Each side in the debate over raising the federal debt ceiling is calling the other reckless and irresponsible. But when the business community weighed in last week, it said both of them are flirting with disaster if they let the nation default on its debts.
Letter to leaders:
In a letter to President Barack Obama and Congress, more than 450 business leaders nationwide – including the chief executives of two of metro Atlanta's largest corporations, Scott Davis of UPS and Martin Richenhagen of AGCO – warned that "it is critical that the U.S. government not default in any way on its fiscal obligations."
It said "treasury securities influence the cost of financing not just for companies but more importantly for mortgages, auto loans, credit cards and student debt. A default would risk both disarray in those markets and a host of unintended consequences."
Doesn't add up:
Some critics say concerns like those the letter expressed are unfounded. In particular, tea party-supported members of Congress contend that continuing to meet the nation's debt obligations without raising the debt ceiling is simply a matter of choosing not to fund some other government programs.
Economists, however, say the choices would be exceedingly difficult, and possibly illegal. The Bipartisan Policy Center, a centrist Washington think tank, notes that after the Aug. 2 deadline for raising the debt ceiling, the government will have $306.7 billion in payment obligations for the remainder of the month, including Social Security and other entitlements, and that it will take in $172.4 billion in revenue – leaving a 44 percent shortfall.
The Los Angeles Times, in an analysis, calculated that with August payments amounting to $30 billion for debt interest, $50 billion apiece for Social Security and Medicare, $35 billion for various military costs and $13 billion for unemployment benefits, the government, without additional borrowing, "would already have run out of money without paying a single civilian employee or running any of its domestic programs."
Higher costs, lower growth:
Many opponents of a debt ceiling increase, including Rep. Ron Paul, R-Texas, say the U.S. is already technically in default because it doesn't have the revenues to cover its $14.3 trillion in existing debt, yet it is continuing to borrow. In their view, the crisis is inevitable and the country should face it sooner than later.
Moreover, shutting down large parts of the federal government is an outcome some conservatives view as a positive, saying the U.S. needs to slash the public sector.
But others, both Republicans and Democrats, believe the effects of a failure to lift the debt ceiling would go far beyond a government shutdown.
The Council for Foreign Relations wrote that even if it did not come to pass, "the risk of a government default that would jeopardize the full faith and credit of the United States" – a scenario major financial rating services have already warned would lead to a downgrading of the federal government's credit rating.
The result would be increased interest rates for federal debt, the basis for all other interest rates. Borrowing costs would go up on everything from mortgages to credit cards at a time when the economy is barely growing.
Add to that a cutoff of government funds that regularly flow into the economy, such as Social Security payments – which Obama said would not be guaranteed if the debt ceiling is not raised – and it's a scenario economists warn could trigger a new recession.
Americans' 401(k) accounts, slowly recovering from the recession, could be beaten down again if Wall Street panics.
JPMorgan Chase CEO Jaime Dimon last week warned against the risk.
"Why take that chance? I wouldn't take that chance," Dimon said.
What's next?
Would failing to raise the debt ceiling result in a new economic meltdown and add billions of dollars to federal borrowing costs through higher interest rates ? Or will it herald a long-needed national reckoning that finally leads the nation out of its debt spiral?
Because the United States has never faced a full-scale default, nobody knows for sure. But one thing is clear: There would be no let-up in the partisan blame-placing.
As financial analyst Darius Dale noted in Fortune, "If we've learned anything ... it's that neither side is afraid to send us to the edge of chaos in order to advance their political agenda."
