This U.S. debt ceiling standoff isn’t like before – economic disaster could happen
John Rapley is a political economist at the University of Cambridge and managing director of Seaford Macro.
Created in 1917, ironically to augment the federal government’s flexibility in raising loans, the debt limit places an upper bound on government borrowing, after which the federal government must obtain the permission of Congress to raise it. Since we live in an inflationary world, the government’s nominal debt increases, even when it’s coming down as a share of spending. That means the government must repeatedly return to Congress for permission to issue new debt.
However, while the government will have to trim its outlays, Congress won’t get a say in how this happens. And the effects on the economy could be severe. Because government spending acts as a stabilizer, smoothing out the ebb and flow of business cycles, its sudden curtailment would most likely induce a recession.estimates that even a week-long standoff could tip the American economy over the edge.
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