America Hits the Debt Ceiling

[Senoska]

The United States today hit its $14.3 trillion congressionally-mandated borrowing limit and the federal government is running on fumes.

While the treasury says it can continue funding Uncle Sam's $3.8 trillion annual spending spree by tapping into what is effectively an emergency credit card -- borrowing from government worker retirement funds and cutting off federally-backed state and local bond programs -- many people are wondering what, if any, impact not extending the debt limit might have as the May 16 deadline comes and goes.
Members of ABC News' economic panel said Wall Street and our foreign creditors have bought into Treasury Secretary Tim Geithner's promise that "extraordinary measures" to keep the government funded will work and the ongoing budget talks between the White House and Congressional Republicans will be productive.

Panelists said there likely will be few economic effects seen next week, with much more dire predictions offered up should a deal on the debt limit and budget not be completed in the next few months.

"Treasury has a lot of wiggle room in terms of shuffling money and delaying payments," said Dean Baker, co-director of the Center for Economic and Policy Research. "At some point it will run out, but I don't doubt that they can get at least until August and quite possibly much later."

http://a.abcnews.com/images/Business..._110513_wg.jpg
Dan Arnall/ABC News; SOURCE: Financial Management Service, Treasury; ABC News estimates



The high-stakes political negotiations will require politicians to reach a deal to bring the nation's long-term debt down by trillions of dollars during the next decade. But tying a budget deal to the short-term need to borrow to fund the government and pay the interest on existing debt is a risky proposition.

"My sense is that if the debt ceiling were not raised, the stock market would react much like it did when Congress failed to pass TARP the first time and plunge, and interest rates would surge," said Mark Zandi, chief economist at Moody's Analytics. "The economy would quickly devolve back into recession."

At this point, the market seems to believe that Washington is capable of reaching a deal. Interest rates on government borrowing have not increased in recent months, indicating that investors do not believe it is likely that the U.S. will default. But, economists said, that could change quickly if negotiations break down or we do not have signs of a deal by mid-summer.

"The real worry is market perception," said David Wyss, chief economist at Standard & Poor's. "At this point, [the market] thinks this is just a game and no one could be stupid enough to force a default. They haven't met enough politicians."

While Vice President Joe Biden and Congressional Republicans will continue a series of budget negotiations in the coming weeks, members of the House Tea Party Caucus say they will not vote to support a deal that would expand the government's credit limits. Members say doing nothing would fulfill their campaign promises to stop deficit spending and force automatic cuts in federal spending.

A new Gallup poll suggests the "do nothing" option has support from Republican voters, with 70 percent saying they want their member of Congress to oppose a debt limit increase. Just 8 percent of Republican voters support an expansion.

Among Americans as a whole, 47 percent say they want to do nothing, 19 percent say they support an increase and 34 percent don't know enough to have an opinion.

Those kinds of middling poll numbers are making it politically difficult to support a credit limit deal.

"No one wants to deal with this and would like to 'kick the can down the road' yet again and hope to get re-elected before it blows up," said Bill Dunkelberg, chief economist at the National Federation of Independent Businesses.

Those opposing an expansion of the credit limit have cast aside the warnings from Treasury Secretary Geithner of "catastrophic economic consequences."

"A broad range of government payments would have to be stopped, limited or delayed, including military salaries, Social Security and Medicare payments, interest on debt, unemployment benefits and tax refunds," wrote Geithner in a letter to Congressional leaders on May 2.

It's that interest on the debt which has most economists worried. The "full faith and credit" of the United States has been an unquestioned cornerstone for global finance -- leading U.S. Treasuries to be a safe haven in times of trouble because Uncle Sam has never missed a payment.

The risks are high enough that 62 business groups sent congressional leaders a plea to address the debt limit.

"Raising the statutory debt limit is critical to ensuring global investors' confidence in the creditworthiness of the United States," said the letter signed by the Business Roundtable, National Retail Federation and U.S. Chamber of Commerce, among others. "With economic growth slowly picking up, we cannot afford to jeopardize that growth with the massive spike in borrowing costs that would result if we defaulted on our obligations."

The stakes, while disputed by the Tea Party, are so high that most economists believe there will be action before the U.S. misses any debt payments.

