By Ryan Gillespie |
On or about Oct. 17, the U.S. will hit its statutory borrowing limit. Most people think the government is already shut down - which is partially true - but it will truly shut down and stop making payments when it is no longer allowed to issue debt to cover payments.
Let’s imagine a reality where the U.S., forced by the borrowing/debt limit, cannot pay its debts on government bonds. What will likely happen? The interest rate on those bonds will skyrocket. Besides increasing the rates required for the U.S. government to borrow money (we’re talking tens, maybe hundreds of millions in extra interest payments each year solely due to increased default risk included in the rate of return on treasuries), interest rates on credit card, mortgage and other consumer debts that have interest linked to U.S. government rates will all skyrocket as well, making it more expensive for all of us to borrow.
But the government is saving money in the meantime, since it will have been forced to shutter its doors during the shutdown and after the debt limit, right? Not exactly - the House of Representatives has voted in favor of back-paying federal workers so they will not lose pay during the shutdown. This means the government really isn’t saving all that much from this little shootout on Capitol Hill.
Moreover, the general hit to the economy is huge, with an estimated $160 million being lost each day; this in turn lowers the amount of income shared by Americans, decreasing the amount of taxable income in the United States, and thereby reducing federal tax revenues. So the government, while shuttered, is actually not saving much money and is lowering the amount of money it takes in through taxes.
The biggest irony of all is that this whole situation is brought about by the want to defund Obamacare, but the Affordable Care Act is funded through separate appropriations! So while the rest of the federal government is shut down, Obamacare actually keeps going!
This seems like a no-brainer for those in Washington—keeping the government shut down and hitting the debt limit is a lose-lose situation. When Social Security, veteran and unemployment benefits are all skipped-out on because the Speaker of the House will not let a clean bill come to the floor (yes, there really are enough votes in the House for a debt ceiling and spending bill to pass, but Speaker Boehner has yet to let a vote be taken), the U.S. will transition from being an international political laughingstock to an international political horror story.
The full effects of defaulting on sovereign debt are unknowable, as there is no such precedent in U.S. history. If Washington decides to enable what may be the most awesome economic experiment in modern history (I predict that they will), then Pax Americana as we have known it for the past century will come to an end.
Ryan Gillespie is a senior accounting major and can be reached at email@example.com.