By Mitch Gurney

July 29, 2011

As the chances for a compromise over budget reductions and the raising of the debt ceiling looks less likely let’s pull this bogeyman out of the closet and take a look at this situation and gain an informed perspective.

The Bipartisan Policy Center has prepared an informative and easy to understand analysis; Debt Limit Analysis. (PDF), the report puts this situation into proper perspective and I encourage all to read it.

Their analysis shows: 

• That the X Date will fall between August 2 and August 9. On July 1st, Treasury publicly reaffirmed their estimate of the X Date as August 2
• The 14thAmendment does not provide a reasonable basis for challenging the constitutionality of the debt ceiling. The Administration will not attack the debt ceiling on this basis
• Treasury has no secret bag of tricks to finance government operations past August 2. Treasury will not attempt to “fire sale” assets during a crisis.
• Other ideas are impractical, illegal and/or inappropriate (gold loans, IOUs)
• There is no precedent; all other debt limit impasses have been resolved without passing the X Date
• The government shutdown of 1995 –96 does not provide a precedent

The report reveals that despite all we’ve heard the government won’t completely shut down nor completely default. The Treasury can prioritize its bills if the debt-limit increase is not approved by Aug 2. Under this scenario the Treasury will have to choose from well over 80 million monthly payments that would leave about 40-45% of its bills temporarily unpaid (see page 12). The U.S will pull in a total of $172.4 billion in revenue during the month, but its total payments exceed $306 billion, resulting in a $134 billion shortfall (see page 15). The unknown factor is which bills the Treasury would pay in the interim.

If you were the Treasury what you would you pay? Use this interactive chart and determine:

What programs would you choose to pay?

While weighing out the options consider the following conclusions reached in the Bipartisan Policy Center’s analysis (see pages; 12, 46, 48, 49, 50, and 51)

The reality would be chaotic:

• Unfair results, unanswered questions
• Treasury picking winners and losers
• Public uproar
• Intense global media focus

Handling all payments for important and popular programs (e.g., Social Security, Medicare, Medicaid, Defense, and active duty pay) will quickly become impossible

Economic disruption:

• Immediate 44% cut in federal spending would affect broader economy
• Many service providers unpaid
• Medicare and Medicaid providers
• Defense vendors
• Individuals not receiving government checks
• Widespread uncertainty as decisions are made day by day

Market Risk:

• Treasury must “roll over” almost $500 b in debt that matures during August 2011 (see page 49)
• During prioritization, this operation may not run as smoothly

Two elements of market risk:

• Treasury will have to pay higher interest rates to attract new buyers
• It is possible, if unlikely, that not enough bidders would appear

If the debt ceiling is not raised by August 2, all three ratings agencies will put the United States on watch for a downgrade, at a minimum (S&P and Moody’s already have)

• The effects of a single downgrade (by S&P) are uncertain
• Even without downgrade, it is likely that rates would increase, perhaps significantly

The risks are real:

• The Treasury market, interest rates
• Level and status of the dollar
• Our economy
• The global financial system
• No guarantee of the outcome; risks are risks

Despite the seriousness of this crisis we humans do love our drama. Mix in the massive polarizing ideological differences that divide policymakers and the public over this issue and the political agendas possibly at work and we have all the trappings for a Hollywood drama on the scale of Fright Night.

But this is real life and our leaders are not actors in some Hollywood movie.

While not reaching an agreement and raising the debt ceiling by Aug 2 will cause quite a disruption this is no time for a rush to judgment or scare tactics. No one has to “blink” first and ‘cave in’ as this crisis is being portrayed. There is time to work out a real resolve and get some control over this budget mess.

This could be, if wisdom were to prevail, an opportunity for leaders to put our financial house on a more stable course. But we need real leaders that serve the nation and not agendas that can deliver less polarized politics and less drama. Leaders that are more level headed and objective, who possess rational thought and more balanced judgment capabilities. Are there any such leaders in Washington that measure up and capable of delivering some real leadership – now?

Mitch Gurney

Addendum:

Earlier this morning The RealNews.com features an interview with Bob Pollin co-director of the Political Economy Research Institute (PERI) who states the crisis is being overblown. He states because interest payments on U.S debt are well below average there is no debt crisis and there is time to deal with long-term debt. View interview.

The ProPublica.org provides very similar views as outlined above in As Debt Limit Deadline Draws Closer, We (Sadly) Explain What ‘Default’ Could Mean providing a link to a detailed report by the Congressional Research Service; Reaching the Debt Limit: Background and Potential Effects on Government Operations.