Real-Life 'House of Cards': Debt Ceiling Crisis Looms for Trump

Office of Management and Budget Director Mick Mulvaney testifies before the House Budget Committee about President Donald Trump's 2018 budget proposal on May 24. Aaron P. Bernstein/Reuters

The Trump administration is facing a looming problem that could escalate into a full-blown crisis, with the government failing to raise money at the expected rate and needing to borrow more soon. It can't borrow more, however, unless Congress raises the debt ceiling. If the debt ceiling isn't lifted, then at some point soon the government won't be able to pay its bills—including its obligations to bondholders.

That kind of disastrous default would threaten the global financial system. The U.S. dollar is the world's reserve currency, the safest investment. If anything threatens that, it could set off a disastrous series of events.

That probably won't happen, but there could be serious and expensive problems.

In 2011, the Republican Congress refused to raise the debt limit unless there were also spending cuts. The full faith in and credit of the United States was in danger. As a game of chicken played out that summer, the rating agency Standard & Poor's downgraded U.S. bonds, and the cost of borrowing soared. The downgrade cost the country $18.6 billion, according to the Bipartisan Policy Center. Eventually, Congress raised the debt ceiling, and total disaster was averted.

Related: The reality of Trump's budget: selling snake oil

Fast-forward to 2017, and Secretary of the Treasury Steve Mnuchin warning Congress that revenues are coming in more slowly than expected and urging that the debt ceiling be raised before the August recess—without any strings attached. The conservative Freedom Caucus is already balking, saying it won't support a debt ceiling hike without spending cuts. Mnuchin is justifiably worried about the bond markets going into a 2011-style freakout.

Complicating matters is Mick Mulvaney, the director of the Office of Management and Budget. As a congressman and co-founder of the Freedom Caucus, Mulvaney favored strings attached to any debt ceiling hike, and he still seems to be far less alarmed by the prospect of a failure to raise the ceiling than Mnuchin. "I do believe that defaulting on America's debts would have grave worldwide economic consequences," Mulvaney said in a written response to senators in January. "I do not believe that breaching the debt ceiling will automatically or inevitably lead to that result."

Technically, that's probably true. The Treasury Department can engage in a few accounting tricks to keep default at bay for a little while, even if the debt isn't limited. But that's a very short-term fix, and it wouldn't stop the bond markets from freaking out. Just last week, Mulvaney said that the administration had yet to adopt a legislative strategy on what kind of debt ceiling hike it wanted, how big it would be and if it would accept any conditions. That was in striking contrast to Mnuchin's preference for a clean, no-conditions hike in the debt ceiling as soon as possible.

The looming debt ceiling crisis comes at a time when Congress is already tied up with health care reform, tax reform and investigations into Russian interference in the 2016 election and possible Trump campaign collusion with Moscow. This makes the already crowded calendar even more jammed.

What's more, Democrats may have their own conditions that they want to put on the bill. Senator Chris Murphy of Connecticut told Politico that "everything's negotiable" and asked, "Why would we make it easier for them to pass unpaid-for tax cuts by giving away a vote on raising the debt ceiling?"

House Minority Leader Nancy Pelosi has called for passage of a "clean" debt ceiling bill without any conditions, but there may be enough Democrats who want to extract concessions from the administration—perhaps on funding Obamacare—that it could thwart raising the ceiling in time.

Before he was president, Trump was fond of saying that he loved debt because it could finance his many projects. And he wasn't afraid to use the bankruptcy laws to help him. His businesses touted no fewer than four bankruptcies. During the 2016 presidential campaign, he briefly floated the idea of giving U.S. bondholders a "haircut"—not paying them all that they're owed—as a way of saving the government money. He quickly clarified his remarks.

It's clear that Mnuchin, a Goldman Sachs veteran, understands how dangerous that kind of talk is. We'll find out soon if the rest of Congress gets it too.