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Mon October 7, 2013
What Happens If The Debt Ceiling Isn't Raised?
Originally published on Mon October 7, 2013 5:08 pm
All eyes are on whether Congress will resolve the government shutdown, which has entered its seventh day.
But an even more serious concern is the debt ceiling.
If lawmakers on Capitol Hill fail to raise the nation’s debt ceiling by October 17th, the government will run out of money to pay all of its bills.
If this were to happen it hurt the economy and the country’s credit rating, and some people simply wouldn’t get paid.
JEREMY HOBSON, HOST:
It's HERE AND NOW.
We've been talking all about the government shutdown, but there are 10 days left until the United States hits the debt ceiling - meaning it would not be able to borrow more money to pay its bills. That, combined with the government shutdown - have markets reacting, the Dow Jones plummeting at the start of trading today. Treasury Secretary Jack Lew is warning of catastrophic consequences if the U.S. defaults. Here he is speaking on "Fox News Sunday."
(SOUNDBITE OF TV SHOW, "FOX NEWS SUNDAY")
SECRETARY JACK LEW: If we were to have the unthinkable happen and have the United States default, it would cause real problems. The only question is how serious the problems would be, and there's a kind of range of how bad the consequences are. But why would anyone want to do that to the American economy?
HOBSON: Meanwhile, on "This Week with George Stephanopoulos," House Speaker John Boehner had a different take, saying the U.S. has a spending problem.
(SOUNDBITE OF TV SHOW, "THIS WEEK WITH GEORGE STEPHANOPOULOS")
REP. JOHN BOEHNER: My goal here is to have a serious conversation about those things that are driving the deficit and driving the debt up, and the president's refusal to sit down and have a conversation about this is putting our nation at risk of default.
GEORGE STEPHANOPOULOS: So are you saying that if he continues to refuse to negotiate, the country is going to default?
BOEHNER: That's the path we're on.
HOBSON: Joining us for more is Cardiff Garcia of the Financial Times. And Cardiff, first of all, because it doesn't make any sense for anybody in the normal course of their lives to know all about the debt ceiling, let's lay this out, because it is different than the government shutdown. Just tell us what the debt ceiling is exactly.
CARDIFF GARCIA: Yeah, that's a very important distinction to make. So the government shutdown involves some parts of the government being shut down. It involves certain government offices being closed, government workers sent home, and some other basic government services essentially slowing to a crawl. Now, that's bad, but it's not catastrophic, and some of the damage can later be reversed, hopefully.
The debt ceiling is a totally different beast altogether. So to understand it, it requires a little bit of simplification. So think of what the government does each month in terms of paying its bills. It has certain checks to send out, Social Security, Medicare. It has to pay for the military, for the courts, all the types of things that you associate with the government paying for. So to fund those payments, first of all, what it does is it collects revenues mainly from our taxes and taxes that companies pay. And then when it doesn't have enough in revenues, it's called a budget deficit. And to make up for that gap between revenues and what it pays, it has to borrow money.
And essentially what happens is that each month when it runs a deficit, it accumulates a little bit more debt. Now, many, many years ago, for kind of archaic reasons, Congress passed a law saying that the debt couldn't accumulate beyond a certain amount. And each time that the government approaches the ceiling, essentially Congress just agrees to raise it each time. But in the last couple of years...
HOBSON: Yeah, they've raised it 78 times, right, since 1960?
GARCIA: That's exactly right. That's exactly right. And essentially, what's happened is that in the last couple of years, Congress has decided that rather than simply raising it - as it would in the normal course of business - it's going to try to extract concessions from the White House in exchange for raising it. So it's a very, very difficult game, but that's essentially what the debt ceiling is.
HOBSON: And we don't know exactly what would happen if Congress - if we did hit the debt ceiling, and Congress then had to start figuring out - or I guess the Treasury Department has to start figuring out what to pay, right? I mean, what do we know that they would do at that point?
