Strategic Briefing | 5.16.2011 | US Debt Ceiling

Debt ceiling drama starts today
CNNMoney | May 16
Monday’s the day: The federal debt will hit its legal limit and Congress doesn’t plan to do anything about it. That leaves Treasury Secretary Timothy Geithner in a bit of a pickle. It now falls to him to jump through hoops every day to keep the world’s largest economy from defaulting on its legal obligations. Geithner told Congress that he estimates he has enough legal hoop-jumping tricks to cover them for another 11 weeks or so. But then he said that’s it. If lawmakers don’t get it together by Aug. 2, the United States will no longer be able to pay its bills in full.

A sword of Damocles for the debt ceiling
Sen. Pete Domenici and Alice Rivlin (Washington Post) | May 15
Congress must increase the debt limit in the next few weeks to avoid a financial crisis. Calls for default on the obligations our government has already incurred are reckless posturing that does nothing to alter future obligations and makes the world doubt our elected representatives’ ability to govern responsibly. We favor raising the debt ceiling promptly and mandating actions to put the federal budget back on a sustainable path.
Boehner says the debt ceiling must increase
The Hill | May 15
Speaker John Boehner (R-Ohio) said he’s “ready to cut a deal today” to raise the debt ceiling. “I think it is necessary, but I understand the doubts,” Boehner said on “Face the Nation.” “They’ve pushed the date back, pushed the date back, pushed the date back. But it’s clear to me that at some point we’re going to have to raise the debt ceiling.” Senate Minority Leader Mitch McConnell (R-Ky.) said he wouldn’t vote to increase the debt limit unless deficit reductions are made. Boehner has made similar demands.
America Held Hostage
Paul Krugman (NY Times) | May 15
Now, there are good reasons to believe that the G.O.P. isn’t nearly as willing to burn the house down as it claims. Business interests have made it clear that they’re horrified at the prospect of hitting the debt ceiling. Even the virulently anti-Obama U.S. Chamber of Commerce has urged Congress to raise the ceiling “as expeditiously as possible.” And a confrontation over spending would only highlight the fact that Republicans won big last year largely by promising to protect Medicare, then promptly voted to dismantle the program. But the president can’t call the extortionists’ bluff unless he’s willing to confront them, and accept the associated risks. According to Harry Reid, the Senate majority leader, Mr. Obama has told Democrats not to draw any “line in the sand” in debt negotiations. Well, count me among those who find this strategy completely baffling. At some point — and sooner rather than later — the president has to draw a line. Otherwise, he might as well move out of the White House, and hand the keys over to the Tea Party.
US should sell assets like gold to get out of debt, conservative economists say
Washington Post | May 15
With the United States poised to slam into its debt limit Monday, conservative economists are eyeballing all that gold in Fort Knox. There’s about 147 million ounces of gold parked in the legendary vault. Gold is selling at nearly $1,500 an ounce. That’s many billions of dollars in bullion. “It’s just sort of sitting there,” said Ron Utt, a senior fellow at the Heritage Foundation. “Given the high price it is now, and the tremendous debt problem we now have, by all means, sell at the peak.” But that’s cockamamie, declares the Obama administration. Mary J. Miller, Treasury’s assistant secretary for financial markets, said the U.S. should sell assets in an orderly, “well-telegraphed” manner, not in a “fire sale” atmosphere with a debt limit deadline accelerating the process.
Testimony of Prof. Matthew Slaughter, Dartmouth
US House of Representative | May 11
Some might ask, couldn’t a deficit-reduction plan be crafted and implemented that would create fiscal balance and thus prevent America from breaching its looming debt ceiling? Speaking practically, the answer is no. As of May 3 the total amount of federal debt outstanding was about $14.28 trillion. The debt limit is $14.294 trillion. Even if America wanted to do so, there simply is not enough calendar time for America to rewrite its spending and taxing laws to prevent reaching this limit. Speaking economically, the answer should also be no. There is no doubt that America must soon control its massive fiscal deficits. But doing so immediately would require such a massive combination of spending cuts and/or tax increases that it would almost surely throw America back into a deep recession. This real economic hardship on American workers and families would not be worth enduring for the sake of immediate fiscal balance.
The Outcome of the Debt Ceiling Battle Could Hurt the Economy
Mark Thoma (Economist’s View) | May 15
If politicians fail to reach a deal to increase the debt ceiling, there would be a large fall in federal spending. The decline in federal purchases of private sector goods and services would reduce aggregate demand, and this could slow or even reverse the recovery (it could also threaten the delivery of critical services that some people depend upon). In addition, the failure to pay wages to federal workers would disrupt household finances and cause a further decline in demand, as would the failure of the government to pay its bills for the goods and services it has already purchased from the private sector (and it could even threaten some households and businesses with bankruptcy should the problem persist). There may be some room for the Treasury to use accounting tricks to avoid the worst problems, at least for a time, but it is not at all clear how well this would work to insulate the economy from problems and eventually this strategy will come to an end.
The Debt Ceiling: What is at Stake?
Mercatus Center at George Mason University | Apr 28
Congress is currently considering whether it should raise the debt ceiling. This is not new territory. Congress has raised the debt ceiling ten times in the last ten years.3 However, raising the debt ceiling for the eleventh time in as many years without recognizing and correcting systemic problems would have consequences beyond merely tapping revenue and assets to meet FY2011 budget commitments. Continuing to pass debt ceiling increases without proper spending reforms would be irresponsible. The United States should not consider defaulting on its debt, nor should it put itself in a position where it has to postpone payment to contractors or “manage” other non-debt obligations. Neither, however, should Congress be forced to raise the debt ceiling under false pretenses. By our calculations, the United States has enough expected cash flow (tax revenue) and assets on hand to avoid either of these unattractive options until at least the end of the current fiscal year in September, perhaps even longer.
No Deal in Sight as Debt Deadline Nears
Frum Forum | May 15
Bond ratings, basically, assess the chances of default and, if a politically caused default is likely, credit will freeze up. Because other countries don’t have debt ceilings–or, for that matter, legislatures that are co-equal branches of government—there’s no exact precedent for a downgrade happening in these circumstances but the logic of bond rating suggests that one would take place and a recession would follow. And Republicans—a few of whom on the party’s fringes seem to relish in the idea of forcing a default—need to be careful of what they wish for: even a debt downgrade would hurt the party terribly.