The federal government on Monday reached its $14.3 trillion legal limit on borrowing, which forced the Treasury to step up the implementation of a series of financial and book keeping maneuvers to buy additional time before facing the real prospects of the first U.S. debt default in history.
The Obama administration says that Congress must raise the debt ceiling – the statutory limit on how much the Treasury may borrow to make up for revenue shortages – by at least $2 trillion through the end of the year to keep the government afloat. But House and Senate Republican leaders and many tea party activists are insisting on linking a debt ceiling vote to agreement on major cuts in government spending, including Medicare, Medicaid and other entitlements.
William Gale, senior fellow at the Brookings Institution, told The Fiscal Times that: “The actual hitting of the debt limit today is not a big economic event, because the Treasury has this wiggle room. If they ran out of wiggle room it would be a problem. The Treasury has a number of thing things it can do to postpone when the debt limit is actually binding even though we hit it today.”
However, Treasury Secretary Timothy Geithner and Federal Reserve Board chairman Ben Bernanke have repeatedly warned that Congress is playing with fire and could trigger a “cataclysmic” upheaval in the economy if the government begins to default on outstanding bonds and Treasury notes, much of them held by foreign countries including China, Japan, Great Britain, and oil exporting countries in the Middle East. It might also force the government to withhold salaries and benefit checks to members of the military, seniors, investors and businessmen – while driving up the government’s cost of borrowing.
“This would be an unprecedented event in American history,” Geithner wrote to Sen. Michael F. Bennet, D-Colo., last week: “A default would inflict catastrophic, far-reaching damage on our Nation’s economy, significantly reducing growth and increasing unemployment.”
But some conservative lawmakers, including Sen. Pat Toomey, R-Pa., and many of the freshmen GOP House members, have hinted they might be willing to risk a default on U.S. debt to extract major cuts in long term government spending and bring down the budget deficit, which is now pegged at $1.5 trillion
Toomey, like other conservatives, agrees we should raise the debt limit, but he wants the White House to commit to long-term debt reduction that puts the country on a sustainable fiscal path. Toomey told a Pennsylvania publication, “I have argued from the beginning that failure to raise the debt limit eventually becomes disruptive, and that’s why I think we should raise it. However, it does not need to result in a default. The [Obama] administration . . . wants to cow Republicans into voting for a debt limit increase without the kind of spending cuts and process reform that some of us demand because we’re on an unsustainable fiscal path.”
A new George Washington University /POLTICO Battleground Poll out today found that 56 percent of Americans say that failure to raise the debt-limit will have a “disastrous” effect on the economy. Just 32 percent feel it will have no serious effect.
nearly $19,175 would be added to every
mortgage in process; one percent would
be shaved off of the United States GDP;
and there would be a loss of 642,500 jobs.
A liberal think tank, meanwhile, concluded that if the U.S. were to default on its debt, the effects on the U.S. economy would be crippling. A new report out today by Third Way, entitled “The Dominoes of Default,” says 401Ks would lose an average of $8,816; nearly $19,175 would be added to every mortgage in process; one percent would be shaved off of the United States GDP; and there would be a loss of 642,500 jobs.
A bipartisan group of six House and Senate members chaired by Vice President Joseph Biden have met three times in the past few weeks in search of a compromise long term budget plan that would pave the way for raising the debt ceiling. Meanwhile, with the House on recess this week, House Budget Committee Chairman Paul Ryan, R-Wis., addressed a luncheon at the Chicago Economic Club to retool his message on reforming Medicare.
The House-passed GOP budget plan drafted by Ryan calls for a major overhaul of entitlements, including converting Medicare, the health care program for seniors, to a voucher program. Those proposals drew sharp criticism at town hall meetings.
“Our budget makes no changes for those in or near retirement, and offers future generations a strengthened Medicare program they can count on, with guaranteed coverage options, less help for the wealthy, and more help for the poor and the sick,” Ryan said in prepared remarks. “Our plan is to give seniors the power to deny business to inefficient providers. Their plan is to give government the power to deny care to seniors.”
“Class warfare may be clever politics, but it is terrible economics,” added Ryan, who is considering running for an open Senate seat. “Redistributing wealth never creates more of it. Sowing social unrest and class envy makes America weaker, not stronger. Playing one group against another only distracts us from the true sources of inequity in this country - corporate welfare that enriches the powerful, and empty promises that betray the powerless."
Geithner and Treasury officials, meanwhile, have begun implementing a set of extraordinary financial maneuvers to buy a couple of months of additional time by reducing existing debt, postponing scheduled sales of government notes and bond and tapping into government funds.
Today, Geithner notified Senate Majority Leader Harry Reid, D-Nev., that the administration has begun dipping into federal retiree programs to help fund government operations. The Treasury is freeing up funds for government operations by not fully investing the Government Securities Investment Fund (“G Fund”) of the Federal Employees’ Retirement System and the Civil Service Retirement and Disability Fund in interest-bearing U.S. securities. By law, these two funds will be made whole once the debt limit is increased, and federal retirees and employees will be unaffected by these actions.
The Treasury has suspended reinvestment in the Government Securities Investment Fund (G Fund) five times in the past 20 years in previous debt limit impasses.
The Treasury previously took steps to suspend issuance of some securities used by state and local government to manage their finances. And in February it began winding down the Supplemental Financing Program, which was instituted during the early stages of the financial crisis to help the Fed manage its balance sheet by having Treasury issue short-term government debt and placing the proceeds at the Fed.
Former Treasury Secretary Robert Rubin used many of these financial maneuvers beginning in November 1995 to forestall a government default on its borrowing by four and half months during a bitter budget dispute between Democratic President Bill Clinton and a Republican-controlled Congress. While Geithner hopes to have similar success in postponing the day of reckoning, Treasury officials this time clearly will have far less room to maneuver to keep the government operating because the sheer magnitude of the federal deficit and debt – and the associated borrowing needs – overwhelms whatever benefits the Treasury might derive from manipulating government accounts and investment strategies.
Debt Ceiling D-Day: U.S. Hits $14.3 Trillion Debt Limit (ABC News)
U.S. Reaches Debt Ceiling, Begins Suspending Some Investments to Delay Impact (LA Times)
Treasury Bill Rates at Almost Record Low as U.S. Debt Ceiling Is Reached (Bloomberg)