On Monday morning the Treasury Department auctioned off the last legally permissible U.S. government debt to the public. A $14,294,000,000,000 cap on borrowing is firmly in place, starting the clock toward potential default and turning up the heat on simmering fiscal negotiations in Washington.
While market participants did not expect Congress to raise the limit before it was met, which should preclude immediate economic consequences, the milestone moves the discussion of American default from theoretical to increasingly probable. Concerns about such a scenario could lead to turmoil in the markets, damaging economic recovery.
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In a letter to Sen. Michael Bennet, D-Colo., on Friday, Treasury Secretary Timothy Geithner warned of a potential “double-dip recession” if investors lose confidence in the United States’ creditworthiness. Rising interest rates could freeze investment, cause runs on money-market funds, and lower the value of the dollar, threatening its status as the world’s reserve currency.
The Treasury Department will begin a series of “extraordinary” accounting measures designed to delay until August 2 the messy clash between the spending priorities enacted by Congress and its refusal, so far, to allow them to be financed; without borrowing, the country would need to cut approximately $125 billion in spending each month.
On Sunday, House Speaker John Boehner, R-Ohio, and Senate Minority Leader Mitch McConnell, R-Ky., reiterated Republican demands for significant budget reforms and spending cuts in exchange for lifting the debt limit, but their refusal to consider tax changes is stymieing efforts to reach a deal. Vice President Joe Biden is leading congressional leaders in ongoing talks designed to reach a deficit reduction framework and the passage of the increase; those talks will continue on a staff level with Congress in recess this week.
While details of the talks remain sketchy, lawmakers are attempting to reconcile competing budgets to find at least $1 trillion in deficit reduction over the coming years, largely through discretionary spending cuts, including at the Defense Department, and reductions in mandatory spending focused on agriculture subsidies and Medicaid. Democrats also want to close tax loopholes that subsidize the private sector, especially oil companies.
Both sides are interested in a budget enforcement mechanism, with Republicans advocating spending caps and the White House a more comprehensive debt-reduction fail-safe. Similarly, though the two parties have been intently focused on Medicare reform, their divergent approaches make an agreement unlikely. Despite warnings last week from the trustees of that program and Social Security that their financial future is in jeopardy, neither one is likely to be at the center of an agreement.
The stress around the debt ceiling is still centered largely within the Beltway, but pressure from businesses around the country will increase as Treasury draws down its final reserves, especially if markets start to tighten around fears that a deal will not emerge. Last week, a coalition of business groups led by the U.S. Chamber of Commerce, the Financial Services Forum, and the Business Roundtable wrote to lawmakers urging them to reach agreement, and their lobbying will only become more vociferous as talks wear on.
Public opinion complicates the politics of the debate further: While the business community is united with the economic experts in fearing the impact of a failure to raise the limit, the Gallup polling organization reports that 47 percent of the public believe their member of Congress should vote against raising the ceiling. Only 19 percent say their representative should support an increase.
Those numbers might change if the public felt the tangible costs of a seemingly abstract default. In a report released on Monday, the centrist Democratic think tank Third Way estimates that default could cost nearly 700,000 jobs, 1 percent of gross domestic product and $8,816 from the average 401(k). Unfortunately, undoing the damage of such an event would be difficult—just like any borrower, a stain on the country’s credit history will be difficult to speedily erase.