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Government faces debt ceiling deadline

By | October 15, 2013 | News (2)

The government shutdown entered day 16 after Congress failed to pass a bill granting funding to portions of the federal government on Oct. 1.

However, what many economists say is an even more catastrophic deadline is approaching this week if the government does not act soon to raise the nation’s debt ceiling.

On Tuesday the debt-rating company Fitch warned it might cut the AAA sovereign credit rating of the U.S.  During the last debate over the debt ceiling, in July of 2011, Standard & Poor’s downgraded the U.S. credit rating for the first time in its history, taking it from a AAA to an AA+, throwing international markets into turmoil. At that time, Moody’s and Fitch retained a rating of AAA.

What is the debt ceiling?

The government shutdown debate has paralleled the debate about whether to raise the debt ceiling.  As a result, many have seen the two as synonymous.

In fact, they are two totally separate issues.

While the government shutdown deals with the lack of an agreed upon budget to plan funding for certain programs within the government, the debt ceiling addresses the ability of the U.S. Treasury to borrow money to fund programs already approved by Congress and to service the national debt.

The Treasury Department defines the debt ceiling as, “the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.”

“The debt limit does not authorize new spending commitments. It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past.”

What happens if the U.S. surpasses the debt ceiling?

If a bill lifting the debt ceiling is not passed by Thursday, Treasury Secretary Jack Lew warned that, “extraordinary measures will be exhausted,” and the government will be unable to borrow money to fully pay for approved government programs or money due to the nation’s creditors.

“There are no other legal and prudent options to extend the nation’s borrowing authority,” said Lew.

Dr. Thomas Holyoke, professor of political science at Fresno State, said that if this happens, “We’d very quickly, I don’t know exactly how quickly, but pretty quickly a debt will come up that we’re suppose to pay that we’re not able to pay. And that will be the first time ever that the US has defaulted.”

What would it mean if the U.S. defaulted on its debt?

No one is quite certain what would happen if the world’s largest economy failed to pay its debt.

“That’s a hard one because we haven’t had it happen,” said David Vera, professor of economics at Fresno State.

“If you look at consumer confidence and investor confidence, and look at in the past how it has responded, in 2011 the consumer expectations turned really sour. We actually had the same discussion in 2011. So I think there is a general agreement within economics there could be a substantial effect because of how people expect the economy to react in the short run.”

The mainstream theory is that international interest rates would rise. As the value of U.S. bonds would decline, it would have an international impact due to the fact that global interest rates are largely tied to the U.S. Treasury.

According to a report by the Bipartisan Law Center, the government would only receive about 68 percent of the money needed to fund federal programs and service the national debt.

Put another way, the U.S. Treasury will have only an estimated $222 billion to finance $328 billion worth of programs such as Social Security benefits, veterans benefits and interest on bonds.

It’s uncertain how those funds would be distributed, but regardless it would constitute a major cut or outright defunding of some programs.

Can the president authorize the U.S. Treasury to prioritize funds to avoid default?

One of the major questions in the political fight has become whether the executive branch has the authority to prioritize some of the tax money it will still receive to service the national debt.

Republican Rep. Justin Amash said, “There’s no way to default on Oct. 17. We will have enough money to make interest payments.”

Holyoke doesn’t see evidence that strategy is workable. “Nope, can’t be done. The president’s treasury secretary laid this out very clearly to the Congress that the law does not provide any means for doing that.”

“The Treasury basically pays this stuff automatically for whatever debts are coming due. The system is not up to handle a massive change like this. They can’t do it.”

The Treasury Department also does not see any way to prioritize the payments.

“While Congress enacted these expenditures, it did not prioritize them, nor did it direct the president or the Treasury to pay some expenses and pay others. As a result, Treasury officials determined that there is no fair or sensible way to pick and choose among the many bills that come due every day,” said Treasury Department Inspector General Eric M. Thorson.

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