The debt limit is a self-inflicted handicap.
To protect the economy from political sabotage, the Democrats must remove the debt ceiling.
Using an arbitrary cap on the country’s lending as a weapon is a brilliant tactic for policymakers and political strategists looking to destroy their developed nation’s economy. This is the Republican Party’s approach to torpedoing President Joe Biden’s legislative agenda and his re-election chances.
Of course, the Republicans are not going to come out and say openly that they are trying to defeat Biden in the game for thrones at the expense of the economic well-being of the American people.
Senator Joni Ernst and Rep. Ashley Hinson explained why they did not vote in favor of raising the debt ceiling, using the same sluggish postulates about how the reckless spending of the Democrats maxed America’s credit card and any breach of the debt ceiling would drive inflation to levels that harm the economy.
According to their logic, we must be fiscally responsible by taking the most fiscally irresponsible measures; Force the US to default and wipe out $ 15 trillion of household wealth.
First, the analogy that the US has to pay its debts like households with credit card bills is ridiculous, since households cannot convert their debts into legal tender. The Treasury issues its debts as securities: assets that are traded by investors in the open market.
During times of economic crisis, one of the Federal Reserve’s strategies is to use cash to buy government bonds from investors. With easy access to liquidity, government bond yields are relatively low compared to other securities such as stocks, resulting in low interest payments on the debt.
In addition, US Treasuries are backed by the US government, the most powerful body in the world. This gives investors confidence that the security they are buying is comparatively less risky than other securities. Therefore, even after government bonds mature, investors simply buy more government bonds so that the US government can refinance its debt with more debt.
In other words, thanks to the high credibility of government bonds with global investors, it is impossible for the US to go bankrupt. Otherwise, the country can no longer issue bonds because it has exceeded its debt limit.
Looking next at expansionary fiscal policy and past deficits, it becomes clear that inflationary deficits and debts do not contribute as much to inflation as other inputs, such as supply chains.
During the recovery from the Great Recession, Republicans argued over how government spending and loose monetary policy would create an economic climate in which inflation would become embedded in the economy. That is far from the truth.
The high inflation rates during the upswing were temporary, as they are today. The reason for this is the inflation that we have seen in the recent economic crises, which was cost pressures. This means that slowdowns in global supply chains will drive prices up, not fiscal and monetary policies.
As soon as the supply chains can return to normal, the price of regular goods will drop. If inflation were really embedded, the prices of sticky goods like wages and capital rents would also rise, which the data does not show.
In the current economy, high debt has not resulted in the inflation Republicans claim is imminent. Therefore, a debt ceiling does not make sense from an economic point of view.
However, in today’s political climate, taking the economy hostage and allowing the US to default seems like a successful strategy. This cannot be sustained and we must remove the debt ceiling.
The columns reflect the opinions of the authors and are not necessarily those of the editor, The Daily Iowan, or any other organization that the author might be involved with.