DUAL CRISIS: U.S. SHUTDOWN, DEBT LIMIT COULD MERGE / DEFAULT?



FROM THE DENVER POST ONLINE: Janette Dunder of Alexandria, Virgina, demonstrates against Congress and lawmakers' inability to pass a budget outside the U.S. Capitol September 30, 2013 in Washington, DC.  (Photo by Chip Somodevilla/Getty Images)

WASHINGTON, OCTOBER 14, 2013 (PHILSTAR) By Tom Raum (Associated Press) Democrats and Republicans regularly warn about the dire consequences of legislation they don't like. Often it's gloom-and-doom partisan hype.

This time, though, people already are feeling the fallout as twin tempests — the partial government shutdown and a potential default on the country's debts — threaten to form a single economic-policy superstorm.

The shutdown began Oct. 1 because a divided Congress couldn't agree on a budget. Thousands of federal workers are furloughed, national parks are closed and many nonessential governmental services are dialed back or put on hold.

The shutdown doesn't directly threaten Social Security, other mandatory benefits or US interest payments on the national debt. Breaching the debt limit would.

Unless Congress raises that limit soon, the government will run out of the authority to borrow and pay its bills on Thursday, the Treasury Department says.

A default would challenge the US dollar's status as the world's "reserve" currency. More than 60 percent of all foreign country reserves are in US dollars, the prime currency in international trade.

"Without enough money to pay its bills, any of its payments are at risk — including all government spending, mandatory payments, interest on our debts, and payments to US bondholders," the bipartisan Committee for a Responsible Federal Budget said in a recent report.

A look at what you need to know about the two fiscal matters:

The debt ceiling is the legal limit to all federal borrowing, an absolute ceiling on the national debt that cannot be breached.

It can be raised.

Since Congress first established a limit in 1917, it has been raised roughly 100 times. Raising the statutory limit does not authorize borrowing for new spending. It only allows the government to keep borrowing to pay existing bills.

The government borrows money mostly by selling Treasury bills, notes and other securities, including US savings bonds. Individuals, mutual funds, corporations and governments worldwide buy the bonds.

Paying interest on these bonds is one of the government's largest single expenses.

In the budget year that ended Sept. 30, the government made $396 billion in interest payments, including payments on bonds held in some government accounts such as the Social Security Trust Fund.

The national debt is the accumulation of annual budget deficits. It first crossed the $1 trillion mark early in the administration of President Ronald Reagan.

It stood at $10.6 trillion when Obama took office in January 2009 and is $16.7 trillion today — bumping up against the debt limit, which is also $16.7 trillion rounded off.

Recently, the Treasury Department has used complicated accounting maneuvers to keep from technically exceeding the limit. But it's running out of such tricks.

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There are a couple Hail Mary plays the government could try if the deadlock persists: selling gold from US reserves, selling or leasing government buildings or national parklands and minting special large-denomination coins.

The Obama administration has shown little interest in such steps.

One possibility was suggested in 2011 by former President Bill Clinton and more recently by House Democratic leader Nancy Pelosi of California: have Obama raise the ceiling on his own, citing the part of the 14th Amendment that says "the validity of the public debt of the United States, authorized by law ... shall not be questioned."

Obama was asked at a Twitter town hall forum in July whether he would use that amendment as the basis to raise the debt ceiling. "I don't think we should get to the constitutional issue," he tweeted. "Congress has a responsibility to make sure we pay our bills. We've always paid them in the past."

His spokesman Jay Carney has said the administration doesn't believe the amendment gives the president the authority to ignore the debt ceiling.

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While budget deficits are coming down, the government continues to add to the national debt.

The deficit represents the annual difference between the government's spending and the tax revenues it takes in. Each deficit contributes to the national debt. The last time the government ran an annual surplus was in 2001.

The annual deficit declined to roughly $642 billion for the just-ended budget year, the first time in five years it has dropped below $1 trillion. It was $1.4 trillion when Obama took office in 2009.

Still, the government must borrow 19 cents for every dollar it spends, pushing up the nation's overall debt level.

One reason that keeps increasing: the army of retiring baby boomers leaving the workforce and beginning to collect Medicare and Social Security benefits.

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Obama and Democratic leaders denounce as a form of blackmail GOP efforts to use the shutdown and debt limit debate to delay or defund Obama's health care law.

Efforts by opposition parties to try to put strings on a president's debt-limit increases have been pretty standard going back at least to President Dwight D. Eisenhower in the 1950s.

