For weeks, economists and bankers have been warning that there will be catastrophic consequences if Congress fails raise the nation’s borrowing limit.
They say it will mean the nation will default on its debt, which could rock U.S. and global markets. The Treasury has warned that it will exhaust the “extraordinary measures” it has been using to keep paying the nation’s bills by Oct. 17.
“To actually permit default, according to many CEOs and economists, would be — and I’m quoting here — ‘insane,’ ‘catastrophic,’ ‘chaos,’ ” President Obama has said. “These are some of the more polite words. Warren Buffett likened default to a nuclear bomb.”
But to a small group of Republicans in Congress, these warnings are just a lot of hype. They believe the country will not default, even if the debt ceiling is breached, and all the fuss about the debt limit is just fear-mongering.
“To suggest that we can’t pay our debts — that’s absolutely not true,” says Rep. Phil Gingrey of Georgia.
The Republicans in this group have different theories about why the country is not going to default, but the conclusion is the same: Let Oct. 17 come and go without raising the debt ceiling, and America’s going to be A-OK.
One common theory: The U.S. will have enough cash on hand to pay Treasury bondholders and everybody else for a long time.
“We can honor our Social Security claims,” Gingrey says. “Social Security checks will go out. Medicare claims will be honored.”
The problem with that theory is twofold. First, cash-flow: The money going out can be more than what’s coming in on any given day. Second: The total going out is a lot more than what’s coming in. In the last fiscal year, the U.S. ran a $600 billion deficit.
Economists say if the U.S. can’t borrow more money after Oct. 17, a lot of people — including Social Security recipients — won’t get paid.
But Rep. Joe Barton of Texas doesn’t buy that. He says the U.S. can prioritize certain payments — and skip payments on less important things.
“You know, paying the travel expenses of the secretary of commerce, maybe we will only pay 50 percent of that next month — or National Labor Relations Board, or some of the discretionary items that we can postpone,” he says. “You know, it can be managed.”
But the Treasury says it can’t be managed. The department concluded it doesn’t have the legal authority — or the technical capacity — to choose whom to pay first and last. It pays debts as they’re due.
And that takes us to another theory. Rep. Ted Yoho of Florida says as long as the United States keeps paying all the interest on its debt — meaning, as long as U.S. bondholders get paid — the nation’s technically not defaulting.
“Default is not being able to service your debt,” he says. “We’ve got plenty of money coming in on a monthly basis to service our debt.”
But economist Mark Zandi says even if bondholders do get paid, they might not think their Treasury bonds look so hot after a while.
“If you’re a bondholder,” he says, “and you’re watching Social Security recipients not getting their check on time … you’re going to begin to wonder: How long can that possibly go on? Can I as a bondholder expect to get paid by the U.S. Treasury if these other constituents are not getting their money on time?”
Zandi says people are going to stop buying bonds or sell the ones they already own, which would raise interest rates. That affects stock prices, housing values and job growth.
Yoho isn’t convinced. He’s a large-animal veterinarian by trade, but his analysis of the issue tells him that a default would actually stabilize the world markets.
“I feel in my heart that this is the right thing,” he says. “I’ve talked to economists; I’ve read a lot of research on this.”
But most economists — including Congress’ top economist — have come to the opposite conclusion.