What Would Happen If The US Debt Ceiling Isn't Extended?

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US Congress
Congress is out on recess all of August but will have to move swiftly in September to pass a bill to fund the government.

The last-minute fiscal-cliff save by Congress at the beginning of the month did nothing to stave off a series of budget woes set to befall America in the coming months, as President Barack Obama and House Republican leaders continue to play a risky game of politics with threats of a government shutdown.

Obama has refused to negotiate on whether or not to raise the debt ceiling, saying he isn’t about to have a discussion with Congress about paying the nation’s bills. The GOP, which has been threatening to allow a shutdown in order to prevent more spending, has decided it won’t call the president’s bluff and is set to vote Wednesday on a measure that would suspend the nation’s $16.4 trillion debt limit for another three months.

What this means is that GOP lawmakers have once again decided to jump from cliff to cliff, pushing the debt ceiling debacle off until May 18. Lawmakers will instead argue about spending cuts after they figure out how to continue funding the government for the rest of the fiscal year and tackle the billions in spending cuts to kick in March 1.

If the government cannot borrow more money, then it runs the risk of a default. The Treasury hit the borrowing limit on New Year’s Eve, but some temporary accounting adjustments are keeping things going. These adjustments aren’t sustainable beyond mid-February to early March, unless lawmakers act.

What exactly will happen if the limit is reached and there’s no action is a question that no expert can answer with certainty. That is because America has never defaulted on its obligations before. But most experts do agree that if the government can’t borrow money, there would be a ripple of economic effects felt nationally and internationally.

“It will be the most unfortunate for the systematic execution of U.S. public laws,” Henry J. Aaron, a tax and budget expert at the Brookings Institution, said.

Aaron added that the competency of U.S. lawmakers to handle a “created or false problem” would be in question. “We’ve never been in this situation before. If the government has no funds, a lot of bills will be paid late.”

Among those who could be affected are pensioners, students and others who depend on government entitlements such as Social Security and Medicare.

The U.S.'s perfect AAA status as borrower was downgraded to AA+ by ratings agency Standard & Poor’s in 2011, when political bickering over the debt ceiling caused lawmakers to come through just mere hours before the deadline.

Political historian Thomas Whalen believes another credit downgrade need not happen this time. “It’s unnecessary,” Whalen, a professor at Boston University, said. “It’s a self-imposed economic crisis. It doesn’t need to happen.”

According to Whalen, a U.S. default is a scenario no one wants to think about, because if push comes to shove, U.S. financial institutions -- many of which support the Republicans -- will react.

"There's too much at stake," he said.

When asked how inaction on the debt ceiling could affect the wallets of ordinary Americans, Ron Haskins, a former White House and congressional advisor on welfare issues, sees two problems.

In the short-term, the impact won’t be so immediate if the Treasury doesn’t pay its bills on time. However, Haskins said payments would stop for people like defense contractors. The bigger impact, according to Haskins, who is now a senior fellow at Brookings, would be on U.S. interest rates.

“Our rates are low, and, if they go up, that would affect the market, impacting home sales and credit cards,” he said. “Interest rates are front and center for anyone with interest in America's debt.”

The U.S. Senate hasn’t approved a budget since 2009 and has been using “continuing resolutions” to sustain the flow of money that enables the government to keep functioning. Republicans are hoping that including language in the debt-ceiling measure that forces Senate Democrats to come up with a formal budget or go without a paycheck will up the pressure.

 

A government shutdown could affect teachers, health care workers and fire fighters, Haskins said. But he doesn’t believe that if this should happen, the shutdown would be for long enough to affect life and property greatly.

“If you close the government, it won’t last that long,” he said. “The pressure will be enormous. It won’t be long enough to have all these long-term impacts.”

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