From the fiscal frying pan into the debt ceiling fire

A new study warns that the government will have far less time than before to forestall a default on U.S. debt – and the process could be very costly.

By The Fiscal Times Nov 29, 2012 2:24PM
By Eric PianinThe Fiscal Times logo

ntil Federal ReserveBoard Chairman Ben Bernanke raised concern about it in a speech last week to the Economic Club of New York,  the fact that the Treasury will once again hit the debt ceiling in a few months has received scant attention from Congress, the White House and the financial markets.

A little more than a year ago, Washington was caught up in a suspenseful political drama as President Obama and House and Senate Republican leaders fought over the terms of raising the national debt limit to avoid the Treasury’s first default on borrowing in U.S. history. Republican House Speaker John Boehner insisted that any increase in borrowing authority be matched dollar for dollar with cuts in spending.  But today, with all eyes on the looming fiscal cliff, the soon-to-be-expiring  $16.4 trillion debt ceiling has become a relative after thought compared to the fears of the effects of year end spending cuts and tax increases.

A new study by the Bipartisan Policy Center released Tuesday warns there will be far less time than before to work out a new agreement before the Treasury hits the debt limit and begins defaulting on some of its borrowing and government obligations.  The Treasury will reach its current statutory debt limit in the last week of December. By mid February 2013, it will have insufficient cash on hand to make all payments when owed.

The government last year  used a series of financial maneuvers and tricks to forestall a default on the debt for nearly 11 weeks before a deal was finally struck in early August. This time, the Treasury will have no more than four to eight weeks before hitting a wall, according to the study. That’s because the government will be paying out far more – in federal tax returns and interest and principle on its debt -- than it will be taking in early next year.

Moreover, the government will be sure to waste an inordinate amount of taxpayers’  dollars if it has to play that game again. The Treasury was forced to squander an estimated $18.9 billion long term in excess interest costs and premiums to continue meeting federal financial obligations while the debt ceiling talks dragged on in 2011. Those wasted funds are the equivalent of what it will cost Congress to once again cancel scheduled cuts in Medicare payments to physicians for the coming year -- the so called “Doc Fix.”

Steve Bell, a former Republican Senate budget adviser and now senior director of the BPC’s Economic Policy Project, said he marvels that the expiring debt ceiling  has been relegated to a secondary concern. That’s especially true after Standard & Poor’s downgraded the government’s AAA credit rating by one notch in August 2011 to express its dismay with the political turmoil and “brinksmanship” in Washington, even after the last- minute deal struck by Congress and Obama.  A repeat of that protracted battle over raising the debt ceiling again could invite a much more severe response and downgrade from S & P, Moody’s and other major bond rating agencies . Such a development could force many institutional investors to move their money out of government bonds, Bell said.

Bernanke and other economists and experts have repeatedly warned that the government’s failure to avoid the year end fiscal cliff would be a disaster that would likely push the economy back into recession and lead to millions of job layoffs. But Bell warned that failure to raise the debt ceiling could have an even more damaging effect on the economy and the government’s ability to borrow.

“From a market point of view, going off the fiscal cliff would have some impact, I don’t know what it would be,” Bell told the Fiscal Times. “It certainly would not be bad for the bond market. But the debt ceiling is a different order of magnitude. And right now, nobody cares about that except Bernanke.”

Bernanke stresses that failure by Congress to raise the debt ceiling again would impose heavy costs on the economy. Senate Majority Whip Dick Durbin, D-Ill., said in a speech yesterday that the debt ceiling and fiscal cliff should be coupled together in negotiations, since no one wants to slog through tough talks on the budget and then repeat the exercise a few weeks later. Echoing that concern, Senate Majority Leader Harry Reid, D-Nev., told reporters yesterday, "We would be somewhat foolish to work out something on stopping us from going over the cliff and then a month or six weeks later, the Republicans would pull the same game they did before," referring to the calamitous debt-ceiling negotiations of 2011.

Robert D. Reischauer, a former director of the Congressional Budget Office, said, “It’s likely Republicans will insist on sort of limited increases in the debt ceiling” that would give them some leverage in their negotiations with Obama and the Democrats during the lame duck session and early next year.

Indeed, after President Obama urged Boehner  at a recent White House meeting to raise the debt limit before the end of the year, Boehner responded, “There is a price for everything,” according to Politico.

A hard and fast deadline for the Treasury running out of cash will depend on a number of “wildcards,” according to the Bipartisan Policy Center report. Those include whether the tax filing season is delayed because Congress fails to take action to prevent an expansion of the Alternative Minimum Tax by the end of the year; possible emergency spending legislation to assist New York, New Jersey and other states that were clobbered by Hurricane Sandy, and monthly fluctuations in government spending and revenues.

