Reuters, Published October 16 2013
Default 101: What really happens to the U.S.WASHINGTON - The United States has been careening toward what could be a calamitous default on its debt because of a political stalemate over raising the nation's $16.7 trillion debt cap.
The U.S. Treasury has said it will hit the ceiling by Thursday unless Congress increases it by then.
Following are some questions and answers about how and when a default could happen.
How could the United States default?
The U.S. government takes in about 70 cents in taxes for every dollar it spends, so it must borrow to pay its bills. This would be easy as there are plenty of investors who want to lend America money. The problem is that Congress put a ceiling on government debt and lawmakers have not raised it.
So will Washington go broke on Oct. 17?
No, but the U.S. government will be dangerously low on cash. When it hits the debt ceiling, the Treasury estimates it would have about $30 billion in the bank. Because it would not be able to add to the national debt, bills would have to be paid with incoming revenues and cash on hand.
How long will the money last?
Not long at all. The Congressional Budget Office thinks the United States would start missing payments on at least some of its obligations between Oct. 22 and the end of the month. No one knows the exact date because you cannot predict with certainty what future tax revenues will look like.
The United States defaults when the money runs out, right?
It depends on how you define default. Historically, default is when a country misses a payment to a creditor. The Obama administration says default would include any missed payment, such as payments for public health insurance. The first really big bill due after hitting the debt ceiling is a $12 billion payment in the Social Security retirement program on Oct. 23.
When would financial markets melt down?
Markets would be alarmed if it looks like bondholders would go unpaid for an extended period, and might even panic if any government checks are delayed. Many analysts think the administration would at least try to prioritize payments on the national debt, but Treasury officials say picking and choosing which bills to pay would be impossible. The first debt payments due after hitting the debt ceiling are on Oct. 17, 24 and 31. The first of those should not be a problem, according the CBO analysis. But there might not be enough money for the payments due on the 24th or the 31st.
How would a default affect the economy?
The Treasury has warned that a default could trigger the worst recession since the Great Depression of the 1930s. Once a default begins, the government would have to slash its spending overnight by about a third. The fiscal drag, if it lasts a full year, would be the equivalent of up to 4.2 percent of national economic output, according to calculations by Goldman Sachs.
That does not take into account the potential for a financial crisis. If investors lose their cool, stock markets could tumble, hitting pension funds and leading consumers to spend less of their money. Credit markets could freeze up because investors around the world might reassess the value of U.S. debt, which serves as collateral for trillions of dollars in loans and other financial transactions.
Is there an easy way out of this?
Washington's army of policy wonks have floated all sorts of ideas that in theory could resolve a debt ceiling crisis. Treasury could mint a $1 trillion dollar coin and deposit it at the Federal Reserve, magically topping up government coffers. The Obama administration could unilaterally raise the debt ceiling by invoking the 14th Amendment of the U.S. Constitution, which some scholars read as prohibiting a default.
The White House has ruled out both approaches. That they are even being considered speaks to the manufactured nature of Washington's crisis. The United States is not at risk of default because its economy is failing. Its political system is just increasingly dysfunctional.