The debt limit crapshoot

Rick Moran
Less than 3 weeks from now, the US will blow through the debt ceiling established by Congress last year and lawmakers will be forced to raise it again or the US will face default.

Or not. Or maybe no one has any idea what will happen. It's pretty clear that the Treasury Department is going to have to prioritize payments to households, businesses, and contractors using the cash from taxes that comes in every month. But really, how can they prioritize? What's the criteria that allows them to send out checks to some people and not others?

No one knows. And no one can predict the reaction by the markets to a failure to raise the debt ceiling.

With a weak economy, is it prudent to play mad scientist and experiment with the "full faith and credit of the US?"

The Atlantic:

The truly scary thing about going over the debt cliff isn't what we think will happen--a scramble to prioritize payments, delayed checks to groups like veterans and senior citizens, and angry, confused investors.

The truly scary thing is that we actually have no idea what will happen. We don't know if it's even possible for the government to prioritize payments to millions of different clients. Households, businesses, and investors don't know how long they'll have to wait for their money, whether it's a defense contract deal, a doctor's reimbursement, or a Social Security check. And nobody will know how long the nightmare will go on. Our international economic reputation--reflected in our low interest rates, the safe haven status of Treasuries (when everything goes haywire, investors clamor for U.S. debt), and our status as global reserve currency--rests on the assumption that Washington isn't completely insane.

That assumption will be proved wrong if we make it past October 17 without increasing the debt limit. That was the drop-dead date announced this morning, when Treasury Secretary Jack Lew sent House Speaker John Boehner a note detailing the dangers of breaking through the debt ceiling.

[...]

Besides Denmark, no other country I know of asks legislators to vote to pay for something they've already voted to pay for. The debt ceiling should not exist. But now that it does exist, it must be said again and again that it does not create new laws. It just affirms that we will pay for old laws. It's not a smart scalpel for shaving the deficit, it's a guillotine hanging over the head of the country.

Even when the blade doesn't fall, it can still have consequences. The Summer 2011 showdown that nearly resulted in default cost taxpayers $19 billion this decade in elevated interest rates as investor panic began to build. That's the price of playing with the full faith and credit of the United States.

Just imagine what the "largest self-imposed financial disaster in history" would cost us.

Those predicting that nothing much will happen are as clueless as those predicting disaster. In unprecedented situations, with no history to guide us, is it responsible governance to take the chance that catastrophe will occur - even if that chance is a small one?

Obama is going to take that chance, refusing to negotiate over the debt ceiling. The GOP may be willing to take that chance as well by inserting an Obamacare delay for one year - something that the president has already said he would veto.

With both sides willing to play with fire, it's likely that someone is going to get burned.



Less than 3 weeks from now, the US will blow through the debt ceiling established by Congress last year and lawmakers will be forced to raise it again or the US will face default.

Or not. Or maybe no one has any idea what will happen. It's pretty clear that the Treasury Department is going to have to prioritize payments to households, businesses, and contractors using the cash from taxes that comes in every month. But really, how can they prioritize? What's the criteria that allows them to send out checks to some people and not others?

No one knows. And no one can predict the reaction by the markets to a failure to raise the debt ceiling.

With a weak economy, is it prudent to play mad scientist and experiment with the "full faith and credit of the US?"

The Atlantic:

The truly scary thing about going over the debt cliff isn't what we think will happen--a scramble to prioritize payments, delayed checks to groups like veterans and senior citizens, and angry, confused investors.

The truly scary thing is that we actually have no idea what will happen. We don't know if it's even possible for the government to prioritize payments to millions of different clients. Households, businesses, and investors don't know how long they'll have to wait for their money, whether it's a defense contract deal, a doctor's reimbursement, or a Social Security check. And nobody will know how long the nightmare will go on. Our international economic reputation--reflected in our low interest rates, the safe haven status of Treasuries (when everything goes haywire, investors clamor for U.S. debt), and our status as global reserve currency--rests on the assumption that Washington isn't completely insane.

That assumption will be proved wrong if we make it past October 17 without increasing the debt limit. That was the drop-dead date announced this morning, when Treasury Secretary Jack Lew sent House Speaker John Boehner a note detailing the dangers of breaking through the debt ceiling.

[...]

Besides Denmark, no other country I know of asks legislators to vote to pay for something they've already voted to pay for. The debt ceiling should not exist. But now that it does exist, it must be said again and again that it does not create new laws. It just affirms that we will pay for old laws. It's not a smart scalpel for shaving the deficit, it's a guillotine hanging over the head of the country.

Even when the blade doesn't fall, it can still have consequences. The Summer 2011 showdown that nearly resulted in default cost taxpayers $19 billion this decade in elevated interest rates as investor panic began to build. That's the price of playing with the full faith and credit of the United States.

Just imagine what the "largest self-imposed financial disaster in history" would cost us.

Those predicting that nothing much will happen are as clueless as those predicting disaster. In unprecedented situations, with no history to guide us, is it responsible governance to take the chance that catastrophe will occur - even if that chance is a small one?

Obama is going to take that chance, refusing to negotiate over the debt ceiling. The GOP may be willing to take that chance as well by inserting an Obamacare delay for one year - something that the president has already said he would veto.

With both sides willing to play with fire, it's likely that someone is going to get burned.