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Many Republicans think hitting the debt ceiling is no big deal. They’re wrong.

There seems to be a growing sense among some Republicans in Congress that crashing into the debt ceiling is no big deal. That's led a few of them to make some wildly incorrect statements about the consequences here.

Debt-ceiling denial isn't a position shared by the entire GOP, but it's worth correcting all the same. Here's a rundown from the past few days:

1) Rep. Ted Yoho (R-Fla.): “I think, personally, [not raising the debt ceiling] would bring stability to the world markets.”

Rep. Ted Yoho of Florida (The Washington Post)

It's hard to find anyone who follows the markets who believes this. Right now, the reigning consensus is that not raising the debt ceiling could be extremely harmful to the global economy. Here's the Treasury Department: "Credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse."

Don't trust the Treasury Department? Here's RBC Capital Markets: "Let us be perfectly clear, crossing the debt ceiling would be catastrophic." Or here's Rob Toomey of SIFMA, which represents hundreds of banks and securities firms: "This would be an unprecedented event, and the consequences for the market are dangerously unpredictable."

2) Sen. Orrin Hatch (R-Utah): "I think the administration could work on who gets paid and who doesn't in a way that would pull us through. I don't think the markets have been spooked so far, and I personally believe that if they realized there was a legitimate attempt to make the government work, they would be less likely [to be spooked]."

Sen. Orrin Hatch of Utah (AP)

Hatch is making a more subtle argument than Yoho. He's basically saying that if we blow past the debt ceiling, the Treasury Department can just prioritize payments to bondholders and delay payments to everyone else — Social Security recipients, let's say — to avert a financial calamity.

There are a few problems with this argument. As we've explored in-depth here, it's not at all clear that "prioritization" is legal or technically feasible. (In fairness, Republicans have endorsed a bill to resolve the legal questions, though not the technical hurdles.)

What's more, even if prioritization worked, it would still cause problems — hitting the debt ceiling would force the federal government to stop around one-third of its payments immediately, which Goldman Sachs estimates would reduce annualized GDP growth by 4.2 percent if it went on for an extended period of time. As even conservative economist Martin Feldstein concedes, "An inability to borrow would have serious economic consequences if it lasted for any sustained period."

And, contrary to what Hatch says, the nation's bankers find this prospect unnerving. "In recent meetings with Republican lawmakers and Obama administration officials, chief executives of the nation's largest financial institutions said putting some payments ahead of others would create insurmountable uncertainty for investors, drive up borrowing costs and cause market disruptions," reports the Wall Street Journal.

In a recent note, Deutsche Bank's David Bianco estimated that Hatch's preferred "prioritization" scenario could cause the S&P 500 stock index to lose 10 percent of its value (the orange line below).

That's not nearly as bad as outright default (which would cause a 45 percent wipe-out), but it's quite severe:

3) Sen. Richard Burr (R-N.C.): "The federal government still has about 85 percent of the revenues we spend coming in, and all they have to do is prioritize that they're gonna pay debt service first. And that leaves some prioritization for federal programs. I'm not as concerned as the president is on the debt ceiling, because the only people buying our bonds right now is the Federal Reserve. So it's like scaring ourselves."

Sen. Richard Burr (R-NC)(Drew Angerer/Getty Images)
Sen. Richard Burr of North Carolina (Drew Angerer/Getty Images)

Burr is making the same "prioritization" argument as Hatch, but his version adds an misleading take on who actually owns U.S. debt — and who would be affected by a potential default.

Despite what Burr is implying, the Federal Reserve owns just a small fraction of U.S. debt. In the second quarter of 2013, there were $11.88 trillion in U.S. Treasury securities outstanding. The Fed held $1.936 trillion, or 16 percent (see p. 96 here).  Burr is correct that the Fed has been one of the largest buyers in recent years, but it's far from the only institution that would be affected by debt-ceiling uncertainty.

The full list includes foreign buyers such as China and Japan (the "rest of the world" owns about 47.1 percent of Treasury securities, or $5.6 trillion), U.S. households (10 percent, or $1.19 trillion), as well as U.S. banks, corporations, mutual funds, money market funds, state and local governments, and pension funds.

That's why the threat of default worries so many people. The Fed that wouldn't be the only one affected. For instance: "Noting that China is a major holder of U.S. Treasurys, Chinese Vice Finance Minister Zhu Guangyao warned Monday that failure by the U.S. to raise its debt ceiling would have global ramifications," reports the Wall Street Journal.

Or this: "It is my strong belief that a true default by the United States Treasury would wipe out bank equity," writes bank analyst Richard Bove. "All bank lending to the private sector in the United States would stop, immediately."


-- Absolutely everything you need to know about the debt ceiling

-- If we hit the debt ceiling, can Obama choose which bills to pay?

--Slate's Dave Weigel has done the best reporting on how a number of congressional Republicans have convinced themselves not to worry about the debt ceiling.



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Ezra Klein · October 8, 2013

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