Bipartisan Study Warns of Debt Limit Stalemate

As the two parties in Congress continue wrangling over the budgetary future of the country, it is important to keep in mind that Treasury Secretary Timothy Geithner’s deadline of Aug. 2 is looming, only three weeks away.
Bipartisan Study Warns of Debt Limit Stalemate
7/13/2011
Updated:
7/13/2011

As the two parties in Congress continue wrangling over the budgetary future of the country, it is important to keep in mind that Treasury Secretary Timothy Geithner’s deadline of Aug. 2 is looming, only three weeks away.

Since May, Secretary Geithner has steadfastly maintained that the Aug. 2 deadline is very real. If the debt ceiling is not raised by that date, the Treasury must face an unprecedented situation in which it will be unable to uphold its debt obligations and pay bills to keep the government operating.

Meanwhile a small, vocal minority of Republican members of Congress have insisted throughout the entire negotiation process that the secretary’s deadline is artificial, while others have claimed that not lifting the debt limit would not have a huge impact on the nation’s fiscal or economic situation.

So, who is telling the truth?

To answer this question, the Bipartisan Policy Center, a Washington, D.C.-based think tank, analyzed the effects of not raising the debt limit and released its findings in a report.

First, the authors of the report estimated that the date at which the Treasury can no longer fulfill all of its obligations falls sometime between Aug. 2 and Aug. 9, supporting Secretary Geithner’s contention his deadline is not at all contrived.

“It’s a real deadline. After Aug. 2, the government will be unable to pay something like 44 percent of its bills,” said Jay Powell, one of the authors of the report, in an interview with the Epoch Times. “It will have to pay interest on the debt … and then after that the cuts will be extraordinarily large and painful.”

If the debt limit is not raised by that date, the U.S. sovereign credit rating will likely be downgraded by the major ratings agencies. At the same time, the government will have to begin prioritizing its spending, funding certain programs while cutting off payments for others.

For instance, in the month of August, if the government decided to protect certain big ticket items like defense vendor payments, Medicare/Medicaid, Social Security payments, and unemployment benefits, it would have to pay out a total of $172.7 billion to keep those programs running.

At the same time, it would also have to sacrifice $134 billion worth of spending that would be necessary to keep much of the federal bureaucracy operating.

In any case, the government would continue paying interest on Treasury securities in order to prevent a bond default. However, beyond that decision, it would be faced with a myriad of unpleasant options.

“The reality is that there are just a range of incredibly unattractive choices, and unfortunately the administration will be put in the impossible situation of choosing from among a set of extremely unattractive alternatives,” said Powell.

In addition, the Treasury would have to “roll over” about $500 billion worth of debt in the form of Treasury bonds that mature in the month of August. While this process would normally be considered fairly routine, failure to lift the debt limit in early August would likely drive up interest rates on Treasury bonds. The Treasury would struggle to attract bond buyers due to lack of confidence in the bond market.

In addition to the hardship imposed upon the government itself, the wider economy of the country would also be significantly impacted, according to the data. A sudden 44 percent reduction in government payouts would have a severe negative effect on the economy, said Powell.