- The Washington Times - Friday, January 14, 2011

I’m really enjoying the debate over the debt ceiling. The best part is watching Obama administration spokesmen issue dire warnings over the hideous fate that will befall us if Congress fails to raise the $14.3 trillion cap to a level sufficient to accommodate another trillion or two in deficit spending this year.

Here’s what Treasury Secretary Timothy F. Geithner had to say: “Failure to raise the limit would precipitate a default by the United States. Default would effectively impose a significant and long-lasting tax on all Americans and all American businesses and could lead to the loss of millions of American jobs. Even a short-term or limited default would have catastrophic economic consequences that would last for decades.”

And here’s Austan Goolsbee, White House economic adviser: “This is not a game. … If we hit the debt ceiling, that’s … essentially defaulting on our obligations, which is totally unprecedented in American history. The impact on our economy would be catastrophic. I mean, that would be a worse financial crisis than anything we saw in 2008.”

Both gentlemen are absolutely right: A default by the U.S. government upon its national debt would be a catastrophic event, although it could be quickly, if only partially, mitigated by the expedient of raising the ceiling after the fact. If financial markets collapse into chaos, Congress still has the option of authorizing more borrowing.

What could not be remedied easily after the fact would be a default caused by the inability of the U.S. government to meet its massive debt obligations because investors lose confidence in Uncle Sam’s ability to meet its obligations - debt limit or no debt limit. If Washington continues on its present path, the national debt will continue mounting, interest rates will rise, interest payments on the debt will compound like a giant snowball, and at some point in the next 10 to 15 years, private investors will boycott the Treasury’s debt auctions because they will fear either outright default or the next worst thing - a financing of government by means of massive money creation, leading to runaway inflation and a collapsing dollar. Either way, the end result will be the very same catastrophe Mr. Geithner and Mr. Goolsbee describe.

The debt ceiling is not to be toyed with. In the end, Republican budget hawks will have to raise the cap or face the dire consequences of a default. Politically, they will have no choice. But I think they’re smart to raise a ruckus. Let Sarah Palin, Rep. Michele Bachmann, Minnesota Republican, and other hard-liners goad the Obamanauts with wild, budget-hawk bravado. It will be like waving a red flag before a raging bull. The O Team will respond by painting ever more vivid pictures of the fiscal and economic Armageddon that will follow a default. And in so doing, they will educate the American people into the unthinkable disaster that would occur if government defaulted for whatever reason.

Most people I talk to are acutely aware that the United States may one day find itself so deeply in hock that it will be unable to honor its debts. But they have no clear idea of what comes after default. Hopefully, as the debate over the debt cap unfolds, Mr. Geithner, Mr. Goolsbee and friends will inflame the public mind with the horrors that will accompany the fiscal endgame.

According to an estimate made by David Greenlaw and Ted Wieseman of Morgan Stanley, it will be half a year before the feds run out of money and the debt ceiling absolutely, positively must be raised. Their analysis assumes House Republicans will manage to slash $50 billion from domestic, discretionary spending, as they have promised, which will stretch out the existing borrowing capacity for a couple of weeks. The wind-down of the Supplementary Financing Program and the influx of tax dollars around April 15 then should enable the existing budget cap to limp along until late May.

Treasury can prolong the agony a bit more by means of accounting tricks, the two analysts say. Suspending the reinvestment of several government trust funds could reap another $250 billion, pushing the day of reckoning into July. But after that, the jig is up. The House will have to raise the budget limit or suffer blame for the ensuing fiasco.

Six months of headlines warning of the calamities to come should work the country into a good lather. A recent Reuters/Ipsos poll found that 71 percent of respondents opposed raising the debt limit. If the Democrats do their job, they will change peoples’ minds by scaring the willies out of them. If the Republicans do their job, the American people will look beyond the debt-cap issue to the time when financial markets, not Congress, dictate a default. The public’s judgment upon elected officials who fail to fix the budget will be severe.

James A. Bacon is author of the book “Boomergeddon” (Oaklea Press, 2010) and publisher of the blog by the same name.

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