According to the Washington Post, the White House is warning that catastrophe will strike if Congress fails to raise the limit on the national debt. It is estimated the nation will go over the limit this month.
The U.S. government has too little cash to pay creditors. Thus the government would default, in whole or in part, if it cannot borrow beyond the current debt limit. In either case, interest rates would skyrocket, throttling credit and collapsing the sputtering "economic recovery."
The national debt consists primarily of government-backed securities and bonds purchased by domestic and foreign investors - including actual nations through what are called "sovereign wealth funds." These securities are essentially loans to the United States that mature - and must be repaid - on various schedules: one year, 10 years, 30 years and so on.
Only about 60 percent of government obligations can currently be covered by tax revenue. The rest must be borrowed. Despite accounting practices that specify numerous "dedicated" accounts, the federal budget has operated on a unified basis since 1968. A cut in overall revenues, including from borrowing, means that ANY government bills, including for Social Security, Medicare, Medicaid, defense, education, environmental cleanups and many other government services, will be at immediate risk.
Republicans, intent on crashing the economy in hopes that somehow Obama will be blamed, are pressing Treasury Secretary Timothy Geithner to prepare for lengthy and stupid congressional battles that could force Treasury, for the first time since the debt limit was established in 1917, to stop borrowing and make do with tax revenue. The truth is that the Republican speeches threatening default are a dangerous bluff intended to suck more cuts in working people's benefits and rights - while killing any tax increases for their rich friends - in exchange for raising the debt limit.
Progressive leaders in Congress want a deficit-reduction trigger that would automatically raise taxes on the rich and corporations before cutting social safety net benefits. Republicans and "Blue Dogs" want a trigger that cuts benefits for retirees and health care, education and the environment first.
Geithner has begun juggling the books to conserve cash. One short-term, unsustainable maneuver would be to borrow money from a pension fund for federal workers to pay only interest obligations and thus forestall official default.
Geithner also has authority to pay investors first for interest they're owed on the debt, and retirees and workers last, according to a decades-old legal opinion. Sen. Patrick Toomey, R-Pa., recently said he favored "partial" debt payment ... "but just as long as 'our' [my emphasis] bondholders get paid." Republicans say this would avert "official default."
Not so, says the cautious Government Accountability Office in a recent study. "The nation will pay a substantial price in higher interest rates if it relied on such evasive maneuvers." And Robert Rubin, Treasury Secretary under President Clinton, remarked: "I think the failure to meet any commitment would be viewed by the markets as default and would be deeply unnerving,"
In fact, currently the Federal Reserve makes all payments on debt automatically and actually has no means to "prioritize payments" between investors and public benefits in such a huge system. It would create political hurricanes whose outcome no one can predict.
Even discussing default is sending tremors through markets right now. Even most pro-business analysts take a dark view of any default. Bill Gross, who runs Pimco, the world's biggest bond fund, said in an email that "failure to raise the debt ceiling would be catastrophic - global investors would move money at the margin to countries which have their act together, interest rates might rise by 50 basis points overnight, the stock market would plunge."
The Republican default threat amounts to a call to put a meat-ax to the 40 percent of government obligations that are not funded by taxes.
The Republicans do not address the drop in revenues from the recession and the failure to terminate the Bush tax cuts for the rich. In addition numerous tax breaks favoring the rich have resulted in an effective tax rate for the wealthy hovering around 14 percent -16 percent, lowest of the industrialized nations and lower than what many middle-income Americans pay.
And shortfalls in Medicare and Medicaid are primarily due to profiteering by insurance companies, pharmaceuticals and wealthy doctors. There is no shortfall in Social Security for at least 25 years.
Warren Buffett said he expects the Congress to raise the nation's debt ceiling before it expires in mid-May, and said it would be that body's "most asinine act" ever if it failed.
For working people the solution to the debt challenges are really pretty simple:
Obviously, extend the debt ceiling for this year
Address the deficit as follows:
1. Tax the rich comparable to their European, Canadian and Asian counterparts and competitors -- that would raise nearly a trillion dollars a year.
2. Reduce profiteering in health care through single-payer, or near-single-payer, adaptations to the Affordable Health Care Act in states, and ultimately, through Medicare for All. There are many billions in savings potential there, much of it from marginalizing the insurance business out of the "health care industry." The effectiveness of health care spending should be reflected primarily in measurable public health outcomes, not industry profitability.
3. Move deliberately toward the demilitarization program outlined in the Mr. Y proposal and discussion.
4. Put people to work. There is no deficit solution that does not aggressively address unemployment.
For now, the debt ceiling must be passed. Republican bluffs should be called.