DEBT CEILING
"The Fed" is the Federal Banking System. It was created by Congress but it is NOT part of the government. The Fed is an independent uber-bank and the stock ownership of this bank is entirely held by other banks. Only banks can own stock in the The Federal Bank.
> The Fed is a private institution with a charter that requires it serve the interests of the public (the citizens of the USA) so it is a unique institution but, it is still the bank.
> The Treasury Department is the part of the USA's executive branch that is responsible for cash flow in and out of the Federal Government.
> Treasury Bills are kind of like the Federal Governments credit card. When the Treasury does not have enough income from taxes to pay its obligations, it asks its bank, The Fed, to sell debt obligations (loans).
> Congress, in this context, is owner of the biggest of all checking accounts ever imagined. Congress controls income (taxes), spending (approved budgets) and the Treasury Department is like their in-house accounting firm overseeing cash flow.
If Congress was a big and complicated corporation, the Treasury Department would be like outsourcing day-to-day cash flow management to a firm like Ernst & Young.
ANALOGY: Pretend that "Mark" is the federal government (Congress) and Truist is my regional bank (The Fed) handling my checking account. Mark is writing checks from his Truist account that exceed what he makes in income. That puts stress on Mark's checking account because if he does not keep a positive balance, Truist will bounce his checks. To solve the problem, Mark borrows money in the form of long term loans (like a mortgage) and short term loans (my credit card). For the sake of the analogy, Truist is also the largest lender to Mark.
Everything is fine so long as my lenders at Truist are comfortable that I will pay (at a minimum) the interest they are charging me for the money I owe them and they are comfortable that eventually I will pay back the principle. Truist (my lender) is keeping Truist (my banker) confident that the balance in my checking account is safe and so cashing the checks I am writing is OK.
That's all well and good until Mark starts struggling to pay the interest on his debts, let alone pay back the principle. Mark might have lost his job, or developed a gambling problem or whatever. But, the worst would be that Mark just decides to tell his lenders to take a hike (Kind of like Donald Trump has done with many banks).
Incredibly, should the bank ask Mark what is his complaint that would cause him to take such a dramatic step, the current situation is like Mark replying that he is pissed of at his lenders because Mark has been spending too much money.
It's a little more complicated because of an observation that goes like this:
If Mark owes Truist $50,000, Mark has a problem. If Mark owes Truist $500,000,000, Truist has a problem.
In other words, if a bank loses confidence in Mark's $50,000 in debt obligations, they can write off the loss, sue me, bankrupt me, foreclose on me and move on without me. But, if the bank loses confidence in Mark's $500 MILLION debt, writing that off as a loss could collapse the bank. The bank cannot afford to have this obligation (an asset) become officially "uncollectable" so they will negotiate with Mark in order to keep this obligation on it's books.
Back to the Debt Ceiling. A failure by Congress to increase the debt ceiling is like Mark forcing the Board of Directors at a Bank to decide that they have no choice but to write-off Mark's $500 MILLION debt obligations even though the bank might collapse along with Mark when they do it.
Of course, the scope of the problem is a lot more gut wrenching because the debt is $30,000,000,000,000.
If Congress gives the big "fuck you" to passing the debt ceiling, they are telling The Fed that it cannot count on the USA to pay its debts.
The Fed, which is an independent bank, has no choice but immediately start bouncing every check that it's customer (Congress) is writing.
The first checks to start bouncing are Social Security checks, Federal pay roll checks and checks to the military. Nobody, not the president, not the Secretary of the Treasury, not the Fed Chairman has the authority to simply decide that checks written by Congress will get paid even though Congress has refused to raise the debt ceiling.
Only Congress has the power to tell the Fed, "oh gosh, we were just kidding about this debt ceiling thing, go ahead and keep paying the bills" but this is no different than just raising the debt ceiling which, by definition, Congress will have failed to do.
Next in line for problems with checks bouncing are all of the holders of US Treasury Bills who expect to be getting income from the USA's interest payments on the debt. These are the "lenders" and the biggest lenders are the huge national banks of the USA, China and Japan. Just like a small regional bank would collapse if Mark walked away from his $50,000,000 in debt obligations, the world's biggest banks will fail if the USA signals that it is walking away from its $30 TRILLION in debt obligations. The Fed, right out of the gate, is a completely fucked bank.
Compromises would be negotiated, of course. The world's most important banks cannot all collapse by writing off this debt as uncollectable so there would be negotiations about writing down some of the debt in exchange for promises by the USA to pay re-negotiated terms.
The problem is that the interest rates the USA would have to pay on the re-negotiated loans would double or triple what the USA pays now. New budgets approved by Congress would have to give a massive percentage of the budget to interest payments (say 50% of the budget goes to nothing other than debt payments) which means that spending for everything else would be decimated even as taxes had to go way up.
But, the long term problem assumes that we get to the other side of the immediate catastrophe is the same way that a giant corporation eventually comes out of bankruptcy. The long term assumes that the value of the dollar does not go haywire in the midst of the chaos.
Nobody has the ability to imagine how we get through the initial catastrophe in order to get to the other side and that is why the president calls defaulting on the debt "unthinkable."
Hopefully, writing this is a big waste of time but maybe not because, if you are still reading this, you understand the problem of failing to raise the debt ceiling far better than Matt Gates does.
Speaker Kevin McCarthy does understand this post very well but Speaker McCarthy might put keeping his role as Speaker of the House as a higher priority than stopping the catastrophe. If McCarthy wants to keep his job, he can never put up a "clean bill" because it would pass with 100% of Democrats and maybe 25% of Republicans voting to support that bill. The very next day, Matt Gates would call for a vote of no confidence in the Speaker and only 51% of the Republicans in the House would have to support that vote for McCarthy to lose his job. McCarthy needed 15 elections to get 51% of the votes last time. That makes it pretty obvious that he will never survive a vote of no confidence.
The world as we know it could fall into chaos on a scale we can't imagine because Speaker McCarthy wants to keep his job as Speaker. He won't lose his income but, come to think of it, he might lose his pension of the Federal government can't afford to pay pensions as a result of the catastrophe. He will just lose his precious title.
There is nothing the president of the USA can do about that. The Bill that the House did pass contains spending cuts that are so ambiguous that it can never get through the Senate and the president would not even know what he was agreeing to. There is no path forward without a bill that the Senate can pass and that the president's Secretary of the Treasury can understand.