The clock is ticking.
If President Obama and congressional leaders don’t reach an agreement to increase the $14.3 trillion debt ceiling by August 2 then the United States will wind up becoming a deadbeat nation unable to meet its obligations for the first time in history. A number of leading economists and policymakers, including Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke, warn that the U.S. would face nothing less than a “huge financial calamity” far greater than the meltdown of 2008.
Washington officials have become increasingly concerned that the nation is headed for crisis. And with good reason. In a recent interview with CBS News, the president maintains he cannot guarantee that 70 million checks will be delivered to social security beneficiaries, veterans, folks on disability and the like come August 3. And Moody’s Investors Service announced on Wednesday it has put the AAA credit rating of the U.S. government on review for a possible downgrade based on the likelihood the debt limit will not be raised by next month’s deadline.
The president is once again involved in talks with the GOP that can only be characterized as hostage negotiations. In December 2010, he was forced to extend the Bush tax cuts for wealthy Americans for two years as a means of avoiding a middle-class tax increase that could have derailed economic recovery and extending unemployment benefits set to expire for millions. To avert a government shutdown in April, Obama and congressional leaders reached a historic, last-minute deal to slash about $38 billion in federal spending. Over the past week the president has taken a give-and-take posture with a recalcitrant Republican leadership opposed to tax hikes and big government. The GOP’s stance has been driven by the increasingly influential Tea Party caucus in the House.
Obama has rejected short-term solutions though. After clashing with House Majority Leader Eric Cantor (R-Virginia), who sought to to make a tactical delay with his proposal for an extension, the president maintained there was too much “positioning, posturing and catering” to lawmakers’ political bases. When he left Wednesday’s meeting, he said, “Enough is enough. ” He then gave lawmakers a Friday deadline to agree on a resolution.
The reality is that the talks have been mired in politics as the 2012 presidential contest heats up. In a CNN interview, Massachusetts Gov. Deval Patrick says that “the Radical Right will let the economy fall off a cliff to stop President Obama.”
As this high-stakes drama continues to play out, we cannot afford to be oblivious to what this byzantine Beltway activity means for the nation’s economic health as well as our financial well-being. Here’s how we got here: Similar to your management of household finances, when the government spends more than it takes in that gap between spending and taxes represents the budget deficit. Over the past decade, the size of the deficit has swelled due to several factors including significant revenue reduction related to the enactment of the original Bush tax cuts and last year’s extension; costs associated with the Iraq and Afghanistan wars; increased expenses for Medicare and Medicaid; and our government’s response to the Great Recession, which boosted stimulus spending and expanded safety-net programs like unemployment benefits.
To cover the deficit, the U.S. Treasury borrows money by issuing securities. The treasury is authorized by Congress to engage in such actions but a limit is placed on the amount of debt the government can issue. That limit, known as the debt ceiling, has been raised repeatedly–in fact, since Ronald Reagan‘s presidency it has been increased more than 30 times. Treasury officials estimate they will need additional borrowing capacity by August 2 but Geithner says the “true deadline is July 22,” enough time to draft legislation, make its way through Congress and onto the president’s desk for his signature.
Without a boost in the debt ceiling Treasury can’t borrow more money. Â According to an analysis by the Bipartisan Policy Center, a Washington think tank, the federal government is expected to collect about $172 billion in revenue while being hit with roughly $307 billion in bills. That means the government would have funds to pay a bit more than 55% of such commitments.
If the U.S. sinks to deadbeat nation status, expect the following:
- Major credit rating agencies to downgrade U.S. debt, forcing bondholders that invest in highly-rated securities to sell their holdings.
- Once the default is resolved, the federal government would face an immediate hike in interest rates in order to borrow money. The ripple effect is that consumers like you would also have to contend with higher rates for mortgages, cars, student and credit loans.
- The erosion of investor confidence could collapse the market for U.S. Treasuries, considered one of the world’s safest assets. Administration officials say uncertainty in the bond market would foment additional financial chaos.
- Some analysts estimate that the market could plunge by roughly 9% in the three months after a default, heading into bear territory.
- Banks, still jittery from the Great Recession , would significantly reduce commercial financing, a development that would result in businesses failures and job losses.
- If the US was forced to create a European-style austerity program, hundreds of thousands would be added to unemployment lines and, in turn, cripple an already fragile economic recovery.
To avoid default, Obama met with GOP congressional leaders for four straight days offering his “grand bargain” of spending cuts and tax increases to reduce the budget deficit by $4 trillion, putting such sacred cows as Medicare and Social Security on the table. House Speaker John Boehner (R-Ohio) appeared to seriously consider the proposal but the Republican leader couldn’t control the Tea Party caucus that refused to budge.
Senate Majority Leader Mitch McConnell (R-Kentucky) offered another proposal in which Obama could request increases up to $2.5 trillion in the government’s borrowing authority in three separate installments over the next year while simultaneously proposing spending cuts. McConnell’s power move: Allow for an increase in the debt ceiling and avoid the risk of default while putting the entire political onus on the president and Democratic lawmakers who support his requests. Conservatives once again rejected the plan, citing it would essentially diminish the GOP’s leverage to force deep cuts in the federal budget.
To break the stalemate, there has been speculation that the president may seek to employ a different power move, invoking his powers under the 14th Amendment to surpass the debt limit set by Congress. The 14th Amendment states that the national debt’s validity “shall not be questioned.”
So where does these political machinations leave the rest of us? I don’t advise any of us to position ourselves on the sidelines. With a Black unemployment rate of 16.2%, the debt default scenario would be even more disastrous regarding the future job prospects and financial standing of large numbers of African Americans as well as our nation as a whole. Cuts in government services will mean slashing of safety-net programs as well as reduction in public sector payrolls that employ legions of Blacks and other ethnic minorities. Even if the debt ceiling is raised, African Americans will still be negatively impacted by painful budget cuts.
We, too, can make a power move. There is strength in numbers and we must reignite our activism. Contact your congressional representative to push for a resolution to the debt crisis and to advocate policies that will advance our financial future. We must be aggressive in voicing concerns to both the White House and Congress so they can be held accountable. Social media also offers a powerful tool for sharing information and rallying troops to take action.
You must be part of the dialogue. Act now. Time is running out. Tick…tock…