As Sen. Mitch McConnell made clear once again on his tour of Sunday talk shows yesterday, he’s perfectly willing to hold the full faith and credit of the United States hostage once again in a debt ceiling showdown… unless Democrats meet all of Republicans’ ransom demands. When S&P downgraded U.S. debt just after narrowly averting this crisis in 2011, it cited the very fact that certain people in Congress were willing to use the debt ceiling as, to use McConnell’s words, “a hostage that’s worth ransoming.”
Unless the government raises the debt ceiling — allowing it to pay back what it has already spent — the ceiling will be hit somewhere between Feb. 15 and March 1. What will that look like? According to Ezra Klein, it’s not pretty:
Imagine we hit the debt ceiling Feb. 15. The BPC’s analysis suggests that federal spending over the next month will be about $450 billion. Federal revenues will be nearer to $277 billion. That means that the government will have to default on about 40 percent of its obligations.
The choices it will face quickly become stark. It can cover interest on the debt, Social Security, Medicare, Medicaid, defense spending, education, food stamps and other low-income transfers, and a handful of other programs, but doing all that will mean defaulting on everything — really, everything — else. The FBI will shut down. The people responsible for tracking down loose nukes will lose their jobs. The prisons won’t operate. The biomedical researchers won’t be funded. The court system will close its doors. The tax refunds won’t go out. The Federal Aviation Administration will go offline. The parks will close. Food safety inspections will cease.
This is the difference between a debt-ceiling shutdown and a government shutdown. As Shai Akabas, a research at the Bipartisan Policy Center, puts it, “in a government shutdown, the government is shutting down future obligations. With the debt ceiling, They’ve already obligated the money. They owe these people the payments now, and they can’t make them.”
Then, of course, there’s the financial-market chaos. Trillions of dollars in derivatives and other financial products are based on the interest rate that the federal government pays when borrowing. U.S. government debt is, after all, supposed to be the safest investment in the world, and so it’s used to “benchmark” all other sorts of debt. A spike in the Treasury rate would mean a spike in credit card rates and mortgage rates, not to mention all manner of more esoteric financial derivatives. The damage to the economy would be tremendous, and it would occur at every level, from individuals looking for a loan to buy a house to hedge funders trying to play the markets.
“Think about what we’re talking about here,” says Steve Bell, director of economic policy at the BPC. “We’re talking about the reserve currency of the world. We’re talking about the deepest and most liquid markets in the world. And we’re sitting here wondering if we’ll cover our obligations?”
And that’s the best-case scenario.
Essentially, McConnell’s (intentionally vague) ransom offer will be for the social safety net to be gutted — and tax deductions and loopholes for millionaires and corporations (that they wanted to end last month) to remain — or else America (the hostage) gets it.
Statesmanship, I tell ya…