What happens the day after Congress refuses to increase the debt ceiling?

[nun]

If Congress refuses to increase the US's debt ceiling what will happen? Will everyone realize the "emperor has no clothes" or say "they intend to tackle debt, so I'm not worried about my US Govt bond investments"

 

[nun]

Last time it happened was in 1996. Here's an article:

What happens if the government shuts down? (3/29/11) -- GovExec.com

No I don't mean budget impasse leading to a shutdown, I mean limiting the ability of the US to borrow money.

 

[ziggy29]

No I don't mean budget impasse leading to a shutdown, I mean limiting the ability of the US to borrow money.

To some degree these are related. If the government's full scope of operations can only occur with debt financing, an inability to borrow more would necessarily require significant curtailment of some government functions.

 

[nun]

To some degree these are related. If the government's full scope of operations can only occur with debt financing, an inability to borrow more would necessarily require significant curtailment of some government functions.

Agreed, the Government would have to reduce spending. It would be interesting to see how this would be worked out and the reaction of the bond markets and those holding US debt.

 

[FinanceDude]

Agreed, the Government would have to reduce spending. It would be interesting to see how this would be worked out and the reaction of the bond markets and those holding US debt.

I think Bill Gross has already spoken by action on this issue...........

 

[nun]

I think Bill Gross has already spoken by action on this issue...........

What happens if China, UK and Japan do the same?

 

[FinanceDude]

What happens if China, UK and Japan do the same?

Then the shu-shu hits the fan!!

China can't do anything but keep buying. They talk tough, but all it would take is for the US to put a 15% tariff on Chinese goods and they would kiss their GDP growth goodbye...........

 

[Independent]

If Congress refuses to increase the US's debt ceiling what will happen? Will everyone realize the "emperor has no clothes" or say "they intend to tackle debt, so I'm not worried about my US Govt bond investments"

I think this is a good question, and I'm not sure.

I've heard one opinion that says the gov't "simply" cuts back spending enough to continue to pay interest and principal on the debt.

I've heard a different opinion that says the gov't would have to stop paying interest and principal. IMO, that would have much more serious consequences.

I hope someone here can provide an answer.

 

[nun]

Then the shu-shu hits the fan!!

China can't do anything but keep buying. They talk tough, but all it would take is for the US to put a 15% tariff on Chinese goods and they would kiss their GDP growth goodbye...........

...and away goes any hope of a US recovery along with it and massive removal of foreign capital.

 

[M Paquette]

If Congress refuses to increase the US's debt ceiling what will happen? Will everyone realize the "emperor has no clothes" or say "they intend to tackle debt, so I'm not worried about my US Govt bond investments"

If you want to know what the politicians will do, consult your Magic 8-Ball.

Meanwhile, Treasury has been through this fire drill before, so they've been stockpiling the incoming cash flow and taking a number of other extraordinary measures to meet the government's existing obligations without exceeding the debt limit. Since Treasury isn't authorized to issue new debt, once funds raised by these extraordinary actions are exhausted, they will be forced to delay payments for government services, and if the delays go on long enough, they could be forced to default on legal debt obligations.

They will try really hard to avoid defaulting on the legal debt obligations, the bonds and notes that come due, and the coupon interest to be paid. Any technical default, or failure to pay on time, will cause a drop in the value of US debt and effectively raise the cost of any future borrowing.

Here's a GAO report on the debt management problem.

 

[rescueme]

I hope someone here can provide an answer.

No, but we can certainly offer opinions ...

 

[kjpliny]

I was wondering how much we spend on Federal Government salaries, and it appears that the number is in the area of $200 Billion per year. I found it surprising that even if we abolished the entire Federal Government, we wouldn't even put a dent in the national debt from payroll savings.

However, I guess if there were no Govt employees, there would be no one to write the checks that cover defense spending, govt. contracts, grants and other hand-outs which is what the real problem seems to be regarding the overspending.

 

[Westernskies]

The sun will still rise in the east and set in the west, despite the political hand-wringing and partisan proselytising...

...and we'll quit spending money we don't have for a (short) while.

 

[Independent]

If you want to know what the politicians will do, consult your Magic 8-Ball.

Meanwhile, Treasury has been through this fire drill before, so they've been stockpiling the incoming cash flow and taking a number of other extraordinary measures to meet the government's existing obligations without exceeding the debt limit. Since Treasury isn't authorized to issue new debt, once funds raised by these extraordinary actions are exhausted, they will be forced to delay payments for government services, and if the delays go on long enough, they could be forced to default on legal debt obligations.

They will try really hard to avoid defaulting on the legal debt obligations, the bonds and notes that come due, and the coupon interest to be paid. Any technical default, or failure to pay on time, will cause a drop in the value of US debt and effectively raise the cost of any future borrowing.

Here's a GAO report on the debt management problem.

Thanks for the source, though I had trouble with the URL. This one works http://www.gao.gov/new.items/d11203.pdf

What I see is a lot of "extraordinary" shuffling of accounts. Apparently we have some borrowing that's not subject to the debt limit and they can get some money there for a little while. They also point out that markets get nervous and interest rates rise.

The only reference I could find that seemed to go to my "stop spending or default?" question was

"As a result, once debt reaches the limit, Congress
will likely have less time than in prior years to debate raising the debt limit
before there are disruptions to government programs and services. This trend
is likely to continue given the long-term fiscal outlook."

The way I read that, they first try the extraordinary shuffling, then they cut back on spending. They cut spending rather than default. If that's true, and I were a member of Congress, I might be willing to go with a few weeks of spending cuts before I'd increase the ceiling.

They also say that the right way to handle the debt ceiling is that Congress should raise it whenever they approve an unbalanced budget. That's a "duh" to me. The fact that we don't take that approach is further evidence that the system is badly broken.