Current Weather
The Spy FM

What A Debt Default Would Really Mean For The U.S.

Filed by KOSU News in US News.
July 5, 2011

Washington lawmakers returned from a long holiday weekend on Tuesday, with just four weeks left to raise the federal debt ceiling or run the risk of a government default.

Many lawmakers insist that they won’t vote to raise the debt limit unless there’s also a deal to cut the deficit.

That would leave the government, which now borrows more than 40 cents of every dollar, suddenly without a working credit card.

“That means after Aug. 3, we’d be entirely dependent upon incoming cash flows to pay our bills,” says Jay Powell, who served as undersecretary of Treasury during the first Bush administration.

Powell, who is now a scholar at the Bipartisan Policy Center, looked at what would happen if the government had to operate like a shopkeeper, paying each day’s bills with whatever cash is in the register.

“It doesn’t balance very well at all,” he says.

The Day After

Trouble would begin as soon as the government exhausts its borrowing authority on Aug. 2. The next day, the government is expected to collect some $12 billion in taxes, but that wouldn’t begin to cover the daily expenses.

“The problem is that $23 billion in Social Security payments are supposed to go out on Aug. 3,” Powell says. “And there’s a really good chance we don’t have the cash to pay that.”

In addition to Social Security, there are bills for Medicare and Medicaid, defense contractors, and federal workers who expect to be paid. Within 24 hours, the government would be $20 billion behind. And the delinquent bills would continue to pile up with each passing day.

“Very quickly, you’re dragging 20, 30, 40, 50, 75 billion dollars in unpaid bills,” says Powell.

Just as the government is trying to decide between stiffing Social Security recipients or active-duty military, a $29 billion interest payment comes due on Monday, Aug. 15. That’s also the day that $27 billion worth of Treasury bonds mature.

Ordinarily, the government would sell new bonds to pay off the old ones. But in these circumstances, finding buyers might not be that easy. Treasury bonds would have lost their key selling point: a rock-solid reputation for safety.

“They’re the Volvos of investment,” says Jim Kessler of the Washington think tank Third Way. “To get people back into Treasury bonds, you’re going to have to give them some sort of deal. And that deal is bad for taxpayers. It’s bad for the economy.”

To attract new buyers, the government would have to pay higher interest rates. And those higher rates would ricochet throughout the economy.

“That will affect credit card interest rates, mortgage interest rates. Every kind of consumer debt and business debt is priced off of Treasuries,” says Powell. “That’s not going to help the economy, it’s going to hurt the economy. It’s going to hurt the housing market.”

The stock market would drop and so would the value of the dollar, resulting in higher gasoline prices.

Third Way’s Kessler estimates that even a short gap in the government’s borrowing authority would slow economic growth by 1 percentage point, at an estimated cost of some 650,000 jobs. And while the default might be temporary, the damage would be lasting.

“You can cheat on your spouse and maybe your marriage will survive, but your marriage will never be the same again,” Kessler says. “And you can default on your debt as a nation and your country will survive. But the way your country is viewed will never be the same again.”

The U.S. can avoid these dire consequences, so long as Congress and the president can make a deal before the Aug. 2 deadline. [Copyright 2011 National Public Radio]

Leave a Reply

9AM to 10PM Sound Opinions

Sound Opinions

Take two nationally respected rock critics, the latest music news, personal commentary, and exclusive interviews and performances, add a huge pile of records old and new, and the result is Sound Opinions-the world's only rock and roll talk show.

Listen Live Now!

10AM to 12PM The Toaster Brunch

The Toaster Brunch

The Toaster Brunch is our Sunday morning Reggae show, hosted by E-Roy. The Toaster Brunch has an active following of scooter clubs and rastas from around the world. E-Roy is also a high school principal.

View the program guide!

12PM to 1PM This American Life

This American Life

Take in a slice of Americana with critically acclaimed host Ira Glass on "This American Life." Each week he picks a theme, then gives his writers and performers the freedom to weave real stories from real people around that theme in a manner they find most engaging.

View the program guide!

Upcoming Events in your area (Submit your event today!)

Streaming audio and podcasts

Stream KOSU on your smartphone

Phone Streaming

SmartPhone listening options on this page are intended for many iPhones, Blackberries, etc. with low-cost software applications available to listen to our full-time web streams, both News on KOSU-1 and Classical on KOSU-2.

Learn more about our complete range of streaming services

We're perfecting the patient experience - Stillwater Medical Center