Kokomo Tribune; Kokomo, Indiana

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October 15, 2013

Q&A: What happens if US breaks borrowing limit?

(Continued)

Q. Could the president just ignore the limit?

A. Some experts say he could. The 14th Amendment to the Constitution says, “The validity of the public debt of the United States, authorized by law ... shall not be questioned.” But the White House has said its own lawyers don’t think he has the authority to do so. Nor is it clear that many investors would buy bonds issued without congressional approval.

Q. Are global investors panicking yet?

A. No, not yet. The stock market surged on Thursday and Friday as Congress appeared to move closer to an agreement to raise the debt ceiling and perhaps end the partial shutdown of the government. But if prospects for an agreement were to dim early next week, stocks could sink. Investors would likely also dump Treasurys.

Interest rates on some short-term Treasurys have risen sharply in the past week. That shows that the deadline might be rattling some investors. The Bipartisan Policy Center estimates that the 2011 fight over the debt limit inflated federal borrowing costs by $1.3 billion, or about 0.5 percent, that year. Over 10 years, the estimated cost comes to nearly $19 billion.

Q. What would the economic impact of all this be?

A. Many foresee a nightmare. No longer able to borrow, the government could spend only from its tax revenue. This would force an immediate spending cut of 32 percent, the Bipartisan Policy Center estimates.

If the limit remained through November, Goldman Sachs estimates that spending would plummet by up to $175 billion. That’s equivalent to about 1 percent of the economy.

On top of that, stock markets would likely fall. Household wealth would shrink. Consumer confidence could plunge. Americans would cut back on spending. Higher rates on government debt would raise other borrowing costs, including mortgage rates.

Q. Why is it potentially catastrophic for the government to miss a payment on its debt and default?

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