April 14, 2011
The political wrangling in Washington about federal budgets is likely to get more intense as the stakes rise from billions of dollars to trillions. Some of the focus is changing from a squabble over government spending for one year, to a bigger battle over the soaring debt accumulated over many years. Some of the bickering is over the "debt limit," an issue that is generally not well understood.
U.S. Treasury Secretary Timothy Geithner says the stakes in the fight over the debt limit are very high.
"The consequences would be catastrophic to the United States. Default by the United States would precipitate a crisis worse than the one we just went through," said Geithner. "I think it would make the crisis we just went through look modest in comparison."
Geithner's point is that if Congress does not take action to raise the debt limit, current spending commitments and the need to refinance the government's earlier loans might force Washington to miss payments on existing U.S. debt. That could cause major economic problems because investors might drastically raise interest rates which would raise costs and compound the problem.
"[Default] would be a reckless and irresponsible act of this country. I find it inconceivable that Congress would not act to increase the limit," added Geithner.
For many years, Washington has been spending more than it takes in from taxes and other sources of revenue. That leaves a deficit in the annual budget. The government has to borrow money to cover the shortfall. All these annual deficits add up to the total debt.
Under U.S. law, the Treasury Department cannot borrow more money by issuing bonds unless Congress gives its approval by increasing the legal limit on borrowing. The current debt limit is more than $14 trillion, a sum nearly equivalent to all the goods and services produced in the United States in a year.
The government is expected to hit its debt limit next month.
There has been a debt limit law of some kind in the United States for nearly a century. During that time, the limit has been lowered on a few occasions, and raised more than 60 times.
As the limit approaches Republicans are pressuring President Barack Obama and his Democratic Party allies in Congress to cut spending on social programs and keep taxes low. The Democrats want to deal with the debt by raising taxes on wealthy Americans and cutting military programs.
A former high-ranking Treasury Department official, Timothy Bitsberger, says the two sides will eventually make a deal to avoid default, but only after a flood of rhetoric.
"There's a lot of political theater involved... I expect the Republicans will try to extract as much blood as they can as the debt negotiations go forward," said Bitsberger.
Bitsberger spoke in an interview on the Bloomberg financial news service. He worked on debt limit issues at the Treasury Department during a previous Republican administration, and says deficits and debt have grown under both Republicans and Democrats.
While there are deep divisions between the two political parties, the global credit-rating agency Fitch says the likelihood of a default is "extremely low."
The top analyst on U.S. government debt at Moody's Investor Service, Steve Hess, says only an "astonishing miscalculation" by the government would lead to default. He says bickering over spending cuts may continue until the very last moment, and might force officials to take "Draconian" actions to manage short-term financial problems.
Hess says if political squabbling really worried lenders, they would raise interest rates they charge on loans to Washington.
"If you look at the market, it does not seem that the wrangling so far has had a big effect on the government's cost of borrowing," noted Hess.
Continuing annual deficits have made the total debt double in the past few years, and many members of Congress believe continuing that course will eventually raise the debt so high it would cause a severe economic crisis.