(MoneyWatch) It is the economic calamity that no one expects and everyone fears.
Experts agree that failing to raise the nation's debt ceiling
by Oct. 17, when U.S. officials say the government will run out of
money to pay its bills, would gravely wound the economy, and perhaps
even throw it back into recession. Because Treasury bonds and the dollar
are cornerstones of the global financial system, meanwhile, the shock
wave would be felt around the world.
"The potential is disastrous," said Gus Faucher, senior economist
with PNC Financial Services Group. "We would see interest rates spike
across the board. We'd see a huge crash in the dollar. People count on
lending their money to the federal government and getting it back, and
if that trust is taken away -- it's never happened that we haven't met
our obligations as a nation -- then that has very, very negative
consequences for the U.S. economy."
The consequences are so severe that, even as the government shutdown
enters its second week, most seasoned political observers still expect
Congress to ultimately reach an eleventh-hour deal to lift the
government's borrowing limit.
But what exactly is the debt ceiling, and exactly how worried should Americans be that it could come crashing down?
What is the debt ceiling?
debt ceiling is the total amount of money the U.S. government can
borrow (by selling Treasury bonds) to pay its obligations, including
interest on the national debt, Social Security and Medicare benefits,
and many other payments. That limit is currently $16.7 trillion,
although technically the government already exceeded it in May. The
Treasury Department has since used various measures to continue
During World War I, amid uncertainty regarding
the total costs of funding U.S. involvement in the conflict, Congress
created the cap in 1917 to put an upper limit on federal borrowing.
Since 1960, Congress has raised the debt ceiling 78 times.
How is the debt ceiling changed?
Lawmakers can adjust it by passing a standalone bill or by including it in another piece of legislation as an amendment.
Does raising the debt ceiling increase the federal debt?
Lifting the borrowing limit simply allows the government to pay its
existing bills. That debt exists whether or not Congress authorizes
additional borrowing, and to avoid default it must be paid.
Why can't Congress and the White House avoid lifting the cap by cutting federal spending?
preventing the government from borrowing to meet its obligations would
require all discretionary spending, such as for defense, education,
housing and other annual appropriations, to stop, according to the
Congressional Research Service. Most of the outlays for mandatory
programs, such as Social Security, also would have to be halted, while
taxes would need to rise to ensure the government had money to spend.
Deep spending cuts and tax hikes would throw the economy into recession.
Why is Oct. 17 a critical date?
Treasury Secretary Jacob Lew recently forecast
that on Oct. 17 the government would have about $30 billion on hand.
That isn't enough because the government spends as much as $60 billion
per day. "If we have insufficient cash on hand, it would be impossible
for the United States of America to meet all of its obligations for the
first time in our history," he said last week in a letter to
What happens if Congress doesn't raise the debt ceiling?
the government runs low on cash, it will have to withhold a range of
payments. Retirees might not get their Social Security checks,
especially worrisome for the millions of Americans who depend almost
entirely on the social insurance program for income. The same goes for
Medicare and Medicaid recipients. Holders of Treasury notes, from Wall
Street and other global banks to foreign governments, also could get
stiffed, jeopardizing the solvency of many financial institutions and
choking off global credit flows.
The U.S. also would struggle to pay the interest on its debt,
including a $6 billion payout due at the end of the month. At that
point, the U.S. would be in default of its obligations. The value of
Treasury bonds and the dollar would nosedive. The nation's borrowing
costs would soar as anxious investors demanded a higher return to buy
suddenly shaky U.S. debt. And because the interest rate on Treasuries
provides a benchmark for rates on other loans, from mortgages and credit
cards to car and student loans, borrowing would become far more costly
for consumers and businesses. Stock markets in the U.S. and elsewhere
around the world would almost certainly plunge.
prices fall, investment or other spending to expand a business is more
costly," the Treasury Department said in a report last week outlining
the potential impact of the debt-ceiling fight. "The effects on
households and businesses, moreover, are reinforcing. Less capacity and
willingness of households to spend, when businesses have less incentive
to invest, hire and expand production, all lead to weaker economic
In short, the already fragile economic recovery could stall.
Haven't we been here before?
There is recent precedent for such turmoil. Consumer confidence
plummeted after lawmakers squared off over the debt ceiling in the
summer of 2011, while the Standard & Poor's 500 stock index dropped
nearly 20 percent. Hiring among small businesses slowed. Ever after a
deal was struck to raise the cap in August of that year, credit rating
agency Standard & Poor's downgraded U.S. debt for the first time
Beyond the immediate economic fallout of defaulting on its
debt, for the U.S. the symbolic blow might be even greater. In the
post-World War II era, Treasuries and the greenback have -- for better
and for worse -- served as the foundation of the global financial
system. A default would shatter the faith on which that system relies.
How much danger are we in?
financial markets are not yet in panic mode, the standoff in Washington
has them worried. Unlike during the 2011 dispute, when Republicans and
most Democrats favored cutting federal spending, the stark division over
Obamacare suggests there may be less room for compromise this time
One clear sign of distress: Interest rates on short-term
Treasury bonds rose last week, as investors seek greater yields to
offset what they perceive as the greater risk of holding the debt.
most economists, stock analysts and, for all the pointed rhetoric on
Capitol Hill, even congressional leaders themselves downplay the chances
of a default. The belief is that common sense, or at least a sense of
political self-preservation, will prevail.