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What Happens If The U.S. Can鈥檛 Pay Its Debt? - YouTube
Channel: CNBC
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The recent debt ceiling standoff
gave a glimpse into just how
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catastrophic a federal default
would be for the US economy
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After weeks of stalemate and
more than 24 hours of delay, the
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Senate finally voted last night
to raise the debt limit and
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averted potentially catastrophic
default.
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This would surely be on the
order of the 2008 financial
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crisis, and possibly worse,
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but this isn't the first impasse
the federal government has had
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over the debt limit. In fact,
the US has faced very similar
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crises in the past, most notably
in 1995, 2011 and in 2013. The
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stakes are higher than ever, as
the ceiling approaches closer to
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$30 trillion for the first time
in history.
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We're essentially throwing a
gigantic Molotov cocktail into
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our own house. And it's the only
house that we live in.
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A bipartisan agreement to raise
the debt ceiling is the easiest
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way to end the crisis. But there
are other solutions to breaking
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the standoff, including a $1
trillion coin that has gained
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more traction in recent years.
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A trillion dollar platinum coin?
What is that it sounds like the
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setup to a heist movie, not
something that the United States
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Treasury Department ought to be
doing.
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It's really a gimmick. And
what's necessary is for Congress
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to show that the world can count
on America paying its debts.
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This is a silly solution to a
silly problem. But as Joe
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Weisenthal and Paul Krugman and
a number of other folks are
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talking about, this is actually
a serious solution that we
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should take seriously because it
can help us to essentially avoid
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the political football that is
being played with the debt
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ceiling.
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So what exactly would happen if
the US government fails to raise
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the debt ceiling and can a $1
trillion coin really put a stop
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to the crisis? As of October
2021, the US government is
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sitting in more than $28
trillion of national debt. This
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amount is accrued when the US
government spends more money
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than it makes from taxation. For
instance, in 2020, the federal
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government reported a revenue of
$3.4 trillion, but spent over
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$6.5 trillion in the same year.
To cover the cost, the
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government borrows money from
individual investors in various
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financial organizations in the
form of bonds.
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Let's say a person buys $1,000
bond, they get a piece of paper
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in return for $1,000. And then
what the federal government
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promises to do is pay a certain
amount of interest on that
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periodically, and then after
certain amount of time, repay
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the $1,000. And so what the
person gets in return for that
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piece of paper is these interest
payments, and then eventually,
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their full principal back.
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The debt ceiling refers to the
maximum amount of money the US
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Treasury can borrow in the form
of bond sales. Over the years,
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the debt ceiling has seen an
exponential increase as the
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national debt continues to
climb. In 1993, the national
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debt limit set at $4.37
trillion, or over $8 trillion,
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when adjusted for inflation. By
October 7, 2021, the US Senate
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would approve a bill to
temporarily increase that limit
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to about $28.8 trillion.
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What used to happen was that
Congress would have to attach an
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authorization to every single
bill that required some amount
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of borrowing or taxing or
spending. And as you can
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imagine, that was super
annoying. Sometimes Congress
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would overestimate the amount of
money that a particular bill
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would need, sometimes they would
underestimate it. But by
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creating this quote unquote,
debt ceiling, this broad
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authority for Treasury to borrow
actually it's simplified the
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whole process.
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Once decisions are made, we have
to pay the bills that come from
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those decisions. And so to place
an arbitrary ceiling on our debt
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and to create periodic crises,
manufactured crises that really
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placed our economy and our
financial system at risk,
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especially now that we're
recovering from the pandemic in
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a fragile way. I consider this
irresponsible.
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If the government fails to
extend the debt ceiling whenever
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it is needed, the Treasury will
no longer be able to raise the
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funds to pay its obligations.
This results in what's known as
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a default, which could leave
severe consequences on the
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economy.
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There's no question it would be
terrible. A lot of the global
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financial system depends on
treating US Treasuries as
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basically without risk and if
the United States does not make
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good on its commitments on time,
that premise is called into
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question. The consequences could
be quite dire.
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We would no doubt see, the stock
market would react the bond
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market would react. If it went
on for more than a day and bond
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market started to get the
impression that indeed the US
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government was not actually
going to make its interest
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payments on time, it would
surely be catastrophic.
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Even the simple threat of a
default is enough to leave dire
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consequences. A similar standoff
in 2011 led to significant
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market volatility as well as a
downgrade of the country's
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credit rating.
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One worry here is that even if
we do not default that maybe we
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call into question the perfect
risk free status that we
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traditionally enjoy, and maybe
cause financial institutions and
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others to think about us in ways
that are slightly more risky
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than they have thought about us
before.
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The easiest solution to any debt
ceiling crisis is a bipartisan
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agreement. Both the Democrats
and the Republicans realize the
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threat of a default on the US
economy and agree to raise the
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debt ceiling as they have done
for decades. But that isn't the
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only solution. The debt limit
can also be raised by a process
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known as budget reconciliation.
