CBS News

Americans are watching an extreme and dangerous game of chicken played out among the most powerful of our elected officials. Who will blink first? Who will win? And what will it mean, if anything, to the ordinary citizen? Fanned by the media,
the uncertainty of the outcome of this
battle of wills is ratcheting up the anxiety
of the public to an almost unbearable level. According to all but the most extreme conservatives, we are perched at the
edge of a precipice, and if we fall into
the abyss, there’s no telling what all the consequences will be. It is certain, however, that every American will be adversely affected.

What is this contest about? The by now notorious debt ceiling is a dollar figure set by Congress, the amount of money the federal government may borrow in order to meet its fiduciary obligations. These fall into two categories. The public debt is the principal and interest owed to individuals and governments that have bought U.S. Treasury bonds. The other is the money the federal government has borrowed from the trust funds of federal programs, principally Social Security and Medicare. In a sense, Congress raises the limit each time it passes a spending bill or a tax cut without corresponding reductions in spending somewhere else.

We have a problem of both spending and income (from taxes). In 2001, federal revenue was 19.5 percent of the Gross Domestic Product, and we spent 18.2 percent of GDP. Since we took in more money than we spent, we had a surplus. But in 2011, the Congressional Budget Office estimates (assuming there are no major changes in fiscal policy) that we will take in only 14.8 percent of GDP, while we’ll spend 24.1 percent. That’s the deficit. In other words, for every dollar we spend today, we have to borrow 40 cents.

On May 16, the current limit of $14.294 trillion was reached. The Treasury has temporized and avoided default by deploying such extraordinary measures as suspending investments in federal retirement funds. But these expedients will carry us just so far — until Aug. 2.

Since the money authorized by the debt ceiling has already been spent, the debate over whether to increase the limit is in effect about a simple choice: will the U.S. government honor its commitments or stiff its creditors? The government writes 80 million checks each month, 55 million to retirees and the disabled on Social Security, as President Obama pointed out. These are real people, many of whom depend on the checks to buy food.

For months, the conservative majority has insisted that it will not vote to raise the debt ceiling without drastic cuts in spending, including fundamental changes in the social safety net, and no increase in revenue through change or reform in the tax code. For their part, Democrats have refused to touch Social Security and Medicare/Medicaid, arguing that it is more equitable to let the tax cuts enacted in President George W. Bush’s administration expire. That would mean the wealthiest Americans — that top 1 percent that earns 20 percent of all the income earned in the United States — would contribute more, and those far less fortunate than they wouldn’t forfeit what would be a much larger percentage of their income. The Republicans counter that any increase in taxes on the wealthy and businesses will discourage investment and thus hamper job creation.

The debt ceiling has become hostage to these starkly different perspectives. The unshakable Republican opposition to the debt limit increase — historically a non-issue — is unprecedented: The debt ceiling has been raised 74 times since 1962. Five of the last 10 increases were passed by Republican majorities, all of which included the leaders of today’s opposition, Sen. Mitch McConnell (R-Ky.) and Reps. John Boehner (R-Ohio) and Eric Cantor (R-Va). Even the current budget, which depends on raising the debt ceiling, was approved by Republicans.

CBS News

If Republicans and Democrats fail to resolve their differences, warned Federal Reserve Chairman Ben Bernanke on July 13, the country would face a “huge financial calamity.” Treasury Secretary Tim Geithner predicted that the closer we get to the deadline, the more risk and uncertainty will rile the markets.

In fact, the deadline may well be before Aug. 2. On July 13, Moody’s Investors Service put the U.S. credit rating under review for possible downgrade, a reminder, Sen. Chuck Schumer (D-N.Y.) observed, that the deadline for these negotiations is “whenever the credit markets decide it is.” Schumer also noted, “The irreversible consequences of a potential rating downgrade could occur ahead of an actual default.” And so it was. Bloomberg reported that in Asia, Moody’s threat to lower the U.S. credit rating depressed the U.S. dollar. It hit a new low against the yen and suffered a steep loss against the euro.

If the U.S. bonds lose their AAA grade, the damage won’t stop there. Moody’s said that at least 7,000 top-rated municipal credits would also be downgraded and there would be an “automatic” downgrade affecting $130 billion in municipal debt, Bloomberg reported. Furthermore, “top-rated securities with no direct links to the national government” and municipal debt including mortgage-backed bonds would also be affected.

“If the U.S. credit is downgraded,” Geithner said Sunday on the NBC News program “Meet the Press,” there will be “catastrophic damage” not just to the American economy but to the global economy as well.

And in the worst-case scenario — no agreement by Aug. 2— the Treasury will have to choose between defaulting on its creditors or holding back Social Security and other government payments. Furthermore, wrote Laurence Tribe, a Harvard law professor,

… a legal cloud would hang over any newly issued bonds, because of the risk that the government might refuse to honor those debts as legitimate. This risk, in turn, would result in a steep increase in interest rates because investors would lose confidence — a fiscal disaster that would cost the nation tens of billions of dollars.

No one really knows all the consequences of a default. Many believe that our bond and stock markets would crash. If the government has no money left for federal agencies and programs after meeting its principal and interest payments (which would take precedence), then it would have to shut down. Anyone who has followed the government shutdown in Minnesota will begin to have an idea of what the implications of such a closure would be.

If we were to pay interest (which comes first) and the social safety net (Social Security, Medicare, Medicaid, food stamps), Jay Powell of the BiPartisan Policy Center told NPR,

we wouldn’t have a single dollar for defense, including active-duty military pay, including the whole Pentagon, and all payments to creditors in the defense area. You couldn’t keep the Justice Department. We wouldn’t have one dollar for the FBI, for the courts, for the prisons. And it goes on and on. The Education Department would be closed and many, many other Cabinet departments. So however you move the chess pieces around here, you lose.

In the meantime, we’ll have to keep biting our nails while we wait for the recalcitrant children in Washington to stop playing with a very dangerous fire and act like the responsible adults we expect to inhabit the seats of power.

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