A game of economic chicken: A US debt ceiling crisis is coming | American Enterprise Institute


By Desmond Lachman

The United States government enjoys a major advantage over the governments of most countries, including those in the European Monetary Union. It borrows in the country’s own currency to cover its financing needs. In principle, this means that no matter how large the government budget deficit might be, the country should always be able to make good on its debt obligations. If all else fails, the Federal Reserve can always print the necessary dollars to cover the government’s financing needs.

The big fly in the ointment is that the country has a Congressionally imposed debt ceiling. This means that while the country might always have the ability to pay its government’s debts, it might at least temporarily lack the political will to do so.

And when it lacks the political willingness to make good on the government’s obligations, it courts creating ructions in the financial markets, inviting a government shutdown, and…

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