WASHINGTON – It’s fair to say there hasn’t been this much attention paid to a ceiling since Michelangelo completed his work in the Sistine Chapel.
And in this instance the effort is neither as beautiful nor rewarding.
Americans may soon experience firsthand what the hubbub over the nation’s debt ceiling is about. Come Oct. 17, according to Treasury Secretary Jack Lew, the federal government’s authority to borrow the funds necessary to meet its obligations will be reached. Unless Congress responds quickly and raises the debt ceiling above its current $16.7 trillion level, world markets could face an economic meltdown.
Yet, as matters currently stand, lawmakers may not meet that looming deadline. Raising the debt ceiling, which many in Congress consider an odious proposition in the best of times, is embroiled in the protracted debate over a stopgap government spending bill and funding for the Affordable Care Act, also known as Obamacare.
The battle already has led to a partial shutdown of the federal government, leading to service gaps. And now it may force the U.S. to default on at least some of its bills.
Congress, Lew said, is “playing with fire.”
“If the United States government, for the first time in its history, chooses not to pay its bills on time, we will be in default,” he said Sunday during an appearance on State of the Union on CNN. “There is no option that prevents us from being in default if we don’t have enough cash to pay our bills.”
Since reaching the debt limit is an unprecedented happenstance, no one can predict with any certainty what might occur. But even the threat of potential default has in the past created tremors in the worldwide economy. After weeks of negotiations in 2011, Congress and the White House reached a deal to raise the debt limit on the default deadline of Aug. 2, 2011. That near disaster led to a downgrading of the nation’s credit rating, increased uncertainty within the business community and led to a drop in consumer confidence. Financial markets fell in response.
From the second to the third quarter of 2011, as an outgrowth of the debt ceiling dispute, household consumption fell $2.4 trillion.
“If Congress were to repeat that brinksmanship in 2013, it could inflict even greater harm on the economy,” Lew said. “And if the government should ultimately become unable to pay all of its bills the results could be catastrophic.”
Last week the Treasury Department released a report, “The Potential Macroeconomic Effect of Debt Ceiling Brinksmanship,” concluding that a default has the potential to freeze credit markets, force a decline in the value of the dollar and hike interest rates.
“The U.S. dollar and Treasury securities are at the center of the international finance system,” it said. “In the catastrophic event that a debt limit impasse were to lead to a default on Treasury securities, financial markets could be shaken to their core as was seen in late 2008, which resulted in a recession worse than any seen since the Great Depression.”
Vanguard, one of the world’s largest investment management companies, warns the economic impact of failing to raise the debt limit would be hard to quantify but would almost surely prove significant.
“Confidence in the U.S. government’s ability to function and fund itself would be shaken with ramifications extending from the confidence of domestic businesses and consumers to the faith of investors both at home and abroad,” said Vanguard economist Andrew J. Patterson.
Publicly, at least, House Speaker John Boehner (R-Ohio), who is leading the charge against the spending package and Obamacare, is warning that it is unlikely the lower chamber will pass a “clean” debt limit increase unless President Obama acquiesces on either defunding or postponing implementation of the Affordable Care Act. Obama has refused to negotiate over the issue, maintaining it’s the job of lawmakers to maintain the financial integrity of the U.S.
Boehner squarely places responsibility for the developing crisis on Obama and Senate Democrats, asserting they are placing “the economy at risk.”
“Listen, there’s never been a president in our history that did not negotiate over the debt limit,” Boehner said. “Never. Not once. As a matter of fact, President Obama negotiated with me over the debt limit in 2011. He also negotiated with the Blue Dog Democrats to raise the debt ceiling in 2010. The way to resolve this is to sit down and have a conversation to resolve our differences.”