Who will suffer if there is no debt-ceiling deal?

[skyblue888]

Are they bluffing? Or could Washington politicians really torpedo the economy by refusing to raise the nation's borrowing limit?

The conventional wisdom is that the debt-ceiling drama is mostly political posturing. Once they've made their point, the thinking goes, Republicans and Democrats arguing over how to rein in out-of-control government spending would reach some kind of agreement, raise the federal debt ceiling, and allow the government to keep functioning normally. But businesses and investors are starting to worry. The government will max out its borrowing ability in early August, and will have to dramatically cut spending if it's not allowed to borrow more. Taxes and other revenue only cover about 60 percent of what the government spends. It borrows--by issuing Treasury securities--to finance the other 40 percent or so. Economists are now running the numbers and trying to predict what will happen if the debt impasse continues and Washington has to stop borrowing. This is not work for the squeamish.

There's a lot of talk about the government defaulting on its debt, but that's not likely to happen. The government collects about $200 billion per month in taxes and other revenue, and that cash would keep coming in. It borrows another $130 billion or so each month--the money it would have to live without. Interest payments on the nation's debt--which Washington must pay on time to avoid being in default--amount to about $30 billion per month. If forced to choose, the government would almost certainly prioritize debt payments above other obligations, because welching on bonds considered the world's safest would sink financial markets everywhere and make American the world's biggest deadbeat. And the Treasury Dept. would still have adequate cash flow to cover debt payments and remain in good standing with borrowers.

Almost everything else the government pays for, however, would be vulnerable to sudden cutbacks. Here's who would feel the pain most abruptly:

Social Security recipients. The government is due to deliver $23 billion in Social Security payments on August 3, according to forecasting firm IHS Global Insight. If the government is forced to cut 40 percent of its spending, these Social Security checks may not arrive. The suddenness with which the political battle in Washington will hit the wallets of ordinary Americans is one reason many analysts assume that a true impasse over the borrowing limit will be short-lived. But it could still be damaging. Social Security recipients who depend on their checks to pay other bills could end up running behind, incurring costly late fees or damaging their own credit. And it's no guarantee that if stopped, the government's check-writing machinery will start up again without delays or snafus that hold up checks even longer.

[see 5 upsides to the lousy job market.]

Government employees. Another likely outcome is the shutdown of government offices and the furlough of federal employees. Everyone loves to bash government bureaucrats, but they're a meaningful chunk of the U.S. economy, amounting to 4.4 million workers, including the uniformed military. Many of them will stop getting paychecks, which at a minimum will slow spending and weaken the economy further. That would probably mean the closure of national parks, passport offices, veterans' facilities and many other government offices. Amtrak and the U.S. Postal Service could be affected. The government would probably fence off the military and certain vital services, but even soldiers could be affected if the debt battle drags on.

The unemployed. Washington currently offers extended unemployment benefits to nearly four million people who have exhausted state-level benefits, which last for 26 weeks in most states. Those checks could stop coming, too. One reason unemployment benefits are important is that recipients spend virtually all of the money, providing an immediate boost to the economy. A tighter crunch on the unemployed could also lead to more foreclosures and defaults on other types of consumer debt, since something will have to give if those checks stop arriving.

Investors. Nobody's sure exactly how a sharp cut in federal spending would affect stock and commodity markets--except it would be bad. Federal Reserve Chairman Ben Bernanke told Congress recently that a borrowing moratorium would generate "shock waves through the entire financial system." The U.S. government is the world's biggest spender, and the flow of money from Washington impacts virtually every financial market in the world, through checks sent to thousands of vendors and contractors, the rates paid on Treasury securities, and decisions made by the Federal Reserve. It's almost impossible to predict the daisy chain of events that would unfold as global investors reacted to the sudden upending of the world's financial order.

[see 5 economic disasters that haven't happened.]

But a few general outcomes seem likely. First, a borrowing moratorium of more than a few days might be enough to tip the U.S. and even the global economy into a recession, so banks, employers and foreign governments would suddenly adjust their own spending and prepare for tough times. "Risk" assets like stocks would plunge in value, with safer assets like gold soaring. Investors may flee dollar-denominated assets and search for other safe-haven currencies, though it's hard to tell which ones, since the euro and yen aren't exactly appealing. Some economists worry about a "TARP moment" similar to Sept. 29, 2008, when Congress first voted down the massive bank bailout bill--and the stock market fell about nine percent in a single session. Even if the debt ceiling were lifted after a few days of pandemonium, there could still be lasting damage. "There would be massive dislocation in financial markets, because the recipients of government spending that fail to get priority, and do not get paid, will be unable in turn to meet their own obligations," says economist Nigel Gault of IHS. "Confidence in the ability of the U.S. government to fulfill its most basic responsibilities would be damaged."

