The Obama administration says a U.S. default would be “catastrophic.” Economists say it could plunge the country into recession and prompt a global financial meltdown.
On Sunday, Republican House of Representatives Speaker John Boehner ruled out a vote on a straightforward bill to raise the government’s borrowing authority before an Oct. 17 deadline, moving the country closer to the possibility of default.
If Congress fails to raise the debt ceiling the government might run out of money to pay its bills already in the middle of this month. This crisis would challenge global confidence in the United States as the world’s financial leader and could permanently increase the nation’s borrowing costs.
“The potential is disastrous,” said Gus Faucher, senior economist with PNC Financial Services Group. “We would see interest rates spike across the board. We’d see a huge crash in the dollar.
“People count on lending their money to the federal government and getting it back, and if that trust is taken away – it’s never happened that we haven’t met our obligations as a nation – then that has very, very negative consequences for the U.S. economy.”
The whole situation may lead to severe consequences, with government being shut for two weeks already, many seasoned political observers still expect Congress to ultimately reach an eleventh-hour deal to lift the government’s borrowing limit.
If the government runs low on cash, it will have to withhold a range of payments. Retirees might not get their Social Security checks, especially worrisome for the millions of Americans who depend almost entirely on the social insurance program for income. The same goes for Medicare and Medicaid recipients.
Holders of Treasury notes, from Wall Street and other global banks to foreign governments, also could get stiffed, jeopardizing the solvency of many financial institutions and choking off global credit flows.
The U.S. also would struggle to pay the interest on its debt, including a $6 billion payout due at the end of the month. At that point, the U.S. would be in default of its obligations. The value of Treasury bonds and the dollar would nosedive. The nation’s borrowing costs would soar as anxious investors demanded a higher return to buy suddenly shaky U.S. debt, according to the CBS News.
Nevertheless, as the NY Times reports nobody believes the country will actually exceed the debt limit — which is exactly why it might, as despite all the predictions of panic, the stock market was down only marginally over the last couple of sessions.
The more Wall Street is convinced that Washington will act rationally and raise the debt ceiling, most likely at the 11th hour, the less pressure there will be on lawmakers to reach an agreement. That will make it more likely a deal isn’t reached.
However, it looks like that to many Republicans the possibility of the world’s lone superpower juggling its bills doesn’t seem so bad.
“We are not going to default on the public debt. That doesn’t mean that we have to pay every bill the day it comes in,” Republican Representative Joe Barton of Texas said on CNBC on Monday.
Barton’s position could reflect a genuine disagreement with warnings by Wall Street and Washington analysts or he could be downplaying the default to gain tactical advantage in negotiations with President Barack Obama. But Barton isn’t an outlier.
Nearly every Republican in the House of Representatives voted for a bill in May that in case of Congress failure to extend its borrowing authority, the Treasury Department will have prioritize bond payments and Social Security retiree benefits over other obligations.
Republicans believe that approach would minimize the fallout if Congress fails to raise the debt ceiling before the Treasury Department exhausts its borrowing authority on October 17, says the Reuters.
Last week, Vincent Reinhart, former head of the Federal Reserve’s monetary division and now managing director and chief United States economist for Morgan Stanley, said that the US “government is not going to default, ever.”
“As political theater,” he said, “the debt ceiling is not a useful threat, because politicians are basically threatening to shoot themselves, as they will rightly shoulder the blame for the serious global economic consequences of a default.”
The debt ceiling is the total amount of money the U.S. government can borrow (by selling Treasury bonds) to pay its obligations, including interest on the national debt, Social Security and Medicare benefits, and many other payments.
That limit is currently $16.7 trillion, although technically the government already exceeded it in May. The Treasury Department has since used various measures to continue borrowing.