Impasse hiding bigger worry: debt ceiling


The impasse in Congress this week has overshadowed the fact that the government is fast approaching its borrowing limit – or debt ceiling – later this month. Most economists and investors view the debt ceiling as a much more significant issue for the economy, with the potential to set off a global financial crisis. What is all the concern about? Below is an attempt to answer the basic questions.

What is the debt ceiling?



What happens on Oct. 17?

Treasury Secretary Jacob Lew has said that on that day his department will run out of tricks to stay under the debt ceiling, making it impossible to borrow any more money. While new tax revenue will continue coming in, if the government cannot borrow, then it will not be able to pay all of the bills due that day. In a letter sent on Tuesday to House Speaker John Boehner, Lew estimated that on Oct. 17 the government would have $30 billion on hand, but indicated that its normal daily expenditures were about $60 billion.


The inspector general of the Treasury Department said in a 2012 report that when the department had approached the debt ceiling in the past, it had considered multiple contingency plans, including selling the government's gold or its portfolio of student loans and reducing payments across the board by some set amount. Both alternatives were deemed to be impossible.

The report also said that Treasury officials determined that they could not choose to issue some checks while ignoring others. The only feasible option, according to the report, would be to delay payments until an entire day's obligations could be paid at one time.

How quickly would big government bills come due?

A payment for $12 billion in Social Security benefits is due Oct. 23. On Oct. 31, the government is due to make $6 billion in interest payments on bonds it has already issued. If it missed any of its payments, the government would default on its obligations. If it missed an interest payment, it would default on its debt, which is particularly serious.


At the most basic level, if the government shows any hesitation in making interest payments on its bonds, investors will demand higher interest payments when the government borrows money again. That would add to the federal budget.



More broadly, because investors have long believed the U.S. government would always be able to pay its bills, Treasury bonds have become the bedrock of the global financial system. If investors doubt the ability of the U.S. to pay its debt, the dollar could lose its special status globally.

Is it possible the United States would truly default?

Some investors and legal scholars believe that the president would be constitutionally required to make interest payments on its bonds even if Congress failed to lift the debt ceiling because of the 14th Amendment. At the very least, many investors think Treasury would make debt payments the top priority, potentially buying time before the government actually defaulted on its debt.

Digital & Driveway Delivery - 50% Off
User Agreement



Business Directory
Ads by Google