seems like basically, Congress has used this as a forcing function to talk about spending, even though it sounds like they’re not necessarily even related. The spending and what the Congress and the government is spending on is done during appropriations. That’s when they are spending money, but this is basically just a check mark to say, yeah, we will actually send you a check, basically for all those things we paid. So that’s interesting, but I think a lot of people feel that this is an important conversation to be had and I guess the debt ceiling somehow has evolved as the time when we talk about this. I’m just curious. You said House Republicans are negotiating with the White House. What is it that they’re hoping for and what are they asking for in exchange for raising the debt limit? That’s basically the conversation. They want reduction of spending in exchange for approving an increased debt limit ceiling.

Sarah:
This is the trick here. I should say the Republicans say they want to negotiate. We aren’t even at the point where they actually are negotiating yet. Just to be clear, there’s been a standoff on the start point of talks. I’ll talk about it in terms of the press office has said, the White House is not going to negotiate. This is not something they can negotiate on. This is a risk that will not be addressed and they need to raise the debt limit point blank. They’ve done it before under Republican presidents, why are they holding this hostage now? That is the White House messaging essentially on this. At the same time in Congress, Republicans are saying they absolutely need to negotiate on this and they also need to negotiate it in terms of spending cuts. They’re not actually saying specifically they want to see cut.
Democrats will point at them. Democrats in Congress point at them and say, “Well, they’re looking at Social Security and they’re looking at Medicare.” Some Republicans are in fact bringing up those two entitlement programs as a part of this conversation, but other Republicans are saying, “Well, no, we need to cut spending across the board.” So there’s really a standoff right now specifically on, well, what’s the plan? Who’s going to decide the plan? Because that’s where you can then go and point fingers depending on who actually comes forward with that plan and say, well, they wanted to cut this or that. So it’s still at the point where both sides haven’t taken a seat at the table and are asking the other side to sit down first and lay out a map of what they want to see. But that is where we’re at, where the White House wants it to raise the debt ceiling, we’ll talk about spending, but we’re not going to do it in this conversation. This is not where we’ll negotiate at this point in time.
And Republicans are saying, “Well, no. We have to negotiate spending at this point in time to address the debt ceiling and the debt limit.” So that’s where it’s at. I think in the coming months, coming weeks, really, we’ll get more information on where there could be places where there is a path to a compromise, but right now, it’s really a lot of posturing and not a lot of sit-down, hard conversations being had. There will be, I’m sure, other proposals about how to go about addressing this so we’re not in this situation again in two years moving forward between now and June, hopefully sooner rather than later.

Dave:
I’m guessing that you, being a reporter in Washington, you can describe a lot of things you cover as posturing.

Sarah:
Oh, most of it is posturing, I will say, and then suddenly something happens usually.

Dave:
Yeah. It just seems like what’s going to happen, is both sides are talking at each other, but there’s not really a conversation going on right now. What do you think happens? You said there’s posturing, but what do you think happens over the next couple of months? Is there going to be progress? Are the people like me who look at this very anxiously going to be worried for the next several months or do you think there’ll be steady progress towards a resolution?

Sarah:
I think people are going to remain anxious for a little bit of time. I will say, I think the White House and Republican congressional leaders are supposed to meet and start these conversations or just start a conversation in general. We are in a new Congress in the coming days and months. So that is a starting point. It’ll go from there. Every time this happens, there’s a standoff and at some point, somebody blinks. We felt that in 2021, where there was a standoff specifically in the Senate because they needed 60 votes in the Senate and that wasn’t happening. Then finally, essentially, Senate minority leader Mitch McConnell blinked, and in that instance, they were able to use just Democrats to raise the debt limit. So that’s going to be one of those situations where one side does have to blink. There are other ideas being floated out there about how this could go about where it doesn’t happen in this way moving forward.
I don’t know if they can reach any meaningful way to address this differently between now and June, but that is something that I think there’ll be another conversation so that we aren’t just kicking the can down the road. There will be a separate group. But the makeup of this Congress is different than it has been in the past and that’s why there’s different uncertainty surrounding this issue. In 2021, they needed to get Republicans in the Senate to step down so that they could pass it, but it was a Democratic-controlled Senate House and White House, so they were able to reach that deal. This time, there’s such a small majority of Republicans in the House that it’s harder to pass anything in the House, and there’s a group of very hard-line Republicans that are simply saying, “We will not vote on this.” So it comes down to they need to reach a compromise.
We’ve spoken to some Democratic congressmen who’ve said it’ll end up being a group of Republicans and a lot of Democrats who come and address this together to pass something in the House. So the makeup of how the House is made up has made this uncertain in a different way. Then of course, it comes down to what will the relationship really be between the White House and Speaker McCarthy and Congressional Republican leaders as they start to have these conversations, because like I said, we had a new Congress that came in in January.

Dave:
Yeah, it’s very interesting. It seems like one of the first tests of the relationship between the new Congress, the White House, and that everything that’s going on happening at a crucial economic period. We’ll have to see what happens, but thank you for explaining this to us. One of the options I’ve heard about, I really don’t understand this, have you heard of the trillion-dollar coin?

Sarah:
Oh, yes. I love this.

Dave:
What is that? I don’t get it.

Sarah:
The idea is there is a law in the books from 1997, which essentially says that the Treasury Department can mint a coin of absolutely any denomination. This has been floated by a former director of the mint. It’s been called for by some lawmakers, I believe more recently from some Democratic lawmakers. The idea is the Treasury could simply mint a trillion-dollar coin. It could be taken and that could be used to address the national debt.

