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Debt limit looms

By Sheyna Steiner · Bankrate.com
Thursday, April 7, 2011
Posted: 9 am ET

Even if the federal government shuts down this weekend, the wheels still need to be greased so Treasury auctions will not be impacted by a government shutdown, Bloomberg.com reported on Monday.

More worrying for the Treasury department would be a failure of Congress to raise the debt ceiling. Some House Republicans have vowed not to do so if their budget doesn't pass.

On Monday, Treasury secretary Timothy Geithner said that the United States will hit the debt limit no later than May 16, Reuters reported in "Geithner warns U.S. to hit debt ceiling by May 16."

There are some stopgap measures the Treasury can take to buy time, but none are long-term solutions. The outlook -- if the debt ceiling is not raised -- is pretty dire.

On Wednesday, Politico.com ran the story "A federal shutdown could pave way for higher debt ceiling," in which it was hoped that a government shutdown could satiate the appetites for political grandstanding currently gripping some members of Congress. After which, they could all sit down and raise the debt limit.

From the story:

From an economic perspective, failure to raise the debt limit -- or to even come close to failure -- would have vastly larger implications than a brief shutdown. It could lead to an equity market collapse and a huge spike in interest rates as investors demand much larger payments for the increased risk of buying U.S. debt.

But a government shutdown could spoil appetites on both sides for another major showdown and make a deal to raise the debt limit later this spring easier for conservatives to swallow and more akin to previous, noncontroversial votes to raise the borrowing limit.

Clearly the U.S. has a spending problem, but destroying the economy just as it picks up speed out of the recession is probably not the best way to solve it. No matter who blinks first in the budget/debt-ceiling debate, the American people will be the ones to suffer the most from the fallout.

Will it come to that, what do you think? Is this just the way sausage gets made?

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