Borrowers. Interest rates would go up, but not necessarily soar. U.S. Treasury securities are a baseline investment that anchor the value of many other types of loans, and a sudden risk of default by the Treasury would change that calculus completely. Rates on Treasuries would go higher, to compensate for the increased risk. Many other interest rates would rise in tandem. But other factors would probably keep rates from rising to usurious levels. The Fed would probably act to counter fears of a recession. A recession itself, if one occurred, would weaken demand for credit, which usually pushes rates down. And investors would bid on bonds while expecting an eventual solution from Washington, which means a rate hike could be temporary. Even that, however, could play havoc with global portfolios.

[see why you should worry about a "TARP moment."]

The government itself. Any moved that weakened the economy and threw more people out of work--or simply impeded hiring--would further reduce the government's tax revenues and make the U.S. debt problem worse.

Art lovers, beachgoers, and public TV viewers. A long list of "discretionary" federal programs has been targeted for cuts or elimination, and those could end up getting whacked right away. These tend to be low-visibility programs that don't cost all that much--compared to huge budget items like Medicare or military spending--but fund nice-to-have things that many people would miss if they disappeared. Earlier this year, House Republicans outlined dozens of cuts they'd like to see in things like the National Endowment for the Arts, the National Endowment for the Humanities, the Corporation for Public Broadcasting, beach replenishment, grants for intercity rail service, regional development agencies, and local transit.

If cut, those programs could see funding restored once the crisis passes. But if the big spending cuts happen, Americans will notice that a lot of things they don't necessarily associate with Washington are suddenly unavailable. The federal government is big, indeed. We may be about to find out just how big!

Rick Newman, On Thursday July 14, 2011, 8:57 am EDT

[skyblue888]

I thought this article was very interesting, informative, and to the point.

sky

[Dr. Shane]

Neither political party is talking about not raising the debt ceiling. The worst case scenario seems to be that the Congressional Republicans are going to give the President power to raise the ceiling without their consent. That will basically make the President 100% to blame for the deficit.

The US debt is now 50% greater than it was when the financial crisis began. That means that in just two years we have borrowed half as much money as we did in the previous 238 years.

[ClubV12]

Shane says,

"Congressional Republicans are going to give the President power to raise the ceiling without their consent."

Thats a trap, on several levels. It continues the political process the Republicans have had since the election, get Obama out at all costs, no matter what. Agreed, if Obama is forced into that corner it will look very bad for him indeed come

re-election time.

Another aspect of this is to "kick the can" down the road, do nothing, wait for the next guy to come to office.

What amazes me is the Republicans are now talking about how a default won't be "that bad". That surely we can find the money, somewhere. That no one will actually suffer. Man thats crazy talk! Peace and safety out of one side of the mouth and doom and gloom because of the Demo's out the other side!

One thing I know for sure, God is in control and has drawn a line beyond which NO PARTY can pass. But that line may well include tremendous suffering before it's over. God allowed the Civil War, there WAS a line, but oh the suffering before that line. Fasten your seat belt, this could get real ugly.

[Dr. Shane]

What amazes me is the Republicans are now talking about how a default won't be "that bad". That surely we can find the money, somewhere. That no one will actually suffer. Man thats crazy talk! Peace and safety out of one side of the mouth and doom and gloom because of the Demo's out the other side!

I have not heard any elected Republicans saying that. I have heard similar things from right-wing talking heads but not from elected Republicans.

[ClubV12]

The TOP leaders of the Republican party have been saying that!!! Not some right wing factions, THIS is the current party position. Are they bluffing? Or, are they so intent on getting their way they can't see reality?

Bachman (that lady running for POTUS) just recently said even if they don't get a budget passed we won't default on our loans. She said there is still money coming in and the higher interest rate wont be that bad!!!!

This is a PARTY PLATFORM, a scary one indeed.

[Dr. Rich]

Can someone please tell me how the Government could be in debt since all they need to do to make money is to print more of it? Huh?

The ONLY reason for income tax is to control the people. The ONLY reason reason to print money out of thin air is to control the world.

[Dr. Shane]

The TOP leaders of the Republican party have been saying that!!!

[ClubV12]

I think it WAS Boehner just the other day who was down playing the impact of a default! What they are saying is, we WON'T actually go into "default" on our loans, even if the budget doesn't get passed. Because we will "find the money somewhere".

The idea is: We don't really have to pass a budget, Obama's threats of an actual default are lies. "Tough love" is what we need. No one will miss their social security check, the interest on our National debt (because of a down rating on our credit) won't increase "that much" and some how everyone will still get paid. We'll just borrow more money some other way instead of using the typical method.

