You might have noticed the negotiations between President Barack Obama and House Republicans to raise the federal debt ceiling have not been going so well. Despite a very public awkward side-hug between Speaker John Boehner and Majority Leader Eric Cantor--the latter wants the former's job--and talking-points discipline from both sides Thursday that the latest talks were "cordial," the possibility that Congress will blow the deadline is real. Rank-and-file Republicans don't like Senate Majority Leader Mitch McConnell's Plan B, which would require a two-thirds majority to disapprove of Obama's request to raise the debt limit. And the White House is insisting on some ways to raise revenue by closing loopholes or raising taxes on the rich and corporations, which Tea Party-backed lawmakers hate. So what happens if Washington can't get it done by August 2? Bad things.
Tax Policy Center's Howard Gleckman looks at the Bipartisan Policy Center's report on the Treasury Department's post-August 2 cashflow.
From Aug. 3-31, the government would have to reduce spending by $134 billion. That is to say, it would pull $134 billion out of the economy in just 29 days--more than 10 percent of monthly GDP.The economic effects at a time of 9 percent unemployment would be catastrophic, even if the bond market did not demand higher interest rates on Treasury debt--which it very likely would.
If the government paid bondholders their $29 billion first, that leaves about $143 billion but to pay bills totaling $277 billion. Which means Treasury would have to rank priorities.
Let's say Obama paid Social Security, unemployment, and veteran's benefits, met the military payroll, and kept the courts and the FBI running. Those programs alone would take up about $70 billion, leaving only $73 billion to run the rest of government.With those remaining funds, Washington would have to make some exceedingly unpleasant choices: It could pay doctors, hospitals, nursing homes, and home health agencies what it owed for Medicare and Medicaid services, but that would cost $50 billion and leave just $23 billion to pay all other bills--everybody from defense contractors to senior day care center operators to disaster relief.
Bloomberg Government offers a handy tool that lets you decide what services to fund first and which to let go hungry. This is a pretty fun game where you try your hand at fantasy policy making--though, sorry stoners, Bloomberg won't let you end the Drug War by defunding the DEA. You'd have to spike the whole Justice Department budget of $1.4 billion. Other fun options? You can imagine stiffing military contractors on their $31.7 billion--maybe that will discourage them from tricking Figian cosmetologists into cutting hair in a war zone for a couple hundred bucks a month.
Bloomberg's David Rapp talked to Jay Powell, undersecretary of the Treasury for Finance under President George H.W. Bush, who says the details might be a bit more complicated. "Powell's research also shows that the daily cash-flow outlook would be just as difficult to manage," Rapp writes. "For example, if the cash shortage begins on Aug. 3, as projected by Treasury, the government may find itself unable to make a $23 billion Social Security payment due to go out that day."
CNNMoney's Jeanne Sahadi looks at what might happen if Treasury is unable to prioritize bondholders. In short: global disaster.
In that case, the United States would lose its triple-A rating. That, in turn, could unhinge the global economic system, said influential bond investor Mohamed El-Erian...The U.S. triple-A rating holds together many parts of the global system El-Erian told CNNMoney's Poppy Harlow. "We simply do not know how the global system will operate without the triple A. We'll see a lot of realignments that can be very costly. We'll be in the land of the unpredictable."
Matthew E. Zames, managing director at JPMorgan Chase, offered more details on the broader financial implications, The New York Times' Catherine Rampell reports. In a letter to Treasury Secretary Timothy Geithner, Zames wrote that if the limit isn't raised, foreign investors might back away from purchasing Treasuries, just as they moved away from Fannie Mae and Freddie Mac after the housing bubble:
If foreigners began curtailing their investment in Treasuries as a result of a default, Treasury rates, and thus Treasury's borrowing costs, would undoubtedly rise. A sustained 50 basis point increase in Treasury rates would eventually cost U.S. taxpayers an additional $75 billion each year.
The effects would be widespread, Zames continues:
Third, the financial crisis ... could trigger a run on money market funds, as was the case in September 2008 after the Lehman failure. In the event of a Treasury default, I think it is likely that at least one fund would be forced to halt redemptions or conceivably "break the buck." Since money fund investors are primarily focused on overnight liquidity, even a single fund halting redemptions would likely cause a broader run on money funds. Such a run would spark a severe crisis, disrupting markets and ultimately necessitating the same kind of backstops that Treasury and the Federal Reserve initiated in the aftermath of the 2008 crisis.
Jamie Dimon, CEO of JPMorgan Chase, also sees looming catastrophe. He told PBS that if the deadline is blown, "Every single company with treasuries, every insurance fund... it will start snowballing. Automatic, you don't pay your debt, there will be default by ratings agencies. All short-term financing will disappear. I would have hundreds of work streams working around the world protecting our company for that kind of event."
And then there's the political fallout. The New York Times' Nate Silver writes that the very able politicians involved in the negotiations know that there's a good chance they'll take a severe beating for failing to raise the debt limit--that voters will be furious at both Obama and House Republicans. Then what happens?
A literal interpretation would be that Mr. Obama loses the White House, either to a Republican or (less likely) to an independent candidate. But the Republican Party loses its majority in the House. Maybe quite a few Democratic incumbents in Congress also lose.More broadly, it would mean that any victories achieved in 2012 would be superficial and Pyrrhic. The public would not trust either side to carry out its agenda. The next several election cycles would be extremely volatile. Prospects for independent candidates for president and for third parties, whether emerging from the center of American politics or from the wings, would improve significantly. And within the major parties, power would tend to transfer away from those who hold it.
But as Oliver Willis tweets, "do people understand that if the us economy collapses, the political 'blame' will be secondary to the COLLAPSE OF THE ECONOMY #justsaying"
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Elspeth Reeve
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