"We have faced debt limits before and have yet to default," said Martin Regalia, chief economist for the U.S. Chamber of Commerce. "As we approach the limit, we may start to see some increases in interest rates and or declines in the dollar, but I do not think that such movements will be large, unless the debt limit was reached and a default occurred."

Should default occur, it is those higher interest rates that would likely have the biggest economic impact. Like a consumer who misses a credit card payment, Uncle Sam would see his borrowing rates increase substantially as buyers of government bonds priced-in the possibility that they wouldn't be repaid.

That could lead to trillions of dollars in extra interest costs in the coming decades and broader economic effects for consumers.

"If there is not a compromise by the August deadline, the result would be a slowdown in government operations which would negatively affect economic growth," said John Silvia, chief economist at Wells Fargo. "In addition, there would be increased uncertainty premiums, slower capital goods orders in the manufacturing sector, and a slower pace of employment growth. The effect would be felt in several parts of the U.S. economy."

The troubled housing market would be directly affected, as mortgage rate increases are highly correlated to the government's cost to borrow money.
"The problem is we will need political discipline to prevent increasing costs of borrowing in the coming years," said Susan Wachter, professor at The Wharton School. "And the housing market will be fragile and potentially endangered by an interest rate shock for several years to come. We will need confidence, investor confidence, to help recovery in the housing market and the overall economy to get back on track."

The next several weeks will be critical to the debate over the debt limit and budget deal. It is possible the markets will start to react depending on Washington's ability to make real headway on some of the most difficult fiscal problems it has ever faced.

"Everybody in Washington still seems content to feed the American public's desire for instant gratification," said Diane Swonk, chief economist at Mesirow Financial. "Entitlements are not insurmountable but will need to be cut and taxes will have to be raised if we hope to keep the bulk of the Americans who need [Social Security, Medicare and Medicaid] from rioting."

http://abcnews.go.com/Business/Polit...ry?id=13599735

[BerenTebogo]

We'll adjust the limit because it's arbitrary anyways.

[Senoska]

Where is America headed? I don't know about all of you, but I feel like some serious unrest may be around the corner. I think all of us know the source of our problems. The answer is fairly simple. Corporate Capitalism doesn't work. This is what America's economy can be defined as.

We're in a unique position right now. It appears a republican senator has pulled out of the talks for raising the debt cap. The American dollar is going to suffer any way you look at this. If we raise the debt cap, the dollar is going to be devalued. If we go into default, the dollar will be worth nothing. Its common knowledge that the dollar has no gold standard. Your money is only given value because of the debt behind it and the government telling you its a way to pay that debt. If we stop paying our debts, what is left?

I live in a city that is a ghost town. I live in Detroit, less than a mile away from something that would remind you of something out of the fallout series. It looks like the aftermath of a nuclear fallout.

We are America, and likewise, all Americans. We are apparently the greatest country on the planet. Yet, we are not given the same basic social services as others in western countries. We are in last place in nearly everything you can consider a living standard. However, the top 1% have billions of dollars, and are making billions more.

Republicans are very transparently trying to push this debt ceiling issue to its brink so that they can negotiate on a political level to push their agenda, much like they did with the last government shutdown.

I don't know about all of you, but I am frankly fed up with being told we're the best while being given nothing that shows that. I'm fed up with war. I'm fed up with robbing other countries. I'm fed up with these lies that we're constantly told to keep us complacent. We all see through the bullshit. All of us know there is corruption. All of us are displeased, and most importantly, all of us know the root of our issues.

The industry exists and doesn't care about us, yet the industry cannot exist without us. Take a look at what is happening in the middle east. Do we not share the same grievances as them? They lived under an emergency rule, as do we. They are kept poor while their leaders profit, and so are we.

Our rights are sold inch by inch. I don't mean to get cliche here, but we are Americans. We are the home of the brave, the land of the free. Yet, it appears at the surface, that those are only ideals that we aim for. Deeper down, those words are just ways to distract us from the fact we are neither free nor brave. True bravery is when someone threatens your way of life, you stand up and fight. You don't sit by and wait for someone else to handle it.

