July 10, 2011 in Nation/World

Debt ceiling scenarios

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WASHINGTON – What happens if Congress doesn’t raise the debt ceiling? Would it cause a devastating economic collapse in the United States? Would it result in a government limping along, meeting only its most important obligations? Or would it ultimately turn into a constitutional crisis? Here’s a guide to what the major players in the debt and deficit debate are saying about possible scenarios.

The sky will fall

The Obama administration says failure to raise the $14.3 trillion debt limit would be an unprecedented event that would lead to default and economic catastrophe. The Treasury Department says U.S. borrowing authority will run out Aug. 2. The president says he and congressional leaders from both parties will meet again today at the White House after having a “constructive” meeting Thursday, adding that there will be political pain on both sides.

Raising the limit, the White House says, would allow the Treasury to pay interest and principal on Treasury bonds, pay military salaries and retirement benefits, and mail out individual and corporate tax refunds. Failure to raise it would mean those payments would grind to a halt.

There are some fresh signs that Republicans are willing to bargain with the White House as Aug. 2 gets closer. But some Republicans and analysts say that passing the Aug. 2 deadline wouldn’t necessarily result in the default that the administration predicts.

Picking and choosing

Republican Sens. Pat Toomey of Pennsylvania and Jim DeMint of South Carolina, for example, say the Treasury could pay the interest on its debt after borrowing authority expires. But Treasury Secretary Timothy Geithner has rejected that proposal, dubbed “prioritization,” calling it, in a June 28 letter to DeMint, “unwise, unworkable, unacceptably risky and unfair to the American people.” Among other things, Geithner says that investors may not buy new securities when $500 billion in U.S. Treasury debt matures in August.

Could Treasury “prioritize” other payments? Several analysts say it could. The Bipartisan Policy Center has estimated that Treasury would have $172.4 billion to use in August to make payments.

Under one scenario, according to the Bipartisan Policy Center report, Treasury could use all inflows for August to pay for just six big items: interest on existing debt, Medicare, Medicaid, Social Security, unemployment insurance and defense contracts. But prioritizing those obligations would mean there’d be no money left over for whole federal departments or federal salaries or Pell grants for college students.

Potomac Research Group political strategist Greg Valliere agrees that the Treasury could pick and choose payments. “I can avoid default,” Valliere recently wrote in the voice of Geithner. “I’ll easily have enough fresh receipts in August and beyond to pay roughly $25 billion per month in interest payments.”

Valliere writes that Geithner would have about $180 billion to use each month after interest payments and that that would cover Social Security, Medicare, military salaries and more. But agencies wouldn’t get their money under Valliere’s scenario, so “prioritization” could result in a government shutdown like those seen in 1995 and 1996.

A constitutional question

If all else fails and the White House and congressional Republicans can’t agree on a long-term deficit-cutting agreement in exchange for lifting the debt ceiling, Obama may have another option at his disposal: invoking the 14th Amendment to allow the government to issue more debt. That amendment states in part that the “validity of the public debt of the United States … shall not be questioned.”

Obama sidestepped the issue Wednesday during the White House’s Twitter town hall saying, “I don’t think we should even get to the constitutional issue.”

Using the 14th Amendment to issue debt has never been done before and would be highly controversial.

Three comments on this story so far. Add yours!

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  DickAdams on July 10 at 9:11 a.m.

  Maybe if Tim Geithner and his ilk, the tax evaders, would pony up what they owe to Uncle and admit their crime, take their medicine in the Iron Bar Hotel, the sky would not fall. Sky fall; what an absolutely asinine statement. In my opinion, the debt ceiling SHOULD NOT be increased. Instead stop the waste in their reckless spending habits and bite the bullet.

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  hawken on July 10 at 11:20 a.m.

  Raise taxes on the job producers,,,,, kill jogs,,,, extend Obama’s 30 month extended unemployment, 16.2% real, U6 unemployment,,, then to depression.

  This is not rocket science.

  Obama and his failed, Keynesian left, Economic theory is tracking the same, failed course as Keynesian, FDR and his failed policies.

  “We are spending more money than we have ever spent before, and it does not work. After eight years we have just as much unemployment as when we started, and an enormous debt to boot.”

  Treasury Secretary To Franklin Roosevelt
  Henry Morgenthau, May, 1939

  Those whom ignore history are destined to repeat it. Just as we are doing today.

  Obama and his liberal left, are “Keynesian on Steroids.”

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  bdr on July 10 at 8:14 p.m.

  invoke amendment #14 and take all foriegn money as ours….!
  Its time to act as Spaniards!