A Compromise of Convenience - Not a Cure

Blog Post
Thursday, October 07, 2021

With pressure mounting to avoid a default on federal government obligations, Senate leaders Republican Mitch McConnell and Democrat Chuck Schumer, agreed to a temporary compromise: Republicans agreed not to filibuster legislation addressing the debt limit and Democrats agreed to a small, $480 billion increase in the statutory debt limit which is expected to be enough to pay the bills through early December.  

The compromise avoids a cataclysmic default, which is a welcome relief, but it also introduces new anxieties. First, by insisting on a dollar increase in the debt limit (versus a short-term suspension of the limit to a date certain) it’s hard to know how long the borrowing authority will last. In this COVID era, the Treasury department is burning through cash at a much faster pace than historical norms. Add in the need to provide disaster relief payments for victims of hurricanes, wildfires, floods, and other unanticipated cash expenses (like resettling Afghan refugees or addressing the Haitian immigrant crisis at our southern border) and it becomes very difficult for Treasury experts to know exactly when the debt limit will impose cash constraints.

Second, the amount of the increase offered by Leader McConnell is intentionally too small to allow the Treasury to reload its “extraordinary measures,” the special cash management operations it uses to buy extra time in a debt limit standoff. When the Treasury closes in on the current limit, there won’t be any buffer to give Congress time to work out a compromise.   

Third, while it’s encouraging to see signs of compromise between our bitterly divided political parties, the current solution risks becoming a “new normal” in future debt limit fights. When the debt limit next begins to constrain Treasury’s borrowing (in just a few weeks) the players, positions, and politics will be unchanged: Republicans still will be unwilling to supply the votes necessary to suspend the debt limit, and Democrats still will be unwilling to raise the numerical limit via reconciliation. The only solution will be another installment of the current compromise. 

Topline? Until our government is once again divided and both parties openly share leadership  responsibility for addressing our debt, the Treasury Department, the bond market, investors, and the U.S. economy should prepare for serial sub-$500 billion increases in the debt limit every few months. The McConnell-Schumer deal may be a compromise of convenience, but it is not a cure.