What is the Likelihood of the United States Defaulting on its National Debt if Congress Does Not Raise the Debt Ceiling

Short answer: 100%

Long answer: Strap in, a bit of a deep dive coming up. This is, as always, a bit of an oversimplification of a complicated concept. But, here goes

First things first, let’s get one thing out of the way: the “debt ceiling” is not about restricting spending. It’s about paying debts that we already owe. The entire idea of the debt ceiling is fairly absurd, as it’s effectively saying that, while the Congress + President may well agree to spend $X amount, putting ourselves into $X of debt, we’ll stop paying after an arbitrary point. It’s like saying that your family will keep spending on the credit card, but refuse to pay anything beyond $10,000 (or some equally arbitrary point).

US debt, in the form of T-bills and bonds, is historically seen as literally the safest investment in the world for the simple fact that the US pays its bills. A T-bill or a bond is, in effect, the US issuing a promise that, in return for $X now, we’ll eventually pay the buyer $X+interest. And, up until now, that’s exactly what we’ve done. We may run up a big check, but we’re also the world’s largest economy; we’re good for it. And, because US debt is the world’s safest investment, the world’s businesses and governments are eager to buy it, keeping the US economy afloat and the world’s economy humming.

The moment it is even suggested that the US might not pay its bills- that it may not pay holders of US T-bills and bonds the $X+interest that they were promised- all hell will break loose. Why? Because, a bunch of stuff will happen, none of it good.

Holders of US debt will all start to demand that the US pay what they owe. Immediately, if not sooner. How will the Treasure Department decide who to pay first? Well, who could cause the biggest problems if they get angry? Who owns the most US debt? As of January, 2023, the largest owners of US debt are Japan ($1.1 trillion), China ($859 billion), the United Kingdom ($668 billion), Belgium ($331 billion), and Luxembourg ($318 billion). Japan, the UK, Belgium, and Luxemburg are allies of the US, so while their residents and businesses might not be happy about being stiffed, they’re not likely to get too angry. So we hope. China is another matter entirely. The main thing keeping the rivalry between the US + China relatively civil up until this point if that each country is making a sh*tton of money by doing business with the other. Lots of said business is funded in T-bills and US bonds. If the US has just said that we won’t pay what we owe, our business frenemy will pretty quickly turn into our enemy. Our enemy that has a bunch of nuclear weapons. On intercontinental ballistic missiles. Pointed right at us. And lots of ground forces. And, and, and… you see how lovely this could get.

But, if we pay China, and leave our allies in the lurch, they might not be our allies anymore, will they? Or maybe they will. We simply don’t know. When billions of dollars are in question, the shared history between the US + UK, or the sacrifices made by the US during WWII and the Cold War will be a nice memory that’s worth as much to them as knowing how welcoming Germany was to Jews before the rise of Hitler was to a Jew walking into the gas chamber. And I chose that rather visceral image on purpose, because that’s how ugly this has the possibility of getting.

Speaking of billions of dollars being in question, that leads nicely to another thing that will happen if the US doesn’t raise the debt ceiling. The world’s business will stop being done in US Dollars. You can bet on that just as well as you can bet on the sun rising in the east. Since the 1944 Bretton Woods accords, the world’s governments agreed to value their transactions in US dollars, rather than in gold. There was a very simple, practical reason for this: as WWII ended, it was clear that the only remaining major economy that hadn’t been blown to smithereens was the US. So, it made sense to do business in the currency of the world’s largest economy, especially as the US had a long track record of paying its debts. Well, if we stop paying our debts, things change pretty quickly, and the world will start looking somewhere else for a reserve currency. Chinese Yuan, perhaps?

The world’s governments will also stop buying US T-bills and bonds, at least at nowhere as low as the interest rates they currently accept. They’ll buy US debt, sure, but only at a much higher interest rate. After all, you remember why “junk bonds” paid so much higher interest rates than safe ones? Junk bonds got that name because they were supporting businesses that had a high chance of failing, hence not paying back the funds promised in the bonds themselves. So, they paid higher interest rates to coax people into buying them. If the US stopped paying its bills, even briefly, it would prove incontrovertibly, that the US was no longer as safe an investment as before. So, the US would no longer be able to pay interest as low as it currently does on its debt. And US debt wouldn’t be as easily sold as it currently is. All of this would put a major crimp on the US’ ability to fund itself.

Put this together, and the US and world economies are each in a world of hurt of the US were to refuse raise the debt ceiling. There are several ways out of this. Again, to oversimplify…

Congress could pull its head out of its ass and raise the debt ceiling. You know, the way they did, unanimously, 3 times during the Trump administration. Funny, isn’t it, how Republicans spent like drunken sailors when there’s a fellow Republican in the White House, but suddenly remember how much they hate debt when a Democrat is in there. Doubt that? Look at how much Presidents added to the national debt since 1970. Pay attention to whether the Democratic or Republican Presidents added the most. Hint: it isn’t the Democrats.

The Biden Administration could effectively say that the debt ceiling is a violation of the 14th Amendment, hence unconstitutional, and therefore invalid. This argument is, at its heart, fairly simple; it’s in the application that it gets very, very ugly. The 1st sentence of Section 4 of the 14th Amendment reads as follows “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” The historical reason for this is a bit dicey, but the fear was that, if former Confederates were to be elected to Congress, they might vote to not repay debts accrued by the Union in winning the Civil War (again, oversimplified). In modern application, however, the Administration could say that, upon the advise of its attorneys, the President had ordered the Secretary of the Treasury to ignore the debt ceiling and continue spending money to pay the debts we already owe. The problem with this is, it’s guaranteed to wind up challenged in court, and remain there for years. During this time, the world will likely at least slow down its purchases of US debt, and start looking for a new reserve currency to replace the US dollar. Chinese Yuan, maybe?

Related to this, perhaps the next time Democrats control both Houses of Congress and the Presidency they can vote to abolish the debt ceiling entirely. Its does nothing whatsoever to enforce fiscal discipline- remember, it’s about paying what we already owe. And its mere existence serves solely to give an intransigent party- currently the GOP, perhaps in another time the Democrats - a tool with which to threaten the destruction of the world economy if they don’t get their way. The only two countries in the world that have a debt limit set at an absolute amount rather than as a percentage of the economy are Denmark and the US. In Denmark, the ceiling is currently set at more than twice the amount where it set the last time a “crisis” appeared- and that was when Danish public debt got up to 2/3 of their debt ceiling. If politicians want the US to have a debt ceiling, set it as a percentage of GDP. In the European Union, for instance, member states agree to keep their national debts at 60% or less of their GDP.

According to Section 31 U.S.C. § 5112 of the United States Code, the US Mint is allowed to "mint and issue platinum bullion coins" in any denomination. So, under this plan, the Treasury will tell the Mint to create a $1 Trillion Platinum coin, and deposit that into Federal Reserve to pay our bills rather than issuing more debt. Yes, it’s gimmicky as hell. But, people far smarter and more familiar with the issue than me have said it’s completely legal.

In short, the US has many ways to avoid its current crisis. But for us to pretend that not paying our bills will have no affect on the world is sheer insanity. It will have an effect, and it will be awful.