Playing chicken with the full faith and credit of the United States officially began at about 9:44 a.m. when National Journal sent out the following Tweet: “BREAKING: The U.S. has officially reached its debt ceiling.” It’s not like no one saw this coming. Treasury Secretary Tim Geithner has been warning Congress since the beginning of the year that the legal limit on how much the government could borrow to meet its financial obligation was fast approaching.
The White House and Congress have been embroiled in tense negotiations to fashion legislation that would raise the debt ceiling and impose some long-forgotten fiscal discipline on Uncle Sam. But until that bill becomes law, Geithner is reduced to diving into the nation’s seat cushions to find cash to pay its bills now that it no longer has the authority to borrow money. Earlier this month, Treasury stopped issuing the bonds that states and localities use to help finance things such as infrastructure projects. Today, Geithner announced that Treasury would no longer make certain deposits to the federal pension fund and thrift savings plan. Treasury is legally obligated to pay the money back, by the way.
But today’s milestone means that we’re hurtling towards a more catastrophic deadline of Aug. 2. And if you think this is more Washington scare-mongering or has no direct impact on you, think again.
From Geithner’s Jan. 6 letter to Congress:
Interest rates for state and local government, corporate and consumer borrowing, including home mortgage interest, would all rise sharply. Equity prices and home values would decline, reducing retirement savings and hurting the economic security of all Americans, leading to reductions in spending and investment, which would cause job losses and business failures on a significant scale.
Default would have prolonged and far-reaching negative consequences on the safe-haven status of Treasuries and the dollar’s dominant role in the international financial system, causing further increases in interest rates and reducing the willingness of investors here and around the world to invest in the United States.
And on Page 4 of that letter Geithner warned that “Payments on a broad range of benefits . . . would be discontinued, limited, or adversely affected.” On Page 4 of his Jan. missive his listed the affected budget items, including military salaries and benefits, Social Security and Medicare benefits, Medicaid payments to states and all tax refunds.
From an April report by the Congressional Research Service:
After noting that the government needed an additional $738 billion (above the $14.29 trillion limit) to pay the obligations in the remainder of the current 2011 budget, that ends on Sept. 30, CRS writes, “. . . the federal government would have to eliminate all spending on discretionary programs, cut nearly 70% of outlays for mandatory programs, increase revenue collection by nearly two-thirds, or take some combination of those actions in the second half of FY2011 (April through September 30, 2011) in order to avoid increasing the debt limit.”
• Say goodbye to 642,500 jobs;
• Add nearly $19,175 to every mortgage in process;
• Lop 1% off the United States GDP;
• Give the S&P a 6.3% plus haircut;
• 401(K)s lose an average of $8,816.
There are way too many people on Capitol Hill who don’t believe any of this will come to pass — or that it won’t be that bad — if the United States reaches the Aug. 2 deadline without congressional action to raise the debt ceiling. Call me chicken, but I am not keen on proving them wrong.