Washington Debt Talks And China Bullying [Debt Ceiling]

Posted: July 14, 2011 in News, Opinion
Tags: ,

Are they bluffing? Or could Washington politicians really torpedo the economy by refusing to raise the nation’s borrowing limit? 

The conventional wisdom is that the debt-ceiling drama is mostly political posturing. Once they’ve made their point, the thinking goes, Republicans and Democrats arguing over how to rein in out-of-control government spending would reach some kind of agreement, raise the federal debt ceiling, and allow the government to keep functioning normally. But businesses and investors are starting to worry. The government will max out its borrowing ability in early August, and will have to dramatically cut spending if it’s not allowed to borrow more. Taxes and other revenue only cover about 60 percent of what the government spends. It borrows–by issuing Treasury securities–to finance the other 40 percent or so. Economists are now running the numbers and trying to predict what will happen if the debt impasse continues and Washington has to stop borrowing. This is not work for the squeamish.

[See how Washington is killing jobs.]

There’s a lot of talk about the government defaulting on its debt, but that’s not likely to happen. The government collects about $200 billion per month in taxes and other revenue, and that cash would keep coming in. It borrows another $130 billion or so each month–the money it would have to live without. Interest payments on the nation’s debt–which Washington must pay on time to avoid being in default–amount to about $30 billion per month. If forced to choose, the government would almost certainly prioritize debt payments above other obligations, because welching on bonds considered the world’s safest would sink financial markets everywhere and make American the world’s biggest deadbeat. And the Treasury Dept. would still have adequate cash flow to cover debt payments and remain in good standing with borrowers.

Almost everything else the government pays for, however, would be vulnerable to sudden cutbacks. Here’s who would feel the pain most abruptly:

Social Security recipients. The government is due to deliver $23 billion in Social Security payments on August 3, according to forecasting firm IHS Global Insight. If the government is forced to cut 40 percent of its spending, these Social Security checks may not arrive. The suddenness with which the political battle in Washington will hit the wallets of ordinary Americans is one reason many analysts assume that a true impasse over the borrowing limit will be short-lived. But it could still be damaging. Social Security recipients who depend on their checks to pay other bills could end up running behind, incurring costly late fees or damaging their own credit. And it’s no guarantee that if stopped, the government’s check-writing machinery will start up again without delays or snafus that hold up checks even longer.

[See 5 upsides to the lousy job market.]

Government employees. Another likely outcome is the shutdown of government offices and the furlough of federal employees. Everyone loves to bash government bureaucrats, but they’re a meaningful chunk of the U.S. economy, amounting to 4.4 million workers, including the uniformed military. Many of them will stop getting paychecks, which at a minimum will slow spending and weaken the economy further. That would probably mean the closure of national parks, passport offices, veterans’ facilities and many other government offices. Amtrak and the U.S. Postal Service could be affected. The government would probably fence off the military and certain vital services, but even soldiers could be affected if the debt battle drags on.

The unemployed. Washington currently offers extended unemployment benefits to nearly four million people who have exhausted state-level benefits, which last for 26 weeks in most states. Those checks could stop coming, too. One reason unemployment benefits are important is that recipients spend virtually all of the money, providing an immediate boost to the economy. A tighter crunch on the unemployed could also lead to more foreclosures and defaults on other types of consumer debt, since something will have to give if those checks stop arriving.

Investors. Nobody’s sure exactly how a sharp cut in federal spending would affect stock and commodity markets–except it would be bad. Federal Reserve Chairman Ben Bernanke told Congress recently that a borrowing moratorium would generate “shock waves through the entire financial system.” The U.S. government is the world’s biggest spender, and the flow of money from Washington impacts virtually every financial market in the world, through checks sent to thousands of vendors and contractors, the rates paid on Treasury securities, and decisions made by the Federal Reserve. It’s almost impossible to predict the daisy chain of events that would unfold as global investors reacted to the sudden upending of the world’s financial order.

[See 5 economic disasters that haven’t happened.]

But a few general outcomes seem likely. First, a borrowing moratorium of more than a few days might be enough to tip the U.S. and even the global economy into a recession, so banks, employers and foreign governments would suddenly adjust their own spending and prepare for tough times. “Risk” assets like stocks would plunge in value, with safer assets like gold soaring. Investors may flee dollar-denominated assets and search for other safe-haven currencies, though it’s hard to tell which ones, since the euro and yen aren’t exactly appealing. Some economists worry about a “TARP moment” similar to Sept. 29, 2008, when Congress first voted down the massive bank bailout bill–and the stock market fell about nine percent in a single session. Even if the debt ceiling were lifted after a few days of pandemonium, there could still be lasting damage. “There would be massive dislocation in financial markets, because the recipients of government spending that fail to get priority, and do not get paid, will be unable in turn to meet their own obligations,” says economist Nigel Gault of IHS. “Confidence in the ability of the U.S. government to fulfill its most basic responsibilities would be damaged.”

FULL ARTICLE HERE–> Who Will Suffer if There’s No Debt-Ceiling Deal

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Since there was  lots of debt news talks today I decided to just add this to the bottom of this post.

Obama calls new debt talks under China pressure

First of all if China is influencing the decision making of the president of the United States openly, then American is farther over the edge of destruction than I thought it was.  Excerpt From Article Below.

President Barack Obama called a fifth day of talks Thursday with his Republican foes on averting an early August debt default, as largest US creditor China sounded the alarm over the impact of a possible stalemate.

Amid mounting market worries of a ruinous breakdown, and growing political acrimony over the crisis, Obama floated the possibility of moving the contentious negotiations to the storied Camp David presidential retreat, senior Democratic and Republican aides told AFP.

But Republican US House Speaker John Boehner “has told the White House he sees no need to go to Camp David this weekend,” said his spokesman Michael Steel, confirming that the White House had “discussed the possibility.”

The secluded compound, a favorite summer spot for US presidents since the 1940s, is best known as the birthplace of a 1978 Middle East peace deal agreed to there by the leaders of the United States, Israel and Egypt.

A Democratic aide earlier told AFP that moving the talks to the retreat, some 70 miles from the White House in Maryland’s Catoctin mountains, was “being discussed as an option” but that no final decision had been made.

An aide to Obama did not deny the possibility but insisted talks “for the next couple days” would stay in Washington and promised “if we have different plans, we’ll let people know,” as pressure mounted on the negotiators.

China — Washington’s largest creditor, with an estimated $1.275 trillion in holdings — urged the United States to safeguard the interests of its investors after ratings agency Moody’s warned US debt could lose its sterling triple-A rating.

“We hope the US government adopts responsible policy and measures to ensure the interests of investors,” foreign ministry spokesman Hong Lei told reporters at a briefing.

And China’s Dagong credit ratings agency echoed Moody’s by putting US sovereign debt on downgrade watch, citing weak US economic growth and the likelihood that fiscal deficits would remain high.

Obama was to host a fifth straight day of White House talks on raising the $14.3 trillion US debt limit ahead of an August 2 deadline that could see cash-strapped Washington default or make drastic cuts to key benefits programs.

With the political temperature rising, US Treasury Secretary Tim Geithner was due to hold a midday meeting with Senate Democrats followed by a public appearance designed to pile pressure on Republicans.

Republicans, meanwhile, redoubled their calls for amending the US Constitution to require a balanced federal budget, forcing deep cuts in spending while tightening restrictions on Washington’s ability to raise taxes. 

FULL ARTICLE HERE –> Obama calls new debt talks under China pressure

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