Matt Pottinger and Daleep Singh
Since its founding, the United States has viewed paying its bills as a matter of economic and national security. Alexander Hamilton, the first secretary of the U.S. Treasury, pushed for the federal government to assume all the debt incurred by the states during the Revolutionary War. In a report Hamilton presented to Congress in 1790, he described the “punctual performance of contracts”—that is, meeting all financial commitments on time—as a matter of national honor. It was also critical, Hamilton argued, to building confidence in a financial system and a national currency that could underwrite his fledgling country’s industrial development and provide “security against foreign attack” by competing empires in Europe.
More than a century later, during World War I, Congress created the debt ceiling—a legislative limit on how much debt the Treasury can take on. Given the controversy surrounding the debt ceiling today, it may be surprising to learn that its original purpose was to make it easier, not harder, for the Treasury to manage the country’s finances during a time of global conflict. Beforehand, Congress had to approve each instance of the Treasury’s borrowing, because only the legislature has the constitutional authority to tax, spend, and borrow. With the debt ceiling, the department could borrow as much as it wanted, up to the limit set by Congress. Leaving aside how unusual it was—no other developed country except Denmark has a debt limit—the measure was seen as a patriotic concession by Congress to share its fiscal authority with the executive branch in service of shared geopolitical purpose. As a direct result of this congressional action, the Treasury was able to issue massive amounts of war bonds, which mobilized the American industrial base and helped turn the tide of World War I in favor of the Allies. After the war, the U.S. dollar overtook the British pound as the world’s dominant currency.
A century later, the United States is again facing intensifying geopolitical competition. Both China and Russia have made clear their desire to challenge the U.S.-led international order. And together, they have the capacity to do so—China thanks to its economic, military, and technological heft, and Russia owing to its outsize appetite for taking risks that disrupt the status quo. The United States and its allies are pushing back forcefully against both revisionist powers, but as this contest plays out, many countries are choosing not to align with either side.
Instead of shoring up the nation’s finances to meet the geopolitical moment, congressional inaction now threatens to irreparably damage the United States’ global standing. The United States reached the debt limit in January. That same month, a group of Republicans in Congress said they would not raise the debt ceiling unless Democrats agreed to federal spending cuts. Earlier this month, Republican House Speaker Kevin McCarthy unveiled a bill for raising the debt ceiling by $1.5 trillion in return for $130 billion in spending cuts, a plan the White House quickly described as a nonstarter. On April 26, House Republicans narrowly passed the bill. Since hitting the debt ceiling, the Treasury has spent down its cash balance and deployed a range of accounting gimmicks (“extraordinary measures” in Treasury parlance) to keep paying the United States’ bills—bills for spending commitments already approved by Congress and presidents from both parties, not new outlays.
Time is running out. Most experts forecast that the department will exhaust its remaining headroom sometime between June and August. If Congress fails to raise the debt limit now, it will impair American power at a time when China and Russia are looking to exploit every weakness they can.
2011, BUT WORSE
There is no question that Washington must put the United States on a more responsible fiscal footing. Both political parties have failed to rein in deficit spending fueled by the wars in Afghanistan and Iraq, the 2008 financial crisis, growing entitlement spending, and the response to the COVID-19 pandemic. Threatening to default on the country’s debt, however, is the wrong way to address this problem—the equivalent of negotiating while putting a gun to one’s head.
Indeed, in the run-up to the potential default date, Congress will make the United States a global spectacle, as the world’s wealthiest and most powerful country careens toward the unthinkable. It won’t be the first time. Since 1960, Congress has raised the debt limit 78 times, in most cases under a Republican president. Sometimes, such as in 2011, Congress dithered until there were only days left before default hit. That year, the rating agency S&P downgraded the United States’ creditworthiness from AAA for the first time, but most of the financial and economic impact was short-lived, vanishing after Congress lifted the debt ceiling that August. In fact, the aftermath of the credit rating downgrade saw borrowing costs fall and the dollar strengthen—a result of the exorbitant privilege of issuing U.S. government bonds, the asset of choice for any investor seeking safe haven from risk, plus the good fortune of there being no plausible alternative to U.S. dollars. At the time, Europe was descending into its own debt crisis, Japan was mired in stagnation, China had yet to lure massive flows of foreign capital, and digital assets had not gone mainstream.
