The question is simple enough - what would happen if the Congress and President Obama cannot agree on a plan to raise the nation's debt limit?
So far, the Obama Administration hasn't shed much light on what would happen with U.S. Government services and functions if no deal has been reached by a deadline of August 2.
The question was raised on Wednesday in a hearing with Federal Reserve Chairman Ben Bernanke, who acknowledged that his staff had been gaming out the possibilities.
BERNANKE: "Yes, of course, we've looked at it, and thought about making preparations and so on.
The arithmetic is very simple; the revenue we get in from taxes is both irregular and much less than the current rate of spending - that's what it means to have a deficit.
Immediately there would have to be something on the order of a 40 percent cut in outgo.
The assumption is, as long as possible the Treasury would want to try to make payments on the principle and interest to the government debt, because the failure to do that would certainly throw the financial system into enormous disarray and have major impacts on the global economy.
Just as a matter of arithmetic, fairly soon after that date (August 2) there would have to be significant cuts in Social Security, Medicare, military pay or some combination of those in order to avoid borrowing more money.
If in fact, we ended up defaulting on the debt, or even if we didn't, I think it's possible that simply defaulting on the obligations to our citizens might be enough to create a downgrade in credit ratings and higher interest rates for us, which would be counterproductive of course, because it makes the deficit worse.
But clearly, if you went so far as to default on the debt, it would be a major crisis because the Treasury securities is the safest and most liquid security in the world; it's the foundation for much of our financial system.
And the notion that it would become suddenly unreliable and illiquid would throw shockwaves into the entire global financial system."
The question is simple enough - what would happen if the Congress and President Obama cannot agree on a plan to raise the nation's debt limit? So far, the Obama Administration hasn't shed much light on what would happen with U.S. Government services and functions if no deal has been ...