Created in 1974, this process
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can expedite the passage of
certain tax spending and debt
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limit legislation. What would
otherwise require a 60 vote
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majority in the Senate to pass
would only require 51 votes or
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50 votes plus the vice president
as the tiebreaker. It sounds
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simple enough. But whether it's
realistic is another story.
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It is not a solution that the
current administration and
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Congress at present appears to
want to have to use. It's
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procedurally very complicated.
There are some folks that
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believe that maybe it's just too
difficult to actually implement.
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The reason they're hesitant to
do that, it seems is that it
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forces them to specify a dollar
amount raised to the debt limit.
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In the last decade, we've moved
to suspending the debt limit for
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certain periods of time. And I
think congressmen like that
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better, because it doesn't give
their political opponents a
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number to stick into a political
act. If Democrats move through
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reconciliation, they'll have to
stick a number into that law.
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And that number is likely to be
over $30 trillion now, and so
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they're worried about the way
that that looks, and the way
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voters will judge them for that.
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The remaining solutions get a
bit more radical. The president
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can potentially use the 14th
amendment to increase the debt
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ceiling by themselves. It states
the validity of the public debt
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of the United States authorized
by law shall not be questioned.
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The debt limit is specified by
statute. So there's no question
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that the President could change
statutory language on his own
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just by citing the 14th
Amendment of the Constitution.
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That would totally up end our
whole constitutional order.
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That's not realistic.
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Congress has made it really
clear through their actions over
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the past years, that they
consider it in their purview to
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raise the debt ceiling. That in
and of itself suggests that if
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the President were to say no,
no, no, it's under my purview to
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raise the debt ceiling, you
create a crisis about powers in
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the executive branch versus
powers in Congress.
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Then there is the idea of
minting a trillion dollar coin,
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which was first discussed during
a similar crisis in 2011.
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Generally, the Federal Reserve
determines when and how much
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money the Treasury Department
can print. But some scholars
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identified a law in 1997, that
allows the treasury secretary to
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mint and issue platinum coins in
whatever denomination and
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quantity.
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The US Treasury has an account,
like almost like a checking
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account at the Federal Reserve
that might surprise you. But
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like, literally, you can go to
the Federal Reserve's financial
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statement, and see how much the
US Treasury has deposited at the
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Federal Reserve and can
actually, in a sense, write
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checks on that account. So US
Treasury could mint its trillion
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dollar platinum coin and deposit
it at the Federal Reserve. And
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then the US Treasury would
effectively have a checking
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account with an extra trillion
dollars in it that they can then
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use to pay their obligations.
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Whether it will actually be
effective depends on who it is
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you ask.
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A trillion dollar platinum coin,
what is that it sounds like the
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setup to a heist movie, not
something that the United States
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Treasury Department ought to be
doing. And I think the fact that
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it strikes people as so
outlandish, is not just a small
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little flaw. It's a real
problem, because the Treasury
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Department depends on confidence
of global investors and of the
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American people. And if it seems
to be playing strange games, it
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could seriously erode that
confidence.
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It's a way to get round
political gridlock. It's not a
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way to run a country. It is not
a way to run the kind of
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sophisticated financial system
that we have today. This is not
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a way to assure the governments
of the world and the world
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economy that we are in fact as
risk free as we are supposed to
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be. This is not the way to do
it. But in the absence of other
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solutions. It's certainly a
plausible way forward.
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As frightening as default
sounds, experts reassure that
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it's quite unlikely to happen
anytime soon.
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I would suggest and argue and
hope that default is unlikely,
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that the debt ceiling is being
used as a kind of naked
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political leverage technique
without necessarily having any
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conditions attached to it. That
being said, there is still hope
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that our political leaders will
do what is right and stave off a
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default as needs be and have a
serious conversation about
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taxing and spending, then what
this panic about a debt ceiling
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would allow.
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Perhaps the bigger issue is that
even if the current crisis were
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to be averted, the US still
faces numerous fiscal deadlines
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that need to be addressed before
the end of 2021.
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We have to think about
incredibly important legislative
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items. But all of that is going
to have to be done in the shadow
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of the debt ceiling. And as far
as political decision making is
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concerned, I'm not sure that's a
very optimal way for
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congressional leaders and
Congressional lawmakers to have
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to think about the rulemaking in
front of them. That task is hard
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enough already without having to
strategize about what they do in
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December come the debt ceiling.
I think as far as the agenda is
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concerned, it's gonna make
things extremely difficult, much
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harder than they already are,
which is hard already.
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If the recurring debate over the
debt ceiling has proven
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anything, it's that despite
numerous shutdowns and
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standoffs, Congress's fiscal
drama is likely to continue for
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years to come.
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I'm not naive enough to think
that all policymakers need to do
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is get in the room and hash it
out and surely they can make
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good policy. These are deep
seated disagreements that we
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have. And it's not just
policymakers who have those
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disagreements, they're
representing us, we have these
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disagreements. And so yes, I
wish we were debating and
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getting to compromise on these
really important issues around
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fiscal policy and what kind of
federal government we want,
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rather than spinning our wheels
on this pointless debate about
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the debt ceiling.
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