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Wednesday, January 12, 2011

"Don't Believe What's Said About the Debt Ceiling"

Stan Collender argues that we are too worried about what might happen if Congress refuses to increase the debt limit:

Don’t Believe What’s Said About Debt Ceiling, by Stan Collender [CC]: There is so much misinformation and grossly misleading talk about what will happen if the federal debt ceiling isn’t increased...
First, not raising the current federal debt limit absolutely will not immediately shut down the federal government. ... Government shutdowns occur when the appropriation that funds a department or agency isn’t enacted. ...
Second, and again contrary to what some have stated as gospel, reaching the debt ceiling will not automatically lead to a federal default on the nation’s existing debt. That will only stop the government from borrowing more than the current limit and force it to rely on other ways to finance its activities.
Although the comparison isn’t perfect, the situation is similar to what happens when individuals max out credit cards. They don’t stay home with the lights off, gently rocking back and forth in a corner; they find other sources of money or change their activities to match the cash available. That could mean delaying paying a bill, taking cash from a savings account, getting a loan from a family member or friend, waiting for the next paycheck, or selling a car or some other possession. ...
In a letter last week to Speaker John Boehner ... about the debt ceiling, Treasury Secretary Timothy Geithner mentioned that the federal government has an equivalent to each of these things. What Geithner didn’t mention is that the federal government also has a number of other tactics, such as leasing an asset — the federal equivalent of renting out a room in your home — or significantly slowing down payments to government contractors and others. These additional tactics may not have been used in the past and may be disheartening or even embarrassing to some, but they are available to avoid a crisis.
Third, if a standoff on raising the debt ceiling lasts for a significant amount of time, the alternatives to borrowing eventually may not be enough to provide the government with the cash it needs to meet its obligations. Even at that point, however, a default wouldn’t be automatic because payments to existing bondholders could be made the priority while payments to others could be delayed for months. ...
Fourth, all of this means that those who think refusing to increase the federal debt ceiling when it is reached later this year will force the White House to accept budget changes will likely find the administration surprisingly unmoved, perhaps for months to come. If the administration is willing to use all of the cash management techniques available to it, the biggest negative reaction will likely come from Wall Street and those whose payments are delayed. Uncertainty in the schedule for auctioning Treasury securities will upset the bond market and it may express its unhappiness both rhetorically and with higher interest rates. But the confrontation is far more likely to be a war of words than an actual battle over the budget...

    Posted by on Wednesday, January 12, 2011 at 12:44 AM in Budget Deficit, Economics, Politics | Permalink  Comments (74)


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