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.”
Some lawmakers, like Sen. Tom Coburn (R-Okla.), dismiss the warnings, insisting that the stated consequences of raising the debt ceiling are overblown.
“I would dispel the rumor that is going around that you hear on every newscast that if we don’t raise the debt ceiling, we will default on our debt – we won’t,” Coburn said on CBS This Morning. “We’ll continue to pay our interest, we’ll continue to redeem bonds and we’ll issue new bonds to replace those. So it’s not entirely accurate.”
Lew informed Congress that the Treasury has employed “extraordinary measures” to keep the wolf away from the door but those efforts have been exhausted. By Oct. 17, the U.S. Treasury is expected to be left with only $30 billion – a sum far short of net expenditures on certain days, which can reach as high as $60 billion. Without sufficient cash on hand, it will prove impossible for the U.S. to pay its creditors.
Raising the debt limit, the Obama administration says, is a duty that rests solely with Congress under Article I, section 8 of the U.S. Constitution, which grants the House and Senate the sole power to borrow money. Historically, until 1917, Congress authorized each individual debt issuance separately. That practice ended with the onset of WWI when, under the Second Liberty Bond Act of 1917, it allowed the government to borrow money as needed up to an aggregate amount now known as the debt ceiling.
In 1979, the House of Representatives adopted a rule that automatically raises the debt ceiling when a budget is approved without the need for a separate vote on the debt ceiling. The House can waive or repeal the rule. In this instance, in the absence of a spending bill, a vote is required to raise the limit.
“Extending borrowing authority does not increase government spending — it simply allows the Treasury to pay for expenditures Congress has already approved,” Lew said.
The public debt represents the value of all outstanding securities issued by the Treasury and other federal agencies to fund the government. The debt rises as a result of government spending and ebbs as a result of tax revenues and other receipts.
Federal debt as a share of the nation’s gross domestic product has historically increased as a result of wars and recessions when spending is forced upwards and falls after the crisis subsides. In 1945, for example, with the close of WWII, the debt held by the public as a share of GDP hit 113 percent but fell steadily over the following 30 years. In more recent decades the federal government has broken with that tradition and borrowed more heavily to fund various programs.
The job of managing the federal debt falls to the Bureau of the Public Debt within the Treasury Department. It divides the IOUs into two primary categories – intergovernmental holdings, which reached about $4.8 trillion as of April 2, and debt held by the public, about $12 trillion.
The intergovernmental debt is held by about 230 federal agencies. The Social Security Trust Fund takes the revenue it collects from the FICA tax and purchases U.S. Treasury Bonds to accrue interest on revenues before the money is distributed to beneficiaries. As of April 2, the Social Security Trust Fund and the Federal Disability Insurance Trust Fund held $2.7 trillion in U.S. debt. Other agencies follow suit. The Office of Personnel Management – in order to help fund employee retirement, life insurance, health insurance and other benefits – holds about $1.12 trillion in securities.
But most of the nation’s debt is held by the public in one form or the other. Of that $12 trillion in public debt, about 44 percent is held by foreign governments who have counted on the U.S. to pay off.
China is the largest investor, holding U.S. securities valued at about $1.3 trillion according to the most recent count. Japan holds $1.108 trillion of the nation’s debt while Caribbean banking centers are third with $291 billion.
The Federal Reserve, which in recent years has upped its purchases of government notes to keep the economy afloat, holds IOUs valued at about $1.66 trillion. State and local governments have purchased securities valued at $709.1 billion.