Life After Debt Ceiling
by Craig Jennings, 5/20/2011
On May 16, the United States Treasury auctioned off $72 billion in bonds, and as it did so, it reached the limit of its $14.294 trillion limit on how much it can legally borrow. But the world didn't end. Or at least the bond market -- the collective pool of investors that buy us debt -- went about its businesses as if nothing happened. A full on freak out by the bond market would drive up the cost U.S. borrowing and, according to Federal Reserve Chair Ben Bernanke, "destabilize" the financial system and "have extremely dire consequences for the U.S. economy."
The bond marketeers are maintaining a stiff upper lip, because even though the government can't borrow anymore, it can continue to pay off its current obligations. Tax receipts continually collected by the IRS give the U.S. a stream of income that allows it keep the government's lights and pay interest on outstanding debt. However, because the U.S. will spend some $1.6 trillion more than it takes in this year, this situation will have to end.
In fact, even before May 16, Treasury Secretary Timothy Geithner began moving the deck chairs around to stay the default date -- the day when we run out of cash to meet the nation's obligations, which include debt payments, Social Security payments, federal contractor bills, and other things that we've promised we'll pay for -- until "about Aug. 2." This shuffling of finances includes suspending the issuance of State and Local Government Series (SLGS) Treasury securities that help state and local governments manage their finances, and on May 16, Treasury suspended payments to federal employees' pensions.
No one is one thundered percent certain what will happen as Aug. 2 approaches and passes without a debt ceiling increase. What is certain is that S&P, one of the big three bond rating agencies, will downgrade the U.S. debt rating from a sterling AAA to "selective default." Moody's, another one of the big three raters, would "consider downgrading the [U.S.'s debt] rating," but would also "consider both the recovery prospects and our updated forward-looking credit view." What that means for the government, the economy, and the world's financial system remains unclear. However, a few experts of speculated.
Uber-investor Warrent Buffet called failure to lift the debt ceiling the "most asinine act" ever.
Fed Chief Ben Bernanke said that "It would be extremely dangerous and likely recovery-ending event" and a "very, very bad outcome for the U.S. economy."
Treasury Secretary Geithner warned that it would cause "catastrophic damage to the economy, potentially much more harmful than the effects of the financial crisis of 2008 and 2009."
President Ronald Reagan, in urging Congress to raise the debt ceiling in 1983 pleaded with them to consider the "risks, the costs, the disruptions, and the incalculable damage" that failing to do so would cause.
Even the Chamber of Commerce wants Congress to "raise the current debt ceiling as expeditiously as possible," because not doing so would "create uncertainty and fear, and threaten the credit rating of the United States."
So it seems like it would be a big deal if the U.S. defaulted, yet Republicans insist on holding the economy hostage until they get their way on some sort of
deficit spending deal. According to House Speaker John Boehner (R-OH), the only thing worse than fiscal chaos would be averting said chaos "without simultaneously taking dramatic steps to reduce spending and reform the budget process." Boehner's intrasigence is further marked by what can't be on the table, and that's tax cuts. Meanwhile, on the other side of the Capitol, Sen. John Cornyn says that Republican senators have "no incentive" to raise the debt ceiling (because Democrats theoretically have enough votes to raise the ceiling themselves, but Republicans have pledged to filibuster a debt ceiling increase, so they don't really have enough votes).
While Republican hardliners' wishes might be difficult to accommodate, at least they have been willing to admit that default is, in fact, a bad thing. But even that stance appears to be changing. There now appears to be a growing default denialism among Republican ranks; a group of Republican Congressmen are now downplaying the possible repercussions of default. House Budget Committee Chair Paul Ryan (R-WI) says defaulting for a few days wouldn't be so bad.
Sen. Pat Toomey (R-PA) argues that if we put bond holders at the front of the line for payment -- avoiding technical default, we'll all be OK. Secretary Geithner, begging to differ has called legislation introduced by Toomey "unworkable." But even if we maintain interest payments, as Toomey suggests, the U.S. would break a lot of other financial commitments, including Social Security payments and salaries for troops on the battlefield. No one really knows how the bond market will react to that situation. But the predictions of non-congressional budget community strongly indicate that this isn't something we should be gambling on.
Fiscal and economic calamity could be around the corner, but as the days pass Republicans are demanding more and more concessions from Democrats as they appear less and less willing to take the steps necessary to avoid catastrophe.