Monday, October 7, 2013

T-Minus 10 days and Counting

Sometimes it feels as though I'm reporting on the goings on of a really bad soap opera. A little over two years ago, the nation came precariously close to defaulting on its debt. Tragedy was averted in the nick of time. In 10 days the U.S. will reach its debt limit. Once more, Republicans are holding the good faith and credit of the country hostage.

If you think that a shutdown (or as Fox News calls it, a slimdown) is bad, the ramifications of an actual default are incalculable. Complicating matters is the fact that many Republicans - specifically Tea Party Republicans - are convinced that defaulting is no big deal. The Treasury, they argue, takes in more than enough to make payments on the debt interest and other essential government functions. What's the big deal if some departments go unfunded, especially if they happen to be departments they don't like in the first place?

The ignorance of these law makers is astounding. They believe that raising the debt ceiling is no different than passing a budget that calls for more spending. If the government takes in $400 billion less in revenue than it spends, that would mean a deficit of $400 billion. So, naturally, the assumption is that raising the debt ceiling merely encourages Congress to spend more money than it has. If we simply balanced the federal budget the way homeowners are required to balance their personal budgets, there would be no need for a debt limit increase at all.

To make matters worse, a majority of Americans don't quite understand what the debt ceiling is either. To many of them it is complicated and abstract. They get budgets, but concepts like world-wide recession and global meltdown are treated like some bizarre sci-fi movie that depicts the end of the world: thrilling, but hardly believable.  Of course the fact that both of these crises are occurring in the same month isn't helping. If anything, it makes it all the more confusing.

One can hardly fault the average citizen for failing to grasp the severity of the crisis. After all, while the nation has gone through 17 government shutdowns, it has never defaulted on its debt. There's no precedent to fall back on; no, "Oh, I know what that's like" flashback moment. And for good reason. No one has been crazy enough to actually find out what would happen if the United States defaulted on its debt.

Until now, that is.

Just so we're clear. The debt ceiling has nothing whatsoever to do with future spending. What it is is a guarantee or promise by the federal government to honor debt that Congress has already authorized. So why does it have to be raised at all if all we're talking about is current debt? Why does the treasury need to raise it's borrowing limit by a trillion or two trillion dollars? Here's where it gets a little convoluted.

Let's say that you know you need to have $4,000 per month for household expenditures. These are expenditures that must be met if you expect to stay in your house. But you can't just tell your bank to transfer monies from your savings account to your checking account. Why? Because, technically the money isn't there, at least not all of it. You need authorization to borrow that amount. Without it, those bills that you know are due will not be paid. You have not incurred additional debt, you have simply run out of cash on hand to pay existing debt. The bank, in essence, is not authorizing more spending; it's simply authorizing payment of the bills that are coming due.

Now imagine a scenario where that bank doesn't grant the authorization to "honor" that existing debt. Other banks and lending institutions find out about it. Your word becomes worthless and all of a sudden the interest rates on your mortgage, car loan and credit cards begin to go up. Some of those loans might even get called, which could produce a cascade effect, inevitably leading to bankruptcy and financial ruin. Even if you manage to make partial payments on some of your debt, as some have suggested is a possibility, you have done irrevocable damage to your reputation; damage that may never be fully repaired.

That's the debt ceiling in a nut shell. U.S. treasury bonds, which have historically been the safest bet for investors, could plummet in value should we default. Global markets would undoubtedly tank and interest rates will go up. How much, nobody knows. But this much is certain: it will not be very pleasant. We could find ourselves right back where we were in the winter of 2009 when the DOW Jones lost half its value and the U.S. entered the worst economic downturn since the Great Depression.

The clock is ticking. October 17th is D-day. Billions of people will be negatively impacted if Congress doesn't act responsibly. Hoping for sanity to prevail isn't much to hang your hat on when you consider the people driving the bus seem intent on taking it over the cliff. After all, we're talking about a group that still thinks global warming is a hoax.

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