GARCIA: Sure. So this is where things get incredibly tricky. So October 17 is sort of the X date, is what everybody is calling it. That's the day where it's anticipated that we're going to run out of borrowing room under the debt ceiling. Now, if the president had the undisputed, unquestioned authority to do it, and if it were logistically feasible, if it were known to be logistically feasible, he would just start saying, well, we can't borrow anymore money to pay our bills, so some bills will be paid and some won't be.
But actually, here's the thing. The president doesn't necessarily have the legal right to do that. And politically, obviously it would be very dubious to start saying, well, for instance, we're going to pay Social Security but not Medicare. We're going to pay for the military, but we're not going to pay, for instance, the interest we owe on our debt that we've already accumulated. So it's a really, really difficult scenario, and that's where things get very, very complicated. And yeah, the White House is going to have to come up with some kind of a - either a back-up plan that would work, or hopefully they'll just come to a negotiated solution before we get to that point.
HOBSON: But so, Cardiff, you're saying we don't know what would happen if it came to that point. We don't know what would be paid or whether it'd even be legal for the administration to decide what to pay.
GARCIA: That's exactly right. And not just that. Here's another thing that's difficult to work out. The payment systems that the Treasury uses - and remember, the Treasury makes about 80 million payments a month, so you can't just pick and choose - well, I'll pay this and I won't pay that - very easily without overhauling the whole system. So those payment systems are very, very difficult to understand to an outsider, right? So it's hard to get any information about them. And so when the Treasury Department says we don't have the logistical ability to even make these payments, just turn off some systems and not - and keep on some of the others, it's hard to say exactly if that's correct or even if they know themselves whether that's correct.
Now this is where it's just so difficult for a reporter or for really anybody who's not directly involved with it to know exactly what the Treasury will do. That's also why you hear very often about several other backup plans that the president might be working on in order to get around it.
HOBSON: And because the dollar is the world's reserve currency and because the U.S. is such a major part of the global economy, there are a lot of worries around the world. I want to listen here to Art Cashin, director of operations for UBS, speaking on CNBC.
(SOUNDBITE OF CNBC NEWS BROADCAST)
ART CASHIN: Every other default dealt with the nation that couldn't pay its debt, that they had run out of something, OK? Now this is self-imposed. This is like virtually no other default that the global finance has ever seen.
HOBSON: Cardiff, what is the expected impact on the global economy if the U.S. defaults on its debt?
GARCIA: Sure. So, I mean, keep in mind that one of those monthly payments that we make each month is the interest on the debt we already have. Now here's the thing. If we default on our debt or if the market perceives that we've defaulted on our debt, a number of things could happen. So in the first place, U.S. Treasury securities are used are collateral in a lot of lending transactions. So the first thing that would happen is that it would cast out on the balance sheet of banks. Now we remember what happened a few years ago when something similar took place, right?
Another problem is that interest rates might go haywire. Now it's not just the direct impact on treasury interest rates. Treasury interest rates are also used as a benchmark for interest rates in other lending transactions all throughout the world. That would be, you know, complete chaos. It would be, you know, it would be completely unpredictable exactly what would happen there. And also, a lot of pension funds and mutual funds and things like that own a lot of Treasuries might be forced to sell some of them.
Now, this is all very speculative and this is all - I don't want to, you know, cause panic unduly, but these are all possibilities. And that's really the thing; is that the worse case scenario here isn't just really, really bad, it's also not implausible. There's so much uncertainty around it that it's clear we want to avoid this at all cost.
HOBSON: Although so far, there hasn't been a 500-point drop in a day in the Dow, so maybe there are some hope on Wall Street?
GARCIA: Let's hope so. I think, right now, it does still remain the extreme scenario that we default in our debt. The hope is that at the last minute, at the very least, Congress will restore a sense of sanity and do the right thing. But look, the problem is that we keep coming up on these deadlines, and at some point, you have to worry that we're just going to trip over. And I, you know, I worry about that each time, and I also worry that this isn't the last time we're going to see a situation where this kind of political fractiousness leads to the threat of a default.
HOBSON: Cardiff Garcia of the Financial Times, thanks so much for joining us.
GARCIA: Thanks, Jeremy.
HOBSON: And you're listening to HERE AND NOW. Transcript provided by NPR, Copyright NPR.