What Happens If Congress Fails to Raise the Debt Ceiling?

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According  to the Washington Post, the White House is warning that catastrophe will strike if Congress fails to raise the limit on the national debt: The Government has  too little cash to pay creditors, thus the U.S. government would default. Interest rates would skyrocket, throttling credit and collapsing the sputtering "economic recovery."

Treasury Secretary Timothy F. Geithner has already begun planning for the catastrophe. First, by juggling the books to conserve cash. One short term,  unsustainable maneuver would be to borrowing money from a pension fund for federal workers to pay interest obligations and forestall default.

Geithner also has authority to pay investors first for interest they're owed on the debt, according to a decades-old legal opinion. Republicans say this would avert "official default" – but, let's be real, the distinction would be lost on global financial markets.

The nation will pay a "substantial price in higher interest rates if it relied on such evasive maneuvers", the cautious Government Accountability Office said in a recent study.

"I think the failure to meet any commitment would be viewed by the markets as default and would be deeply unnerving," said Robert Rubin, former Treasury Secretary on President Clinton. "We don't know" what would happen in the event of default, Rubin said. "But I think it is totally irresponsible to take the risk of trying to find out."

Progressive leaders want a deficit-reduction trigger, which would automatically raise taxes on the rich and corporations before cutting benefits. The debt is forecast to hit the limit in mid-May. Geithner has said he can keep the wolf from the door only until early July.

Geithner is likely to take a series of steps to hedge resources. But even uncertainty has its costs. The GAO found that "general uncertainty" forced the Treasury to pay millions of dollars in higher interest rates in the months leading up to debt-limit increases in the early 2000s and again last year.

Republicans intent on crashing the economy in hopes that somehow Obama will be blamed, are pressing Geithner to prepare for lengthy and stupid battles that could force Treasury for the first time since the debt limit was established in 1917 to stop borrowing and make do with tax revenue. The government is forecast to collect $2.2 trillion in taxes this year and obligated to spend $3.7 trillion. That means Geithner could cover a maximum of 60 percent. Payments to both U.S. soldiers, Social Security, Medicaid and Medicare recipients and payees would be in immediate jeopardy.

Republican idiotic arguments (Like Patrick Toomey R-PA) favoring "partial payments...just as long as 'our' bondholders get paid" speak for themselves. The GAO does not even want to take it on as meaningful since even discussing default is sending tremors through markets right now. In fact, the Fed makes all  payments on debt automatically and actually has no means to "prioritize payments" in such huge system. It would create political hurricanes whose outcome no one can predict, with every move.

Even most pro-business analysts take a dark view of ANY default. Bill Gross, who runs Pimco, the world's biggest bond fund, said in an e-mail that "failure to raise the debt ceiling would be catastrophic – global investors would move money at the margin to countries which have their act together, interest rates might rise by 50 basis points overnight, the stock market would plunge."

The Washington Post reports that " traders have begun hoarding Treasury bills and other short-term assets in case the government stops issuing new debt."

As one analyst quipped: "It's like before a thunderstorm. The birds are quiet in the trees, and there's a very weird mood in the market. But it hasn't yet started to rain. YET."

Photo by dietrich_craig/cc by 2.0/Flickr

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  • When does it end? The US Taxpayer can not keep giving Congress and endless credit card limit? What is the point of a debt ceiling if you keep raising it? The real reason Congress and the President and the FED want it raised is because...THEY WON"T HAVE TO MAKE HARD DECISIONS!!!!!

    These people are still children incapable of making choices that we have elcted them to do. We need a new group of men and women capable of stopping the run away debt that will eventually kill the GLOBAL ECONOMY. Make no mistake if the US Economy goes everyone else goes with it...including CHINA.

    Posted by D Brady, 04/29/2011 10:02am (7 years ago)

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