The United States is expected to reach its $14.29 trillion debt limit Monday, a turning point that has kept members of Congress debating for months.
On one side Treasury
Secretary Timothy Geithner and Democrats claim failing to raise the debt ceiling will have catastrophe consequences for Americans, making it the first time the nation has defaulted on its debt. Some Republicans in the House insist lawmakers draft a plan that includes spending cuts alongside any raising of the debt ceiling.
In theory, the debt limit debacle does not become an emergency issue until Aug. 2, giving lawmakers more time to etch out an agreement. Geithner wrote in a letter to Congress
that "largely as a result of stronger than expected tax receipts, we now estimate that these extraordinary measures would allow the Treasury to extend borrowing authority until about August 2, 2011, approximately three weeks later than was forecast last month."
In February 2010, Congress increased the debt limit to its current level. The new proposal would raise the ceiling by another $2 trillion.
In a previous letter to lawmakers, Geithner said "even if Congress were immediately to adopt the deep cuts in discretionary spending of the magnitude suggested by some members of Congress, such as reverting to fiscal year 2008 spending levels, the need to increase the debt limit would be delayed by no more than two weeks."
Geithner said "the Treasury would be forced to default on legal obligations of the United States, causing catastrophic damage to the economy, potentially much more harmful than the effects of the financial crisis of 2008 and 2009."
Geithner outlined the following consequences of a default on America's debt on the Treasury's website:
- A default would impose a substantial tax on all Americans. Because Treasurys represent the benchmark borrowing rate for all other sectors, default would raise all borrowing costs. Interest rates for state and local government, corporate and consumer borrowing, including home mortgage interest, would all rise sharply. Equity prices and home values would decline, reducing retirement savings and hurting the economic security of all Americans, leading to reductions in spending and investment, which would cause job losses and business failures on a significant scale.
- Default would have prolonged and far-reaching negative consequences on the safe-haven status of Treasurys and the dollar’s dominant role in the international financial system, causing further increases in interest rates and reducing the willingness of investors here and around the world to invest in the United States.
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- Payments on a broad range of benefits and other U.S. obligations would be discontinued, limited, or adversely affected, including: U.S. military salaries and retirement benefits; Social Security and Medicare benefits; veterans’ benefits; federal civil service salaries and retirement benefits; individual and corporate tax refunds; unemployment benefits to states; defense vendor payments; interest and principal payments on Treasury bonds and other securities; student loan payments; Medicaid payments to states; and payments necessary to keep government facilities open.