This time around, it could be worse. The context has changed dramatically. Congress is as polarized now as it has ever been. In 2011, Republicans had a comfortable majority in the House, with 24 more votes; today, it has only a five-vote margin. What is more, the amount of debt the United States must refinance is about twice as large as in 2011. Foreign holdings of U.S. government bonds are up $2.5 trillion since 2011 to $7 trillion in total; of these holdings, at least $1.5 trillion are held by governments that are not members of the G-7 and may have geopolitical motivation to pare their exposure to dollars at a moment of stress. In another difference from 2011, Europe is forging an ever-closer economic union, making euros a more plausible alternative to dollars worldwide. Finally, and most important, the United States is currently spearheading the most severe economic sanctions campaign in history against Russia, deriving its potency in large part from the United States’ ability to exclude a rogue actor from the dollar-dominated global financial system. Washington may need to employ an even more consequential sanctions campaign against Beijing in the event it attacks Taiwan or gives Moscow lethal support for the war in Ukraine.
RISKING A NATIONAL TREASURE
Although the sanctions are certainly justified and are doing more harm to Russia’s war-making capacity than Moscow is letting on, there is little question that sanctions are a double-edged sword. Some countries are considering what would happen if Washington’s Russia playbook were deployed against them, raising questions about whether continued dependence on U.S. dollars is a safe bet. Beijing and Moscow are encouraging their trading partners to build new payment mechanisms using their own currencies or the Chinese yuan. In other words, both the geopolitical incentive and operational capacity to reduce exposure to dollars is on the rise, and another debt ceiling drama needlessly gives other countries further justification to consider alternatives.
No one should underestimate the stakes involved: U.S. dollar primacy is a national treasure. The strength of the dollar allows American households, businesses, and governments at all levels to fund themselves far more cheaply than would otherwise be the case. Families benefit from the dollar’s unrivaled status each day by paying lower interest rates on credit card debt, mortgages, and student loans. It has, at least so far, conferred on the United States the unique capacity to absorb a shock, such as the 2011 downgrade of the United States’ credit rating, without seeing the country’s borrowing costs rise or U.S. currency fall in value. Dollar primacy gives the U.S. government the singular power to deliver an economic shock to an adversary by excluding it from the dollar-based global financial system through sanctions.
But if taken for granted, the dollar will lose its primacy. The fact that the world must once again confront the question of whether the United States might default on its debt is itself a problem. Dollar primacy is nothing more than a network rooted in trust, habit, and an assumed lack of alternatives. All systems based on trust have tipping points, often psychological ones that are impossible to identify in advance. Dollar primacy was able to gather force over the past century thanks above all to faith in the United States’ stewardship of the global financial system—alongside rule of law, the quality and independence of U.S. institutions, the depth and liquidity of American capital markets, and an open system for trade, capital, and people. Although most of these competitive strengths are still very much intact, the study of networks—whether in ecology, technology, or finance—shows that they lose value slowly and then suddenly once confidence is lost.
To avoid this outcome, some lawmakers and outside experts have proposed unilateral options the Treasury Department could fall back on to bypass the debt limit: Exploit an obscure legal loophole to mint a trillion-dollar platinum coin to offset Treasury’s liabilities. Invoke the 18th Amendment to challenge the constitutionality of the debt limit. Prioritize the payment of debt service and selected spending programs to balance the budget and avoid new debt issuance. What do these options have in common? They are legally dubious, unworkable, or deeply damaging to the credibility of the United States. Pulling from a bag of tricks to pretend the country is honoring its obligations is not what great powers do. It is a clownish display rather than a confident show of readiness for global competition.
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