And as the shutdown meets the debt limit in Congress this week, the nuclear option is now back on the table in the wings of the Senate. The nuclear option is an arcane filibuster reform that allows a bill to pass by a majority in the Senate, rather than the usual 60 votes needed to override a filibuster. The proposal would, in theory, allow the Senate to raise the debt limit with a majority vote.
The Treasury Department warns that both houses of Congress need to pass something that raises the debt limit by October 17 or we'll start defaulting on our loans.
Meanwhile, Republicans are raising eyebrows with another claim, namely, that a debt default can't possibly be as bad as everyone says it is. According to the NY Times, a "surprisingly broad section" of Republicans are convinced that daily tax receipts would be more than enough to pay off Treasury bonds as they come due, so in other words, there's really no drop-dead deadline no matter what the Treasury says. Republican Senator Rand Paul of Kentucky told The Times:
It really is irresponsible of the president to try to scare the markets. If you don't raise your debt ceiling, all you’re saying is, "We're going to be balancing our budget." So if you put it in those terms, all these scary terms of, "Oh my goodness, the world's going to end" – if we balance the budget, the world’s going to end? Why don't we spend what comes in?
For a party that loves to call itself the party of business, this is strangely out-of-touch perspective.
"There's no business person out here who thinks this wouldn't be a big deal," President Obama said in his Tuesday press conference, "not one. You go to anywhere from Wall Street to Main Street, and you ask a C.E.O. of a company or ask a small-business person whether it'd be a big deal if the United States government isn't paying its bills on time. They’ll tell you it's a big deal."
Despite Mr. Paul's Main Street rationale, the institutions upon which the nation's credit rating relies are governed by a different set of parameters. A quick glance of Wall Street and it's clear the financial world is already jittery about a potential default. The Dow hit a high in mid-September, but since then, it has fallen 900 points, including a nearly 160-point decline Tuesday after House Speaker John Boehner and President Obama indicated that neither intends to compromise.
Once the deadline date passes without resolution, there's every reason to expect the nation's credit rating to slip, which means that the borrowing of money becomes more expensive, which only adds to the nation's deficit. As The Times notes:
The turmoil created by the partial shutdown of the federal government has already sent investors fleeing from stocks to the safe harbor of Treasury bonds, long considered the safest investment on earth because the full faith and credit of the United States government has never been questioned. If that safe harbor is undermined, most economists have said loudly and repeatedly, the impact could be catastrophic.
And the bond markets are already feeling it, "pushing up the price the government paid to borrow money for a month to its highest level since 2008, more than doubling from just a day earlier."
But even if Republicans are right, why risk it? By the 17th, the U.S. will have $30 billion in its Treasury, according to Mark Patterson, a former Treasury official, which is the equivalent of you or I have $30 in our checking account. Several major payments are due in the days following October 17th:
- October 23rd: Social Security payment, $12 billion
- October 28th: Federal employee salaries, $3 billion
- October 30th: Medicaid payment, $2 billion
- October 31st: Interest on the debt, $6 billion
- November 1st: Medicare payments, $18 billion
- November 1st: Social Security payments, $25 billion
- November 1st: Military pay, retirement and veteran benefits, $12 billion
- November 1st: SSI payments, $12 billion
It's almost certain some of these payments won't be made and if the United States wants to avoid a default on the debt, it has to make that interest payment on the 31st. However, even if we make that payment, it's not guaranteed that rating agencies won't downgrade our credit rating before then or that bondholders won't demand higher interest rates.
Congress could avoid defaulting on the debt until November, but that means elderly people can't pay their bills, federal workers can't pay their mortgages, doctors can't be reimbursed for services, and soldiers can't buy food.
So again: why risk it? It's ironic that members of Congress who insist that America pay its bills and reduce it's debt load would actually seem so entirely ignorant of the way the world of finance works. As one reader in The Times commented:
The most frightening thing is that little by little the lies and the fantasies build one upon the other. It feels like the GOP in particular keep gilding their position to keep people looking at them. But when you look at what they are espousing they have no factual basis. They are not experts. Their theories are untried. Many of them have no actual background in economics. They are scarily like someone pretending to be a doctor but with no formal training whatsoever. So the potential impact on people's lives from these attention seeking con men should have serious repercussions.