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Q&A: Why breaking federal debt limit sparks fear

First Published Oct 08 2013 10:25AM      Last Updated Oct 08 2013 10:25 am
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There are legal and political obstacles, too. The government is legally obligated to pay contractors. If not, they could sue for non-payment. And how long would members of Congress stand by as bondholders in China and Japan were paid interest, while Social Security and veterans’ benefits were delayed?

Treasury officials looked into such prioritization during the last showdown over the borrowing limit in 2011. Their conclusion: "There is no fair or sensible way to pick and choose among the many bills that come due every day," according to a report by Treasury’s inspector general.

Q. Couldn’t the government just print more money?



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?

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?

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.

 

 

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