“If the debt limit is not increased as part of the lame duck negotiations, policymakers will be left with only a matter of weeks to ensure that all federal financial obligations continue to be met in full and on time,” the center’s report  concluded.

Eric Pianin is the Washington Editor at The Fiscal Times. Subscribe to The Fiscal Times' FREE newsletter.

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Nov 29, 2012 2:49PM
Thanks to all the big gov progressive politicians on both sides of the aisle and on the SCOTUS, the USA is just about FUBAR...
Nov 30, 2012 8:31PM
Right now the debt limit is the only leverage the Republicans have to force Democrats to be responsible about spending and move the country towards a balanced budget.

Japan and the countries in Europe are proving that you can't spend forever without a day of reckoning coming due.

Nov 30, 2012 1:57PM
The dems lied and never followed through on past deals. No increase period. The only hope for this country is to burn and rebuild.
Dec 2, 2012 7:55PM

For all the posturing over the cliff, taxes, entitlements, and political theatre, I am just about convinced that regardless of the consequences, over the cliff and down the drain is better than what either side is proposing. A complete collapse might bring real reform and offer hope for younger generations.

As things currently exist, it is nothing more than generational theft with government looting the public wealth to futher threir own political agendas.

Dec 2, 2012 7:04AM
Screw wall street and Ben ! He just wants to keep the printing presses running at full speed! Lets see the FEDs are pumping 40 BILLION a month in their QE3 BS !!!! Its time to put the brakes on the feds easy money to wall street ! And its time for wall street to run on its OWN MONEY !!! < This is a socialized wall street running on NO sound investing principals and nothing but borrowing and credit in wall street! Let the cliff come ! We need this !!! And WHAT 16 TRILLION was good enough for 2012 ??? What its not good enough for 2013??? But then Ben and the boys will be stuck in the mud ! 40 Billion a month is what Ben is spending on wall street banks ! < SCREW WALL STREET America .
Nov 30, 2012 11:32PM
You all talk big about Mr. Obama's spending , but you all  wise suckers, Bush handed trillion of dollars in a fake platter, and you ate the 10.8 trillion dollar dinner that the 2 wars produced. You paid with 720 billions in the reconstruction of Iraq. Bush VP made a fortune with stock in war manufacturing hardware, hundred of large Scale manufacture's made billions in war transportation trucks, and equipment that could not protect against the explosions of Iraq home made road detonation grenades, and equipment.. Bush did not pay for any of it, all of it was charged to the USA credit card, to include the prescription help for seniors that Bush did not pay for it either, costing nearly 800 billions. Now, Mr. Obama comes in and rescues the USA from the deepest hole, and to save the country needed to spent 2.1 trillion, and all of you accused the President of over spending. Why don't you all take a walk, learn that your former president Bush nearly make the USA another Rome. You al should get in touch with Bush and offer him a match to start the burning of the USA he started, and because of him, and Boehner, Ryan, Cantor, the country is in a mess that Obama is trying to correct! Get the rich to pay tax, and there will not be a Fiscal Cliff, nor a Budget deficit in 2 years.
Nov 30, 2012 3:06PM

of you feel the wings of anger from all the guts of the American citizens that will not take it again!

Boehner, we the Democrats will remember you for ever as a persistent blocker of progress for our country, and we will work hard in the next elections in 2014, to kick you out of the House of Representatives. We will pursue this task with all our heart. Our prime future agenda is to consolidate our efforts to get you fast ejected in the next elections out of a job you did not know how to do efficiently, you did not earned it, and you do not deserved it as an American! We will make you invisible by jerking you out to never return because have done so much damaged to the American people, to our credit ratings during the Budget Ceiling discussions  by so much indolent opposition against the president Obama.  Unfortunately for the people of America your negative actions quickly ricochet against the middle class, stopping their opportunity for job creations, better economics future, and less poverty.  We still do not understand, and still we cannot mentally accept a man's in your position to be so weakly and wrongly leading this mass of incoherent Tea Party nuts, and Republican members, that with no excuse, were put there by the people to supposedly work with the people benefits, and for the people gains only, and not for you monetary growth, and big names in the House of Representatives. You made yourself a detestable inhuman, we all deeply feeling sick just by listening to you bully unaccomplished voice always commanding nothing but despair, no jobs,  no presidential Bills passed, future poverty, anti -health opposition for the citizens, you need to be put out of your job quickly and we can hardly wait for the next elections! You, and all of you  have put us through misery, poverty, and no jobs, you have discredit our USA by not wanting to increase the Debt Ceiling when you kissed the rear of Bush, and increase the debt ceiling many times because you adore this man of poor and reckless presidential performance just like yours!

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