Dave:
Oh, wait, so is that basically just money printing though, but it’s-

Sarah:
Pretty much. Well, the Fed has to step in and accept this.

Dave:
Okay.

Sarah:
So that’s one uncertainty. I can say point blank that Treasury Secretary Janet Yellen has been asked about this and she’s called it a gimmick, so not really onboard. So it can toss this out the window in reality, though it comes up every couple of years when we talk about the debt ceiling. She’s also said this would be one of those things where you’re overriding the independence of the Fed. So that’s part of it where it just comes down to, okay, so we are not going to get the Treasury secretary to say yes to this. Then at the other side of this is, well, if the US can simply mint a coin of any denomination, what does that mean for the markets moving forward and any future situation the United States might be in, period?

Dave:
Yeah, that seems like a terrible idea. Okay.

Sarah:
So if it is something that’s okay, it’s out there, it might be doable. It’s never been tried before.

Dave:
Oh, I get it. So it’s basically saying that normally, the Fed controls monetary policy. Just for everyone listening, when we talk about Congress and spending by the government, that is fiscal policy. When we’re talking about how much money is in circulation, federal funds rate, stuff we talk about a lot on this show, that is called monetary policy. Usually, the Fed controls money printing, that sort of stuff. So what you’re saying though is there’s basically a loophole where the Treasury, which is part of the executive branch, I don’t even know,-

Sarah:
Yes.

Dave:
Executive branch?

Sarah:
It’s the executive branch under, yes.

Dave:
Okay. So it’s part of the executive branch. Could get through a loophole, print a trillion-dollar coin. Glad to hear that’s not going to happen, but man, they would’ve to have a cool design. I feel like a trillion-dollar coin would have to look pretty cool.

Sarah:
That would be fantastic. I should add the specifics on this is that it has to be platinum.

Dave:
Ooh.

Sarah:
That is also a part of this rule,

Dave:
Baller. Okay.

Sarah:
So yes, a coin of any denomination, but it must be platinum and it must be cool-looking, I’m sure.

Dave:
Yes. Wow.

Sarah:
And the Treasury Secretary has been like, not going to happen.

Dave:
What weird law was like, yeah, you could print anything as long as it’s platinum?

Sarah:
I think it had to do with coin collectors and valuation on that front. That’s a really wonky random loophole and a really random law that just materialized as this debate moved on and now we have lawmakers who are like, that sounds like a potential way to address this ongoing crisis that we face every few years. But no one’s tried it. I think the folks, of course, the Treasury secretary also used to be the chair of the Federal Reserves, Secretary Yellen, so she’s gone mm-mm.

Dave:
Okay. All right. Well, we won’t know what happened, but glad to hear that a trillion-dollar coin is not one of the realistic options.

Sarah:
Not yet. We’ll see where we go in a couple of months, but I’m holding off on that for now.

Dave:
Okay. Well, thank you, Sarah. This has been super helpful. Is there anything else you think our listeners should know about the debt ceiling as it pertains to investors or just everyday Americans?

Sarah:
I think right now, it’s one of those conversations where the bigger problem will need to be addressed in how we go about spending moving forward, but that doesn’t seem to be something that is addressed when we get to this debt limit crisis and counting down the clock to the so-called X date. So big picture, I think there will be conversations about this, about how the US is spending money. But the other aspect of this, I think, is people will yawn when they hear about this now because it’s happened so many times, and it shouldn’t be something that people panic about at this moment. I really don’t think it is at the stage where there should be the panic, but it is a pressing issue and it’s one that will continually to become more and more dire as we get into the coming months. So that is where, take a deep breath now. Stay calm. Don’t change up your pattern so much yet in terms of how you’re spending or your investing at this stage.
I don’t think anyone, when we see these warnings coming out of the White House or Treasury secretary’s office specifically, or Congress are like, “Ooh, need to sell off immediately.” That’s not where we’re at right now, but it is something to keep an eye on moving forward. Everyone says we absolutely cannot default on our debt. Let’s see if they hold that up in Congress and keep on playing a game of chicken moving forward.

Dave:
All right. Well, thank you. This has been super helpful. I have learned a lot. I really appreciate your expertise on this. If people want to follow you and your reporting, where can they learn more about you?

Sarah:
Sure. Well, follow our reporting at CBS News at cbsnews.com, your local stations, our national news. We have the morning show and evening news as well. Then of course, you can always find me on social media @ewallwice. It’s my last name, E-W-A-L-L-W-I-C-E, on both Twitter and Instagram.

Dave:
All right. Thanks again, Sarah.

Sarah:
Thank you.

Dave:
Big thanks to Sarah for joining us for this episode. I learned a ton from this. I learned that I don’t need to be anxious about this just yet, and that we have a couple of months. Even though we had hit the debt limit, the US is still paying its obligations and there is time for Congress to figure this out. I would love to know what you all think about this type of episode. We’re trying something new just to help you stay on top of the important things that impact investors and ordinary Americans related to the economy. This is an important issue, and hopefully you learn something. You can always hit me up on Instagram where I’m @thedatadeli. You can find me on BiggerPockets and send that feedback as well.
Thank you all so much for listening. We’ll see you next time for On The Market. On The Market is created by me, Dave Meyer, and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal, and a big thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.