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4 Ways the Debt Ceiling Debacle Could Play Out

It's expected that Treasury will not be able to cut the checks starting sometime between Feb. 15 and March 1.

by
Bill Straub

Bio

January 17, 2013 - 12:28 am

The Bipartisan Policy Center acknowledges the Treasury may try to prioritize some payments over others but the department could find it has neither the legal authority nor the technical capacity to do so. More likely, it maintains, the Treasury will collect sufficient revenue to make an entire day’s worth of payments at a time — meaning all payments would be made in turn but everyone anticipating funds from the government would experience delays.

Problems don’t end there. In the month following the start of any default about $500 billion in debt is expected to mature. Normally, the Center said, this would be rolled over by issuing new debt, an avenue rendered unavailable sans a debt limit increase.

Those issues could seem inconsequential compared to the anticipated reaction of the financial markets if the limit is not raised. Investors are expected to dump Treasury bills, pumping up interest rates and leading to inflation. The stock market could panic, leading to a sell-off with an impact felt near and far.

But J.D. Foster, a senior fellow in the Economics of Fiscal Policy at The Heritage Foundation, argues that the only way the federal government would default on its debt is if the Treasury opts to do so. There is sufficient money entering the system to meet debt service if no agreement is reached although such a move likely would result in a partial government shutdown

“This means certain governmental functions are suspended because the Treasury lacks the authority to spend — not because it lacks the means to spend,” Foster said. “Further, a government shutdown applies primarily to those activities funded by what is called ‘discretionary’ spending, essentially the day-to-day operations of the government, as opposed to entitlement spending such as Social Security and Medicare.”

Foster expressed confidence the Treasury will “take the actions necessary to preserve the full faith and credit of the U.S. government and avoid defaulting on debts due.”

The Obama administration anticipates governmental spending would have to be cut by 40 percent under the package described by Foster. Sen. John Cornyn (R-Texas), in an op-ed piece for the Houston Chronicle, asserted that “it may be necessary to partially shut down the government in order to secure the long-term fiscal well-being of our country, rather than plod along the path of Greece, Italy and Spain.”

Cornyn said Republicans “are more determined than ever” to implement spending cuts and restructure entitlement programs to secure the nation’s long-term integrity.

“If we don’t reduce spending and reform our three biggest entitlement programs – Medicare, Medicaid and Social Security – then we will strangle economic growth, destroy jobs and reduce our standard of living,” he said.

Obama said that outline carries dire consequences.

“If congressional Republicans refuse to pay America’s bills on time, Social Security checks and veterans’ benefits will be delayed,” Obama said. “We might not be able to pay our troops or honor our contracts with small-business owners. Food inspectors, air traffic controllers, specialists who track down loose nuclear materials wouldn’t get their paychecks. Investors around the world will ask if the United States of America is in fact a safe bet. Markets could go haywire. Interest rates would spike for anybody who borrows money, every homeowner with a mortgage, every student with a college loan, every small business owner who wants to grow and hire. It would be a self-inflicted wound on the economy. It would slow down our growth, might tip us into recession, and ironically, would probably increase our deficit.”

AGREEMENT

The Obama White House and Congress have peered into the abyss before and arrived at solutions, although most proved no more than temporary. Congress balked at raising the debt limit to $16.4 trillion in August 2011 and demanded budget cuts to attract support. The administration and congressional leaders finally settled on $917 billion in cuts over 10 years in exchange for a $900 billion hike in the debt limit. Spending under the deal therefore was cut deeper than the increase in the debt limit.

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