Sort of accurate. There are other ways to borrow money, the interest on our debt will increase (what "not that much" means is a mystery). Treasury says we CANNOT pay the bills, period! So someone isn't getting paid! Who? Maybe we can borrow enough money through back door methods to avoid an "actual" default. Maybe. For how long? Another year and half until the election?

Bottom line: GOP is willing to let the country go into what is essentially "default" and then figure out how to deal with paying the bills afterward. Irresponsible, kicking the can, not facing reality.

Bachman is rapidly becoming a voice for the PARTY. The Tea Party, in my opinion, is largely responsible for this current debacle. They absolutely refuse to negotiate and are willing to risk default in obtaining their goals. There not just some "radical right wing" they are, in fact, becoming the very heart of the GOP.

[Dr. Shane]

No, I have not heard that from the GOP leadership at all. The GOP has even offered to raise the debt limit slightly as to give them and the White House more time to negotiate. I see the GOP going to great lengths to prevent default but they are not willing to raise taxes. Obama wants to raise taxes to pay for a government that is way too big. Our monthly deficits now are as big as the annual deficit was in 2007.

[ClubV12]

HA HA HA, GOP wants to raise debt limit for more time???

PUHLEASSEE,,, they want to give Obama the power to do that for the next year and a half in hopes he will be voted out!!! It's a trap, a ploy, a bush whack, it's avoiding taking responsibility and buying time for the PARTY, not for the debt!

Raising taxes is inevitable, it will have to be done, sooner or later, no way out of it.

[Dr. Shane]

they want to give Obama the power to do that for the next year and a half in hopes he will be voted out!!!

[ClubV12]

GOP is willing to let this go into default, I believe that. There rhetoric shows it, there down playing the impact in preparation. Boehner has lost control of his party, the Tea Party is in control of the GOP and will not negotiate.

I don't believe for a second and never have that raising taxes on the wealthy will stop the creation or stimulation of jobs. The job situation is far more complex than that. They will pocket the money and laugh all the way to the bank. The GOP will barely even talk about closing loop holes!

We have to have a two fold approach, cut back on entitlements and raise taxes. Actually, both of these are biblical. If you look back in the Old Testament and the laws of Moses it kept the balance between the rich and the poor. It provided for the worthy poor, not those who refused to work. That system kept anyone from accumulating staggering wealth, which is exactly whats happening today. Super wealthy, extra ordinary wealth, with subsidies from the Government and plenty of loop holes to retain it. This super wealth will "take care of business" first. If that means moving corporate head quarters to India, they will. This won't create jobs, it will simply add to the enourmous wealth they already have. Protecting THESE people is utterly foolish and not biblical.

Billionaire hedge fund managers are going to create jobs? Not a chance, there going to buy a new Ferrari.

Three years ago, the Republicans buried us so deep in debt we are STILL having to borrow to cover their enourmous mistakes! Bush started TARP, then handed it to Obama. Obama did not start this mess, he inherited it, from the GOP!

[Dr. Shane]

GOP is willing to let this go into default, I believe that.

[ClubV12]

Tea Party member of the GOP, Walsh says,

"President Obama, quit lying. You know darn well that if Aug. 2, comes and goes there is plenty of money to pay off our debt and cover all Social Security obligations,” says Walsh.

Plenty of money! No worries mate! Everything is going to be fine!

Oh yeah, GOP has no problem missing the deadline and going into default. We'll just borrow more money through the back door.

Maybe it's the Treasury department thats lying?

"The Treasury Department has estimated that the U.S. will go over its’ debt limit on Aug. 2, and Walsh is angry that President Obama has said that Social Security checks may not go out if there is not a debt limit deal by then."

Not a good idea to ignore your accountant when your facing foreclosure and want to have on more back yard party!

[Dr. Shane]

If you want to ignore Boehner and McConnell and pretend that Bachmann and Walsh are the party leaders, I will not try to convince you otherwise. I don't live in that world. In my world Boehner is Speaker of the House and McConnell is Senate minority leader.

[bonnie]

I think it WAS Boehner just the other day who was down playing the impact of a default! What they are saying is, we WON'T actually go into "default" on our loans, even if the budget doesn't get passed. Because we will "find the money somewhere".

The idea is: We don't really have to pass a budget, Obama's threats of an actual default are lies. "Tough love" is what we need. No one will miss their social security check, the interest on our National debt (because of a down rating on our credit) won't increase "that much" and some how everyone will still get paid. We'll just borrow more money some other way instead of using the typical method.