It's official. As of Monday, May 16, the United States of America has reached its debt limit ($14.294 trillion). That means that the Treasury Department can no longer borrow money to pay the debts or meet the expenses of the U.S. government. You may say, wait, the sky didn't fall. People are not running in the streets in chaos. The stock and bond markets haven't crashed. I had my latte this morning and it was delicious. So what's the big deal?
The reason those things haven't happened (yet) is thanks to Treasury Secretary Timothy Geithner. Geithner sent a letter to Congress on Monday explaining how he is able to "move money around" and keep things running until August 2.
He's "fudging" the debt constraints right now by "suspending investments in federal retirement funds." Depending on the level of U.S. government expenses, he may also have to pay just interest due to bondholders (rather than principal) -- and generally pick and choose which debtors to pay off and which to put off -- on a day-to-day basis. This strategy, said Geithner, is akin to a homeowner who pays his mortgage at the expense of his car loan and credit cards.
While the sky isn't falling today, or even this week, Geithner says that he can't keep this juggling act up forever. In his letter to Congress, he wrote that we must "increase the debt limit in order to protect the full faith and credit of the United States and avoid catastrophic economic consequences for citizens." Fifty-six percent of Americans agree with this prognosis, according to a POLITICO-George Washington University Battleground Poll.
If the debt ceiling is not raised -- at a minimum -- "our bond market and stock market would crash," said former Congressional Budget Director Rudolph Penner. It's hard to imagine what a maximum would be.
Despite this looming disaster, it doesn't seem like Congress is in too big a hurry to do anything about it. Quite the opposite: Tea Partiers and many Republicans are hoping that this coming financial apocalypse will force the Democrats to make big cuts fast to the U.S. budget.
Speaker John Boehner said in response to Geithner's plea: "There will be no debt limit increase without serious budget reforms and significant spending cuts -- cuts that are greater than any increase in the debt limit." And Senate Minority Leader Mitch McConnell threatened that he would not vote for an increase in the debt ceiling without "serious" reforms to entitlements like Medicaid and Medicare.
Meanwhile, Democrats argue that any solution must include raising tax revenue -- a position that Republicans have said is unacceptable. Democratic House leaders are in New York this week meeting with Wall Street execs, to present their vision of deficit reduction. (Speaker John Boehner met with Wall-Streeters last Monday.) Meanwhile in D.C., Vice President Joe Biden is leading a bipartisan, bicameral panel charged with coming up with long-term deficit solutions -- even as House members are on recess.
The difference, of course, between Democrat and Republican strategies, is that the Republicans are willing to drive this game of chicken all the way off the cliff if they don't get what they want. We learned this in the last round of budget negotiations in April -- and that's a difficult position with which to negotiate. Democrats are full of warnings, but they are willing to negotiate. Republican are full of threats and they're willing to pull the trigger.
Will we get a compromise? As of today, the bond markets haven't collapsed. Neither has the stock market. Most well-respected financial analysts are betting there will be an accord. But -- given this year's tough budget negotiation -- maybe the question we should be asking is: at what price?