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U.S. government hits
debt ceiling, lighting 11-week fuse
By Kevin G. Hall
WASHINGTON — Treasury Secretary Timothy Geithner informed Congress on
Monday that the United States has reached its legal debt limit, setting
off a ticking time bomb that could explode in less than three months if
lawmakers can’t bridge differences and allow more government borrowing.
In hitting the $14.3 trillion debt ceiling — the limit on how much the
government can borrow — the Obama administration on Monday began
temporarily halting payments to the retirement and federal pension
accounts of federal workers and started borrowing from those funds, to
be restored later.
Geithner sent a letter to Senate Majority Leader Harry Reid, D-Nev.,
warning that the government can move money around for about 11 weeks
but if a new debt ceiling isn’t agreed to by Aug. 2, the U.S.
government could effectively default on its obligations to its
creditors. He warned of “catastrophic economic consequences for
citizens” unless Congress raises the debt ceiling.
An increase of about $2 trillion is expected, enough to get the issue
past the 2012 elections before Congress would have to lift it again.
Republicans who control the House of Representatives vow to link
raising the debt ceiling to cuts in government spending of at least
equal measure. In a combative statement Monday, House Speaker John
Boehner, R-Ohio, upped the ante.
“As I have said numerous times, there will be no debt limit increase
without serious budget reforms and significant spending cuts, cuts that
are greater than any increase in the debt limit.” Boehner has called
previously for $2 trillion in spending cuts as part of any deal to
raise the debt ceiling.
Wisconsin Republican U.S. Rep. Paul Ryan, the chairman of the House
Budget Committee, repeated the linkage in a speech Monday in Obama’s
adopted hometown.
“For every dollar the president wants to raise the debt ceiling, we can
show him plenty of ways to cut far more than a dollar of spending,”
Ryan told the Economic Club of Chicago. “Given the magnitude of our
debt burden, the size of the spending cuts should exceed the size of
the president’s debt limit increase.”
Republicans rule out tax increases and any significant cuts in defense
spending. The United States continues to fight wars in Iraq and
Afghanistan paid for with borrowing, the only time in U.S. history that
wars weren’t offset at least partially with some sort of tax.
Democrats insist that Social Security is off the table, as is an end to
Medicare, but they are open to changes in Medicare funding.
If Congress fails to raise the debt ceiling by Aug. 2, it would force
the Obama administration to choose between paying creditors or paying
for military operations, Social Security and Medicare payments, and
other commitments.
A government default on debts surely would trigger a harsh reaction
from investors and could panic global financial markets, jeopardizing
the U.S. and global economies. It would mean that the world’s largest
economy was governing its finances as if it were a basket-case economy
such as Greece.
It might not even take a default to have severe consequences for the
U.S. economy, warned prominent forecaster Mark Zandi, the chief
economist for Moody’s Analytics. Democrats and Republicans alike
frequently cite Zandi’s research.
Speaking to the National Economists Club last Thursday, Zandi scoffed
at the idea that the government could simply prioritize payments to
creditors and halt other spending commitments, as some Republicans have
suggested.
“The global investors are going to ask themselves how long can
policymakers pay me and not a Social Security recipient? So if I were a
global investor, I would be bailing well before that, and interest
rates would spike,” Zandi said. He added that the idea that deep
spending cuts on the order that Republicans are calling for wouldn’t
harm the economy is “just wrong, dead wrong, particularly in the
context of the kind of cuts we’re talking about here.”
(David Lightman contributed to this story.)
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