May 27, 2023 / VOLUME NO. 263

Defaulting on the Debt

I’m saddened this week by watching the U.S. Congress and President Joe Biden take arguments about raising the debt limit to the brink of what Treasury Secretary Janet Yellen called “economic catastrophe.” 

True, we’ve been through this before. The last time we reached a so-called debit limit crisis was in 2011, when Congressional Republicans demanded spending cuts from then-President Barack Obama. In fact, Sung Won Sohn, a professor at Loyola Marymount University and the former CEO of Hanmi Financial Corp., both in Los Angeles, told me that the U.S. has had a debt ceiling crisis 70 times since the 1960s. But there are reasons not to blow this drama off as inconsequential. 

For one, the debt has reached a historical eye-popping number at $31.4 trillion. In the 1980s, we reached $1 trillion in U.S. debt; the debt has grown substantially in recent years, driven by the Afghanistan and Iraq wars, the 2008 Great Recession and the Covid-19 pandemic, according to the U.S. Treasury. The Congressional Budget Office now estimates that debt held in relation to the size of the economy will rise each year, reaching 118% of gross domestic product by 2033 — the highest on record. A growing debt of this size could make it harder for the U.S. Department of the Treasury to maneuver and pay its debts in a crisis. And this time, Washington seems more polarized than in 2011, Sohn says. 

Yellen and others have warned of serious consequences to the economy if the U.S. doesn’t act soon to suspend or raise the debt ceiling. She estimated that Treasury could run out of money to pay its bills by this Thursday. There’s the possibility that the Treasury could prioritize certain payments and delay others — it appears the Treasury would delay payments to Social Security recipients, for example.

Another looming issue is what happens to global investor confidence if the U.S. defaults on its debt. Sohn thinks confidence could be damaged even if Congress comes to a resolution next week. U.S. debt has long been thought of as the safety net for global investors — which equates to the U.S. enjoying lower borrowing costs than almost anyone else. “I hope Washington realizes how serious this is,” Sohn says. As do I.

• Naomi Snyder, editor-in-chief of Bank Director

*This newsletter was last updated Friday at 2 p.m. CDT.

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• Laura Alix, director of research for Bank Director

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