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How the U.S. Debt Ceiling Battle Threatens the Global Economy

Why a political fight could “blow up the global financial system.”

By , the newsletter writer at Foreign Policy.
Speaker of the House Nancy Pelosi and U.S. President Joe Biden talk.
Speaker of the House Nancy Pelosi and U.S. President Joe Biden talk during the congressional baseball game at Nationals Park in Washington on Sept. 29. BRENDAN SMIALOWSKI/AFP via Getty Images

Here is today’s Foreign Policy brief: U.S. Congress averts shutdown but avoids debt ceiling issue, climate ministers meet in Milan ahead of COP26, and North Korean leader Kim Jong Un offers to reopen hotline with South Korea.

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U.S. Debt Ceiling Battle Threatens the Global Economy

Here is today’s Foreign Policy brief: U.S. Congress averts shutdown but avoids debt ceiling issue, climate ministers meet in Milan ahead of COP26, and North Korean leader Kim Jong Un offers to reopen hotline with South Korea.

If you would like to receive Morning Brief in your inbox every weekday, please sign up here.

U.S. Debt Ceiling Battle Threatens the Global Economy

U.S. Congress is likely to prevent a government shutdown today by passing a short-term funding bill, but another major fiscal issue remains unresolved, threatening the health of the global economy in the process.

The debt ceiling—a limit on U.S. government borrowing to service debt that has historically been raised routinely by Congress since it was established in 1917—is back again as a political football as Senate Republicans seek to pressure Democrats to solve the crisis through reconciliation rather than join a bipartisan effort to raise the ceiling and avert a U.S. debt default.

No one knows exactly when the United States will reach its borrowing limit, but the time is fast approaching. U.S. Treasury Secretary Janet Yellen has warned the cliff could be reached as soon as Oct. 18. The Bipartisan Policy Center said it could hit between mid-October and Nov. 4.

Yellen brought her message to Congress on Tuesday, saying raising the ceiling was “necessary to avert a catastrophic event for our economy.”

A U.S. default, no matter how quickly it is fixed, would lead to “complete chaos,” prompting investors to sell off an asset class that was considered risk free, Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics, told Foreign Policy. “Its a bomb—you basically blow up the global financial system,” he said.

The damage to U.S. credibility in global markets would be irreversible, Kirkegaard said. “If they miss a payment, that trust is gone: 250 years down the drain. And you dont get that back just by promising, ‘Oh, I promise I wont do it again.’ Thats not good enough for investors around the world.”

The long-term effects of a default could also disrupt U.S. foreign-policy tools, with a world less trusting of the U.S. dollar making U.S. financial sanctions that much less effective.

The problem is nakedly political, David Super, a professor at Georgetown University Law Center and an expert on congressional procedure, told Foreign Policy. Republicans are happy to threaten default to extract concessions on other priorities while Democrats are afraid to simply get rid of the limit in case their opponents attack them as fiscally irresponsible in midterm elections next year.

“The irony is that raising the debt limit does not increase the deficit. The way you increase the deficit is either by cutting taxes or increasing spending, and both parties have done plenty of that,” Super said.

“I think a number of politicians are hoping to confuse voters by making a lot of noise about the debt limit, which doesnt matter, to distract from their votes on budget-busting bills, like the 2017 tax cut, that do matter,” he added.

Jamie Dimon, head of banking giant JPMorgan Chase, told Reuters he had grown tired of the political wrangling and wished the two parties would remove the ceiling once and for all. “Every single time this comes up, it gets fixed, but we should never even get this close.”

What We’re Following Today

U.S.-Haiti policy. Brian Nichols, the recently appointed U.S. assistant secretary of state for Western Hemisphere affairs, heads to Haiti today for talks with Haitian Prime Minister Ariel Henry and Haitian Foreign Minister Claude Joseph, days after Henry dismissed an electoral council, postponing elections indefinitely. Nichols’s visit comes just over a week after Daniel Foote, then the U.S. special envoy to Haiti, resigned over the deportation of Haitian migrants from a Texas camp and concerns over “deeply flawed” U.S. policy toward the country.

U.S. and Russia talk arms control. U.S. Deputy Secretary of State Wendy Sherman meets her Russian counterpart, Sergei Ryabkov, in Geneva today for another round of the Strategic Stability Dialogue, the second since the talks were revived following the meeting of U.S. President Joe Biden and Russian President Vladimir Putin in Geneva in June.

Italy hosts Pre-COP. Italy hosts climate and energy ministers today in Milan for Pre-COP, the final ministerial-level meeting in preparation for COP26, the U.N. global climate summit set for Glasgow in November. COP26 President Alok Sharma and Italian Minister for Ecological Transition Roberto Cingolani co-host today’s summit, which U.S. climate envoy John Kerry will attend ahead of a visit to Paris later in the week.

Keep an Eye On

Inter-Korean relations. North Korean leader Kim Jong Un offered to restore an inter-Korean hotline, severed in August in protest over U.S.-South Korea military exercises, as a peace gesture, stating, “we have neither aim nor reason to provoke South Korea and no idea to harm it.” His comments regarding U.S. engagement were less sanguine as he accused Washington of indulging in a “petty trick” by calling for talks while “hiding its hostile acts.”

Tunisia’s new prime minister. Tunisian President Kais Saied appointed Najla Bouden Romdhane as prime minister on Wednesday, making her the first woman in the Arab world to hold such a position. Romdhane is unlikely to have the same power as her predecessors, however, after Saied announced last week that he would effectively act as head of government.

Reporting from Tunis for Foreign Policy, Simon Speakman Cordall warns of trouble ahead if Saied ignores real reforms: “Whatever the president is doing, he will need to do it quickly. Otherwise, with Tunisians denied jobs, economic progress, or a sense of what the future might hold, the popular storm he summoned on July 25 risks engulfing him.”

Odds and Ends

Northern Ireland is suffering a shortage of clowns, although the dearth of performers (unlike shortfalls in chicken, carbon dioxide, and truck drivers) has nothing to do with Brexit. David Duffy, co-owner of one of the country’s largest circus troupes, has appealed to members of the public to try their hands at the profession after many of his usual performers found work in countries that eased COVID-19 restrictions earlier. Duffy will be holding online auditions in the search for his next top clowns.

Colm Quinn is the newsletter writer at Foreign Policy. Twitter: @colmfquinn

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