Like a shrinking room in a haunted house, the debt ceiling is quickly closing in on us. Treasury Secretary Jack Lew has said the limit likely will be reached "no later than Oct. 17," when the government will no longer be able to meet its financial obligations. The week may have begun with the nation's capital under a tornado watch, but the real worry involves a financial tsunami resulting from a feared default.
As the partial federal government shutdown continues, virtually all observers agree that the bigger economic threat facing the U.S. and the world involves the debt ceiling. Without an increase, the government loses the authority to borrow and could fail to pay its bills on everything from interest on debt to Social Security payments. The U.S. has never defaulted in the past, having averted a similar political logjam just two years ago.
How it could be avoided
Thankfully, fault lines are beginning to replace the hardline positions held by both sides, giving rise to hope for compromise. House Speaker John Boehner now is saying "nothing is on or off the table," while pressing the president for a "conversation." The White House responded by saying the president remains willing to negotiate.
As the week began, top administration officials were signaling that a short-term increase in the debt limit could be acceptable, as if to give more time for a broader discussion. In the Senate, Democrats reportedly are planning to consider a debt-limit-raising measure as soon as this week. House Republicans have not yet come up with actual debt-limit legislation.
The ripple effects in your financial life
Because such a debt-limit breach is unprecedented, the true impact is difficult to gauge. But most experts who ponder the possibility use words like "catastrophe" or "disaster." Economist Nayantara Hensel says an actual default would lead to higher interest rates and depress the dollar. From there, one could foresee a freeze-up of the housing market, layoffs and a sharp decline in consumer spending.
Stock prices have declined over the past couple of weeks due to concern about a possible default, but economists have opined that an actual default would likely bring about a wave of stock declines similar to what was seen during the financial crisis in 2008. As the last crisis demonstrated, when the dominoes start falling, it is hard to predict where they stop.
The effects of reaching the debt limit will be felt much farther than just here in the U.S. Olivier Blanchard, the chief economist for the International Monetary Fund, told reporters at a news conference Tuesday that "failure to lift the debt ceiling would be a major event."
The largest foreign buyers of U.S. Treasury bonds, Japan and China, have made public comments pressing for a resolution. Taro Aso, a top Chinese finance official, was quoted as saying Washington has a "responsibility" to guard China's investments.
Have you changed any of your investments or spending decisions because of the gridlock in Washington?