WASHINGTON: Even as President Barack Obama prepares to sign the hard-won tax deal that Congress passed Tuesday, another manufactured deadline with a colorful name is threatening to hamstring the government and undermine the economy.
Goodbye, fiscal cliff. Hello, debt ceiling.
The federal government has exhausted its legal authority to borrow money, and in about two months it will no longer have enough cash to meet all of its obligations, the Treasury Department said Monday.
Congress could vote to let the government borrow more, as it has done 11 times since 2001, most recently in August 2011.
But some congressional Republicans say they are willing to do so only as part of an agreement to reduce federal spending, while Obama said Tuesday that he would not accept any conditions, even as he warned of disastrous consequences.
"We can't not pay bills that we've already incurred," Obama said. "If Congress refuses to give the United States government the ability to pay these bills on time, the consequences for the entire global economy would be catastrophic - far worse than the impact of a fiscal cliff."
While it remains difficult to imagine that the federal government would default on its obligations, doubts may grow as the deadline approaches, and the cost of that uncertainty could be significant.
The belief that lending money to the US government is virtually risk-free is a basic tenet of the global financial system.
The risks of other investments are measured by comparison, and priced accordingly. Doubts also could cost the government directly. The scale of federal borrowing means that even small increases in the interest rates that the government pays to investors add billions to the federal debt.
The slightly higher rates on debt issued during the last debt ceiling standoff, in 2011, will cost taxpayers about $18.9 billion in additional interest payments, according to the Bipartisan Policy Center.
"Last-minute agreements to raise the debt ceiling undermine confidence in the sovereign's willingness to pay," Fitch Ratings, which evaluates risks for bond investors, said in a report last month. It added that it still saw little chance of defaulting, describing the very idea as "incredible."
The debt ceiling was created, ironically enough, to make it easier for the government to borrow. The Treasury once required congressional approval each time it issued debt.
The ceiling, which evolved from an initial version created in 1917 to facilitate the government's wartime borrowing binge, replaced those individual authorizations with an upper limit, like the limit on a credit card.
There is an important difference, however: This credit card can be used only for spending that Congress has separately authorized. That might seem to obviate the need for a limit, or at least create a ready justification for the necessary increases.
Instead, over the last century, Congress has repeatedly authorized more spending than borrowing, creating a long-running series of crises that have grown more frequent in recent years.
The ceiling is now set at roughly $16.4 trillion and, as of Monday, that is the amount of the federal debt, too.
The government has enough money to pay its debts until "mid-February or early March," the Congressional Budget Office estimated in November.
The government needs to borrow about $100 billion a month, and the Treasury estimated last week that it could use bookkeeping tricks to borrow about $200 billion more without increasing the total amount of its debts.
These "extraordinary measures" mostly involve government pension funds that invest their holdings in special federal debt to earn interest. The money that the Treasury borrows from the funds, however, cannot be used to pay other bills.
So over the next two months, as about $175 billion in debt held by those funds comes due, the Treasury will repay the money it borrowed and then borrow the same amounts from external investors to pay its bills.
Once the debt ceiling is raised, the Treasury will then compensate the pension funds for the lost interest.
The tax deal that passed Congress on Tuesday also cuts into the time remaining to deal with the debt ceiling because it reduces revenues while postponing spending cuts.
Falling off the cliff, for all of its downsides, could have delayed hitting the ceiling.
indiatimes.com
The federal government has exhausted its legal authority to borrow money, and in about two months it will no longer have enough cash to meet all of its obligations, the Treasury Department said Monday.
Congress could vote to let the government borrow more, as it has done 11 times since 2001, most recently in August 2011.
But some congressional Republicans say they are willing to do so only as part of an agreement to reduce federal spending, while Obama said Tuesday that he would not accept any conditions, even as he warned of disastrous consequences.
"We can't not pay bills that we've already incurred," Obama said. "If Congress refuses to give the United States government the ability to pay these bills on time, the consequences for the entire global economy would be catastrophic - far worse than the impact of a fiscal cliff."
While it remains difficult to imagine that the federal government would default on its obligations, doubts may grow as the deadline approaches, and the cost of that uncertainty could be significant.
The belief that lending money to the US government is virtually risk-free is a basic tenet of the global financial system.
The risks of other investments are measured by comparison, and priced accordingly. Doubts also could cost the government directly. The scale of federal borrowing means that even small increases in the interest rates that the government pays to investors add billions to the federal debt.
The slightly higher rates on debt issued during the last debt ceiling standoff, in 2011, will cost taxpayers about $18.9 billion in additional interest payments, according to the Bipartisan Policy Center.
"Last-minute agreements to raise the debt ceiling undermine confidence in the sovereign's willingness to pay," Fitch Ratings, which evaluates risks for bond investors, said in a report last month. It added that it still saw little chance of defaulting, describing the very idea as "incredible."
The debt ceiling was created, ironically enough, to make it easier for the government to borrow. The Treasury once required congressional approval each time it issued debt.
The ceiling, which evolved from an initial version created in 1917 to facilitate the government's wartime borrowing binge, replaced those individual authorizations with an upper limit, like the limit on a credit card.
There is an important difference, however: This credit card can be used only for spending that Congress has separately authorized. That might seem to obviate the need for a limit, or at least create a ready justification for the necessary increases.
Instead, over the last century, Congress has repeatedly authorized more spending than borrowing, creating a long-running series of crises that have grown more frequent in recent years.
The ceiling is now set at roughly $16.4 trillion and, as of Monday, that is the amount of the federal debt, too.
The government has enough money to pay its debts until "mid-February or early March," the Congressional Budget Office estimated in November.
The government needs to borrow about $100 billion a month, and the Treasury estimated last week that it could use bookkeeping tricks to borrow about $200 billion more without increasing the total amount of its debts.
These "extraordinary measures" mostly involve government pension funds that invest their holdings in special federal debt to earn interest. The money that the Treasury borrows from the funds, however, cannot be used to pay other bills.
So over the next two months, as about $175 billion in debt held by those funds comes due, the Treasury will repay the money it borrowed and then borrow the same amounts from external investors to pay its bills.
Once the debt ceiling is raised, the Treasury will then compensate the pension funds for the lost interest.
The tax deal that passed Congress on Tuesday also cuts into the time remaining to deal with the debt ceiling because it reduces revenues while postponing spending cuts.
Falling off the cliff, for all of its downsides, could have delayed hitting the ceiling.
indiatimes.com
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