The Consequences of Failing to Raise the Debt Ceiling
Who'll get stiffed — Social Security beneficiaries, federal workers or the businesses that sell goods and services to Uncle Sam — if the U.S. Treasury's coffers come up short?
With every day of unproductive negotiations between the White House and congressional Republicans that passes, the prospect that the United States government will find itself unable to pay its bills becomes less unthinkable. So what happens if Congress doesn’t increase the debt ceiling?
Though we still believe that to be unlikely, the prospect is worth exploring. It’s uncharted territory. A small technical default in 1979 doesn’t compare to what would happen if the U.S. Treasury’s coffers were short, come early August. Does it mean Uncle Sam defaults the next day on principal and interest owed lenders — the foreign and domestic holders of U.S. Treasuries?
Not necessarily. President Obama would have options, but none of them are good. Odds are bondholders would be paid first, chewing up a few billion in monthly tax collections, which are sufficient to cover about three-fifths of federal spending. To pay the rest of its obligations, Treasury borrows, to the tune of $125 billion a month.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
On August 3, the day after Treasury Secretary Timothy Geithner says is the effective deadline for extending the debt ceiling, about $23 billion in Social Security benefits is slated to go out. The White House could choose to go ahead with that disbursement and still have enough left to pay for Medicaid, Medicare and food stamp program obligations before the coffers were empty.
Alternatively, Obama could opt to stiff the elderly and make the payroll for the country’s military and for law enforcement — ponying up what’s needed to keep the FBI, courts and prisons running. Civilian and military personnel are paid on the first and fifteenth of every month, so August 1 paychecks would presumably go out as usual. But if Uncle Sam can’t raise additional funds to roll over maturing debt and pay all of the federal government’s bills in August, August 15th paychecks will be in danger. Odds are most government employees wouldn’t get paid. It’s hard to believe that the White House would be willing to let down either Social Security beneficiaries or the men and women of the military and take the heat for paying federal file clerks. It’s more likely that a criterion similar to what has been used for furloughing government employees in the past would be invoked to determine who stays on the job and who is told to stay home.
Likely to come last on the list, in any case, are federal contractors — the businesses, small and large, that sell goods and services to Uncle Sam. Ironically, that may wind up costing taxpayers even more money in the end, because contractors who aren’t paid within the usual 30-day window after delivery are bound to sue, adding legal costs to the feds’ bottom line.
Keep in mind that it wouldn’t take default on loans to wreak havoc on the economy. Interest rates may surge even though bondholders get paid, because traders reckon that sooner or later their interest checks will be delayed. That would trigger hikes in rates for everything from car loans to farm loans, with the 30-year fixed-rate mortgage jumping perhaps as much as 1.5 percentage points.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Is It Too Late to Do a Roth Conversion if You're Retired?
The short answer is: Not at all. Roth conversions can be great tax-saving strategies … for the right people. Are you a good candidate?
By Arrin Wray Published
-
Five Options for Retirees Who No Longer Need Life Insurance
If you're retired and you've checked with your financial planner that life insurance is no longer vital, here are five ways you can turn it to your advantage.
By Evan T. Beach, CFP®, AWMA® Published
-
Start-ups Trying to (Profitably) Solve the World’s Hardest Problems
The Letter More investors are interested in companies working on breakthrough science to tackle huge societal challenges. The field of deep tech has major tailwinds, too.
By John Miley Published
-
The Big Questions for AR’s Future
The Letter As Meta shows off a flashy AR prototype, Microsoft quietly stops supporting its own AR headset. The two companies highlight the promise and peril of AR.
By John Miley Published
-
China's Economy Faces Darkening Outlook
The Letter What the slowdown in China means for U.S. businesses.
By Rodrigo Sermeño Published
-
AI Start-ups Keep Scoring Huge Sums
The Kiplinger Letter Investors continue to make bigger bets on artificial intelligence start-ups, even for small teams with no revenue. Some backers think a startling tech breakthrough is near.
By John Miley Published
-
Should We Worry About the Slowing U.S. Economy
The Letter With the labor market cooling off and financial markets turning jittery, just how healthy is the economy right now?
By David Payne Published
-
New Phones Get All the Hype, but Consumers Still Love Old Models
The Letter Even as flashy artificial intelligence features drive sales of new smartphones, used phones continue to fetch big bucks as demand outstrips supply.
By John Miley Published
-
Starlink's Internet Beamed From Space Is Taking Off
The Kiplinger Letter Satellite broadband provider Starlink is taking over the space market. Amazon’s mega-constellation will soon join the fray, adding to the unprecedented disruption.
By John Miley Published
-
Kiplinger Special: How Businesses Should Budget for 2025
Kiplinger Forecasts From fuel to AI software subscriptions, here's what you can expect to pay next year.
By John Miley Published