"Congress consistently brings the government to the edge of default before facing its responsibility. This brinkmanship threatens the holders of government bonds and those who rely on Social Security and veterans' benefits," Reagan said in a 1987 radio address. He was scolding the Democratic-controlled Congress for seeking to modify or defeat his proposal to raise the debt limit.

He raised the debt ceiling 18 times.

As a senator representing Illinois, Obama voted against President George W. Bush's 2006 increase in the debt limit, calling it a "leadership failure" and "sign that the US government can't pay its own bills."

Bush won that battle.

FROM TodayOnline.com

What default? Republicans downplay US debt limit impact


As the United States Government shutdown enters its seventh day, US House of Representatives Speaker John Boehner said that there is "no way" Republican lawmakers will agree to a measure to raise the nation's debt ceiling unless it includes conditions to rein in deficit spending. OCTOBER 13, 2013 Photo: Reuters

Many GOP congressmen disagree with Obama
and Wall Street that a default on public debt
will be ‘catastrophic’.

WASHINGTON — The Obama administration says a United States default would be “catastrophic”. Economists say it could plunge the country into recession and prompt a global financial meltdown.

To many Republicans, however, the prospect of the world’s remaining superpower juggling its bills does not seem so bad.

The government could muddle through without a debt-ceiling increase as long as it kept up with interest payments and a few other priorities, they argue.

“We are not going to default on the public debt. That doesn’t mean that we have to pay every bill the day it comes in,” Republican Representative Joe Barton of Texas said on CNBC yesterday (Oct 7).

Mr Barton’s position could reflect a genuine disagreement with warnings by Wall Street and Washington analysts or he could be downplaying the default to gain tactical advantage in negotiations with President Barack Obama. But Mr Barton isn’t an outlier.

Nearly every Republican in the House of Representatives voted for a bill in May that would direct the Treasury Department to prioritise bond payments and Social Security retiree benefits over other obligations if Congress failed to extend its borrowing authority. In the Senate, 29 of the chamber’s 44 Republicans have signed on to the idea.

Republicans say that approach would minimise the fallout if Congress fails to raise the debt ceiling before the Treasury Department exhausts its borrowing authority on Oct 17.

Past and present Treasury officials and Wall Street analysts reject that view out of hand as naive at best.

In order to make sure bond payments and Social Security checks went out on time, the government would have to delay other payments by days or weeks. That would send a massive economic shockwave through military contractors, hospitals, and other entities farther down the priority list.

The plan also may not be workable in a practical sense. The US Treasury handles four million transactions a day, and separating some of them out would be practically impossible.

“It’s mind-boggling. I don’t know what to say,” said Mr Tony Fratto, a Republican and a former Treasury Department official under President George W Bush. “Every member of Congress should know this. These aren’t complicated concepts.”

That may not be the point. By presenting a plan to deal with a possible default, Republican lawmakers can show voters they are taking steps to minimise any potential fallout.

NEGOTIATING PLOY?

And as the Oct 17 deadline approaches, they may gain a negotiating advantage by showing Democrats they are not particularly afraid of going right up to the edge - or over it.

“It’s a strategy to say, ‘We can hold out longer, because we don’t think it’s so bad,’” said New York University political science professor Steven Brams, who has written extensively about strategic decision-making.

With the government entering its second week of a partial shutdown due to a dispute over Mr Obama’s healthcare law, business leaders are warning against further brinkmanship. The US Chamber of Commerce has called for a “clean” debt ceiling increase, without any other legislation attached, while financial executives like Mr Lloyd Blankfein of Goldman Sachs have urged the lawmakers to resolve the dispute quickly.

The uncertainty has weighed on financial markets. The CBOE Volatility index .VIX - a measure of market turbulence called the “fear index” - has risen by nearly 50 per cent over the past three weeks amid fear of a default and anxiety over a related government shutdown that took effect on Oct 1.

“With each passing day, the market becomes more restless,” said Mr Leo Grohowski, chief investment officer at BNY Mellon Wealth Management in New York.

The last debt-ceiling showdown in Aug 2011 proved costly. Lawmakers averted default with a last-minute deal, consumer confidence plummeted and the S&P 500 .SPX fell 17 per cent.

Although the S&P 500 recovered in a little over two weeks, the standoff will cost the government US$18.9 billion (S$23.6 billion) over ten years in higher interest costs, according to the Bipartisan Policy Center. REUTERS


Chief News Editor: Sol Jose Vanzi

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