Late Tuesday afternoon, House Republicans canceled a vote on Speaker John Boehner’s (R – Ohio) latest proposal crafted to woo right wing Republican support to end the government shutdown, raise the nation’s debt ceiling and avoid a first in history U.S. government default on U.S. bonds and payments legally obligated under current law.
This is scary. Time is running out. We may actually do the unthinkable. The United States, owner of the premier reserve country in the world, can borrow at rates so low that they are the envy of the world. But that will come to an end should the United States actually default and refuse to pay all of its bills when due.
Reaction to a possible default is beginning to appear. Stock indexes were down Tuesday on Wall Street, with the Dow Jones Industrial Average down by 135.25 points. After the market close, the credit rating firm Fitch issued a watch or warning that the United States could lose its AAA credit rating. That could lead to an increase in United States interest rates, not just for the government, but also for business and consumers. We have already seen some upward movement in interest rates as a result of the crisis atmosphere.
The deadline for raising the debt ceiling may be in as little as two days, but extraordinary measures by the U.S. Treasury may be able to push that date into November. Most economists expect severe economic impacts should the ceiling not be raised in time. First, the United States would no longer be considered a rock solid financial bet, causing our borrowing costs to rise substantially. Borrowing costs will not only rise for the government, but also for consumers and businesses.
The rise in interest rates could send us back into economic recession.
Second, the rate of government spending will have to fall quickly and dramatically, by as much as four percent of GDP, or about $0.6 trillion dollars on an annual basis according to economist Paul Krugman. For example, the Treasury has estimated that on October 17, about when the debt ceiling will be reached, it will have $30 billion of cash on hand, with more than $76 billion in payments due within two weeks, including $70 billion in Social Security Payments, Medicare reimbursements, military pay, and government pensions and $6 billion in interest payments on the U.S. debt.
Neither law nor precedent offers any guide on how Treasury should handle this. Treasury may decide to use its cash on hand, pay it all out, somehow deciding whom and what to pay and whom to stiff. Or it could decide to wait until incoming revenue accumulates by enough to pay a full day’s payments late all at once. As time goes by the government will fall further behind. The forced, sudden and dramatic accumulated fall in government payments will add to the rise in interest rate drag on the economy sending us into deeper recession with the loss of thousands of jobs and rising unemployment.
The hope to prevent most of this damage is for the U.S. Senate to quickly pass a bipartisan bill to open the government and raise or suspend the debt ceiling, that Boehner will allow it to go to the House floor for a straight up or down vote and that it passes the house with an overwhelming majority of Democrats and enough Republicans voting in favor.
But it is scary. What if there is a miscalculation and Boehner refuses to let it on the House floor for a vote, or if he does, it doesn't garner enough votes to pass? I suppose the politicians could regroup and immediately try again. But this is like playing with matches near a can of gasoline. The economy could actually go down in flames.