Impending market cataclysm might motivate a compromise, though it will not arrive for several months. The game of trillion-dollar chicken has a while yet to go
over the debt ceiling. This legal limit on the amount of debt held by the Treasury is periodically raised—but never by enough to avoid a repeated stalemate. Without a bipartisan political deal to raise the ceiling America would be in uncharted and dangerous territory, bumbling into pointless default.
Republicans, who have newly taken control of the House of Representatives, say that they cannot abide runaway spending and must rein it in. This deep concern appears episodic. When Donald Trump was president, the debt ceiling was increased three times with Republican support, and the national debt rose by $8trn over his term . Those increases were not particularly contentious, and the White House wishes the same for this one.
This is forcing financiers, lawyers and officials to focus on the unthinkable. The starting point of such contingency planning is that a sovereign default would be cataclysmic: in all likelihood stocks would plunge, borrowing costs would soar, growth would suffer and the dollar’s status as the world’s dominant currency would be shaken. Any way to avoid this series of disasters merits attention.
A second suggestion, which seems almost equally crazy, would be for the Treasury to issue ultra-high-interest bonds. Because only the face value of bonds counts toward the debt limit, the Treasury could, in theory, sell $1bn worth of one-year bonds with an interest rate of 105% for twice their face value . That would allow the Treasury to raise $2bn of funding but only add $1bn to the national debt.
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