❗Help close the gap: We still need to raise $40,000 by the end of March. Donate now

Treasury resets debt ceiling to April or May

John Dimsdale Feb 2, 2011
HTML EMBED:
COPY

Treasury resets debt ceiling to April or May

John Dimsdale Feb 2, 2011
HTML EMBED:
COPY

TEXT OF STORY

Bob Moon: Good news! We won’t be $14 trillion-plus in debt — quite as fast as we thought. The Treasury Department figures we might not hit the official debt “ceiling” ’til May. If lawmakers don’t raise the limit, a lot of people — from Medicare patients to government workers — could be left holding the bag.

But some in Congress think there’s a way to stop borrowing, without necessarily defaulting. Our D.C. bureau chief John Dimsdale reports.


John Dimsdale: If Congress doesn’t raise the debt ceiling, it has to stop borrowing and spend less. That means it could miss interest payments to its debt holders, investors in government bonds. A default would shake the financial credibility of the United States.

But at a hearing this week, new Republican senator Patrick Toomey, asked a group of economists why not put Treasury bond holders at the head of the line?

Patrick Toomey: Is it possible that the Treasury could nevertheless ensure that those people holding the marketable securities of this government would receive their interest payments?

But giving priority to debt holders would force some difficult choices, according to economist David Malpass at Encima Global.

David Malpass: So what would happen each week, is someone — meaning the Treasury Department or you, members of Congress — would have to be deciding who not to pay.

Border guards? Bank regulators? Air traffic controllers? Tea Party activists say sticking to the current ceiling, and paying debt holders first, is a way to force tough spending cuts without shaking investor confidence.

But MIT management professor Simon Johnson warned even a hint that Congress would let the government bump up against its borrowing limit will frighten foreign debt holders.

Simon Johnson: Senator, I think you’re playing with fire. I really don’t think that you want to create potential disruptions of this kind. Because there’s nothing that says that the dollar has to be the world’s number one reserve asset forever.

Treasury Secretary Timothy Geithner has said breaching the debt limit could cause more harm to the economy than the financial meltdown did two years ago.

In Washington, I’m John Dimsdale for Marketplace.

There’s a lot happening in the world.  Through it all, Marketplace is here for you. 

You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible. 

Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.