If anyone manages to read through this entire post, please let me know your thoughts. If we all can agree that this is the reason we are mad, if we all see beyond this superficial garbage, I believe that most of American's can. This feeling, and subsequent movement, will arise from within. Those that are angry are not given the voice the deserve, or are painted as socialist and thusly apparently, commies. We are the silent majority. No one will do this for us. Its up to us to demand our rights back.

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From the other thread. This isn't arbitrary.

[Milkster]

The ceiling will be raised and the burden will be put on us (under 30) our children, their children and their children's children and their children's children's children. That is unless something catastrophic happens to change the minds/thinking of all Americans/the world.

[Stumblingdrunk]

Ronald Reagan was not a retard!

Republicans are about fiscal responsibility!

[Stumblingdrunk]

How does anyone believe republicans are fiscally responsible? Seriously, egon? swamp? explain to me how the policy of the republican party isn't the exact reason we find ourselves in this mess?

[Kuya]

I often get the feeling that when americans talk about the foreign debt and the deficit, they assume they're both the same thing.

[Mazmaz]

Why do these articles quote Moody's and S&P's analysts like they're experts? These are the same people that gave AAA ratings to the toxic CDOs that caused the meltdown in 08.

[Andalusian girls]

How does anyone believe republicans are fiscally responsible? Seriously, egon? swamp? explain to me how the policy of the republican party isn't the exact reason we find ourselves in this mess?

Because we generally elect the living, Reagan does not get to vote on the debt ceiling, and among the living the Republican Party appears far more serious about cutting the deficit and reforming entitlement programs than do their Democratic counterparts.

If you were to map Obama's presidency onto that chart he has overseen a +13% increase in a little over half of one term, assuming those statistics are accurate, the current principle number is 96%.

[Silviya]

Everyone knows to make money you have to spend money. So clearly the answer is to just keep spending and eventually the problem will fix itself. Amiright?

[kuronosan]

Everyone knows to make money you have to spend money. So clearly the answer is to just keep spending and eventually the problem will fix itself. Amiright?

Get out.

[Shuvo]

Funny how this corresponds to a few days before the world is supposed to end >.>

[Senoska]

Why do these articles quote Moody's and S&P's analysts like they're experts? These are the same people that gave AAA ratings to the toxic CDOs that caused the meltdown in 08.

That is only a part of what caused the meltdown. Scroll up to the video "Capitalism Hits the Fan" for pretty much the exact reason we're in the situation we're in, and continue in perpetuating.

[Krandor]

Funny how this corresponds to a few days before the world is supposed to end >.>

World Ends, we're off scott free.

World Doesn't End, we're still off scott free because we (i.e. America) honestly won't give a flying fuck about this a week from now.

[Senoska]

Do you think ignoring problems makes them go away? The pile of shit we have ignored has gotten to the point were its affecting our standard of living. While the topic may change, the fact is all of us are going through this experience, with the recession, wars, and everything else. I think that the fact this is happening is (and should be) an big moment for people realizing there are more important issues at hand than celebrities or anything else the news decides to try to turn to. Just because the TV stations stopped covering it doesn't mean the story is over.

[Krandor]

Do you think ignoring problems makes them go away?

It's the American Way.

[Foxer]

What is this nonsense thread? Americans are all rich.

[popsiclestix]

Haa, America has been spending more money than earning for a long time... QE2 has been just buying T-Bills that the banks bought so they would lend money. Its a giant ponzi scheme in itself.

In that chart, Barack is going to be the biggest gainer (debt to gdp) over all of them.

Honestly, the national debt doesn't matter. Purchasing power matters. The 2nd largest holder of debt by a foreign country is in a full blown recession and will go further into recession as it triples sales tax to pay for the earthquake.

Imagine when Japan first stops buying Treasuries, dollars, bonds, etc and then starts to sell them.... Japan was always America's emergency Diner's club card if its economy was shot. We will soon see what happens.

[Kuya]

This thread is like a calling card for every conspiracy theorist ever.

[Olo401]

Funny how this corresponds to a few days before the world is supposed to end >.>

Hey let's look at the bright side - if all the batshit Repubs in Congress get raptured maybe we can actually pass some truly meaningful legislation, starting with getting rid of the $21bil oil company subsidies.