Quantcast
Get breaking news alerts via email

Click here to manage your alerts
Q&A: Why breaking federal debt limit sparks fear


< Previous Page


A. No. The Federal Reserve, an independent agency, is responsible for creating money. The government funds itself through tax revenue and borrowing.

Q. What else could Treasury do?

Join the Discussion
Post a Comment

A. It could make its interest payments first — then delay all other payments until it collects enough tax revenue to make a full day’s payments. That would avoid choosing among competing obligations.

But that would lead most other payments to be delayed. Example: Social Security benefit payments worth about $12 billion, scheduled to be paid Oct. 23, would be delayed for two days, according to an estimate by the Bipartisan Policy Center. Tax refunds slated for Oct. 24 would probably be delayed until Oct. 28.

And on Nov. 1, nearly $60 billion in Social Security benefits, Medicare payments and military paychecks are due. With no increase in the borrowing limit, those payments would likely be delayed, possibly for up to two weeks.

Q. Would that avoid a default?

A. Impossible to say. One problem is that the government would likely have to pay higher interest on new debt. Consider: On Oct. 24, the government must redeem $93 billion in short-term debt. Normally, it sells new debt to pay off old debt. This step doesn’t increase total debt, so it would still be allowed even if the borrowing limit wasn’t raised. Yet given the risk of a default, investors would demand higher rates on new U.S. debt. Short of cash, the government might be unable to pay off its maturing debt. The result: a default.

Q. Could the president just ignore the debt limit?

A. Some experts say he could. The 14th Amendment to the Constitution says, "The validity of the public debt of the United States, authorized by law ... shall not be questioned." But the White House has said its own lawyers don’t think he has the authority to do so. Nor is it clear that many investors would buy bonds issued without congressional approval.

Q. Are global investors panicking yet?


story continues below
story continues below

A. The stock market has drifted lower over the past couple of weeks. But investors aren’t panicking. And long-term Treasury yields have been mostly unchanged. Stocks could sink further just before Oct. 17 if the government remains partially shut and no sign of a deal on the debt limit seems near. Investors would likely also dump Treasurys.

"There would be a rush to the door," predicts Steve Bell, an analyst at Bipartisan Policy Center.

Interest rates on some short-term Treasurys have risen slightly in the past week. That shows that the deadline might be making some investors nervous. Bell’s group estimates that the 2011 fight over the debt limit inflated federal borrowing costs by $1.3 billion, or about 0.5 percent, that year. Over 10 years, the estimated cost comes to nearly $19 billion.

Q. What would the economic impact of all this be?

A. Many foresee a nightmare. No longer able to borrow, the government could spend only from its revenue from taxes and fees. This would force an immediate spending cut of 32 percent, the Bipartisan Policy Center estimates.

If the debt limit wasn’t raised through November, Goldman Sachs estimates that government spending would be cut $175 billion. That’s equivalent to about 1 percent of the economy.

On top of that, stock markets would likely fall. Household wealth would shrink. Consumer confidence could plunge. Americans would cut back on spending. Higher rates on government debt would raise other borrowing costs, including mortgage rates.

Q. Isn’t the fight over the debt limit about an out-of-control budget deficit? Doesn’t government spending need to be cut?

A. This year’s deficit will likely be the smallest in five years, thanks to higher tax revenue and government spending cuts. The CBO projects that the deficit will be $642 billion for the budget year that ended Sept. 30. Though still large by historical standards, that compares with the four previous years of $1 trillion deficits. Many economists think it’s healthier for spending cuts to be made gradually — rather than from a huge and immediate cut of the kind that would follow a breached debt limit.

Q. Why is it potentially catastrophic for the government to miss a payment on its debt and default?

A. In part because the repercussions would be felt worldwide by a global economy that still isn’t at full health. Banks in the United States and overseas use Treasurys as collateral when they borrow from each other. If Treasurys were no longer seen as risk-free, it would disrupt borrowing and jolt credit markets. A financial crisis like the one in 2008 could follow.

Next Page >


Copyright 2014 The Salt Lake Tribune. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Top Reader Comments Read All Comments Post a Comment
Click here to read all comments   Click here to post a comment


About Reader Comments


Reader comments on sltrib.com are the opinions of the writer, not The Salt Lake Tribune. We will delete comments containing obscenities, personal attacks and inappropriate or offensive remarks. Flagrant or repeat violators will be banned. If you see an objectionable comment, please alert us by clicking the arrow on the upper right side of the comment and selecting "Flag comment as inappropriate". If you've recently registered with Disqus or aren't seeing your comments immediately, you may need to verify your email address. To do so, visit disqus.com/account.
See more about comments here.
Staying Connected
Videos
Jobs
Contests and Promotions
  • Search Obituaries
  • Place an Obituary

  • Search Cars
  • Search Homes
  • Search Jobs
  • Search Marketplace
  • Search Legal Notices

  • Other Services
  • Advertise With Us
  • Subscribe to the Newspaper
  • Access your e-Edition
  • Frequently Asked Questions
  • Contact a newsroom staff member
  • Access the Trib Archives
  • Privacy Policy
  • Missing your paper? Need to place your paper on vacation hold? For this and any other subscription related needs, click here or call 801.204.6100.