Friday, April 15, 2011

What if the U.S. Hits the Debt Ceiling?

Secretary Geitner warned congress last week that the U.S. will smash into the debt ceiling sometime around May 16th. Once the government hits the current debt limit of $14.3 trillion it will be legally constrained from incurring anymore debt. This is a problem since the U.S. takes in only about 60 cents for every dollar it spends. Congress has raised the debt ceiling 74 times since 1962. Ten of those times in the last decade. It has almost become a yearly routine vote. It appears that congressional Republicans will not vote to raise the debt ceiling without considerable concessions from the Democrats. So what would happen if the U.S. did hit the debt ceiling and it was not raised? Immediately after this happens the Treasury Department can impose 'extraordinary actions' to pay the bills. This include the suspension of investing in government workers savings plan, and pulling Treasury securities out of a trust fund.  If the debt ceiling was not increased the government would have to cut $738 billion in government spending in the span of six months. In the worst case scenario the markets would crash world wide. The dollar would decline dramatically and foreign investor's would flee the country. The country's credit rating would be severely damaged. This would make it even harder to sell more debt later. The political ramifications for the party perceived to be in the blame would be Armageddon like.

Related post:

America's Financial Demise

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