Debt Limit Worries Increase as Shutdown, Deadlock Continue

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The federal shutdown over the 2014 budget continues amid growing concern among economists, investors, business executives, foreign leaders and others that Washington is also deadlocking over the federal debt limit — raising the possibility that financial markets could fall sharply in anticipation of a U.S. default.

Elected officials are frittering away millions of tax dollars while harming federal workers and millions of other Americans with the shutdown. But a federal default would be much worse, for reasons that a Treasury report last week underscored:

“A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.”

By no later than a week from this Thursday, the administration warns, the government will exhaust the “extraordinary measures” it has relied on for months to avoid hitting the current debt ceiling. It will then have only a relatively small amount of money that won’t last long before the government will begin defaulting on at least some of its financial obligations.

Yet elected officials appear to have made little progress towards resolving their differences.

Republicans continue to demand Democratic concessions in return for raising the debt limit while Democrats argue that Congress has a fundamental responsibility to finance the commitments it has already approved.

On Saturday, however, the House did overwhelmingly pass a bill authorizing back pay for furloughed federal workers.

As the debt limit approaches, the debates over funding the government and raising the limit appear to be merging. This has led to speculation that a “grand bargain” of some sort may be back on the table.

On Sunday House Speaker John Boehner emphasized the importance of a budget deal and downplayed his previous insistence that “Obamacare” must be defunded or repealed.

White House economic advisor Gene Sperling said Monday that the President would be open to a short-term debt limit increase, which would provide time for a broader agreement to be worked out. Sperling reiterated, however, that Obama would not negotiate over the debt limit.

It is important for the public to understand that there is no realistic alternative to an increase in the current debt limit; even the supposedly austere House Republican budget calls for more borrowing through the next decade.

As responsible elected officials in both parties know, they must eventually find the common ground that will enable them to reassure nervous financial markets, increase the debt limit and end the government shutdown. They should avoid further delays in doing so.

External links:
Default Threats Generate Fear Around the Globe (New York Times)
Four Ways a Debt Ceiling Crisis Could Affect You (CNN)
The Potential Macroeconomic Effect of Debt Ceiling Brinksmanship (Treasury Department)
As BPC’s X Date Window Narrows, Economic Risks Grow (BPC)
Washington Must Quickly Resolve Impasses on Federal Budget and the Debt Limit (The Concord Coalition)
Alice Rivlin: Today’s Budget Impasse Is Much More Dangerous Than in ‘95 (Brookings Institution)
Federal Debt and the Statutory Limit (CBO)

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