The level of U.S. federal debt has almost reached it statutory limit, according to Treasury
Secretary Timothy Geithner. And if Congress doesn't pass legislation to increase that limit, the United States as a country will go into default causing "catastrophic economic consequences."
Geithner wrote a letter to Congress
Thursday requesting an increase in the federal debt limit. According to his numbers, the current debt limit set last February is $14.29 trillion. As of the writing of the letter, the outstanding debt subject to the limit standards is $13.95 trillion — just $335 billion shy of the maximum.
The national debt is the total amount of money borrowed in order to fulfill governmental and monetary requirements imposed by past Congresses and presidents, Geithner said. Changing the debt limit will permit the Treasury to fund obligations Congress has previously made, not alter or increase obligations, he said.
If Congress does not increase the federal debt limit and the U.S. defaults on its monetary obligations, Geither said the effects on the economy would be catastrophic and possibly more harmful than the most recent financial crisis (2008-2009).
"A default would impose a substantial tax on all Americans," Geithner said. "Because Treasurys represent the benchmark borrowing rate for all other sectors, default would raise all borrowing costs."
In turn, interest rates would raise sharply, equity prices and home values would decline, and both savings and spending would decrease, potentially causing job losses and business failures, he said.
Additionally, Geithner said a broad range of benefits, such as Social Security, Medicare, veteran benefits, state unemployment benefits and student loans, would be discontinued or very limited.
There are ways the government can stall national debt from hitting the limit. For example, the Treasury can temporarily stop selling state and local government series Treasury securities — special purpose securities sold to local and state governments for cash to invest in tax-exempt bonds.
But Geithner said he would rather not take those kind of extreme measures.
"Once these steps have been taken, no remaining legal and prudent measures would be available to create additional headroom under the debt limit, and the United States would begin to default on its obligations," he said.
Geithner said he couldn't pinpoint exactly when the debt limit would be reached due to the "inherent uncertainty associated with tax receipts and refunds during the spring tax-filing season."
"However, the Treasury Department now estimates that the debt limit will be reached as early as March 31, 2011, and most likely sometime between that date and May 16, 2011," he said. "This means it is necessary for Congress to act by the end of the first quarter of 2011."
Write to Christine Ricciardi
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