{"id":2354,"date":"2013-10-16T11:48:22","date_gmt":"2013-10-16T17:48:22","guid":{"rendered":"http:\/\/peaceeconomyproject.org\/wordpress\/?p=2354"},"modified":"2013-10-16T11:48:22","modified_gmt":"2013-10-16T17:48:22","slug":"what-a-u-s-default-will-do-to-the-economy","status":"publish","type":"post","link":"https:\/\/peaceeconomyproject.org\/wordpress\/what-a-u-s-default-will-do-to-the-economy\/","title":{"rendered":"What a U.S. Default Will Do to the Economy"},"content":{"rendered":"

by Imara Jones, Colorlines
\nclick here for original article<\/a><\/p>\n

Tomorrow October 17\u00a0the United States is poised to default on its debt for the\u00a0second time<\/a>\u00a0in its history.* \u00a0Within 24 hours the Treasury Department effectively loses the authority to borrow money and pay the country\u2019s bills, including interest payments on the nation\u2019s debt. Should it happen, such a move would be a disaster. As the world\u2019s reserve currency and with billions of dollars in Social Security, Medicare, and veterans benefits at risk, default\u2014against the backdrop of the government shutdown\u2014is potentially catastrophic. But the genesis of this financial armageddon is, ironically, political rather than economic. It\u2019s propelled by Tea Party adherents in the House and Senate who believe in an errant economic ideology. That view holds that the nation\u2019s economic system has been hijacked by the historically marginalized to such an extent that it must be destroyed and then remade in order to thrive. Troublingly, we\u2019ve reached this perilous moment in American history because economic visions informed by race are preventing a resolution to the looming default crisis and time is running out.<\/p>\n

To understand why could be a fundamental economic game changer, let\u2019s take a look at exactly what will happen.<\/p>\n

Thursday is the beginning of a period of technical default for the United States. Starting\u00a0then nation will have more financial obligations than cash on hand. According to Treasury Secretary, Jack Lew, the United States will have just\u00a0$30 billion<\/a>\u00a0in the bank on\u00a0October 17, but analysis from the Bipartisan Policy Center shows that$120 billion<\/a>\u00a0in U.S. debt will mature on that date alone. Between\u00a0October 17\u00a0and the end of the month more than $400 billion in loans and cash payments have to be met.\u00a0 The problem is that there\u2019s less than 10 percent of that amount available to do so. The good news is that more than seven out of 10 dollars from this whopping bill, though due, won\u2019t have to be paid in October.\u00a0 The government will essentially transfer them into different types of debt that can be paid later. But the remaining roughly\u00a0$80 billion<\/a>\u00a0is where the rubber meets the road. \u00a0It includes Social Security benefits for the disabled and elderly, Medicare payments to hospitals, benefits to veterans, and direct cash payments to the nation\u2019s creditors at home and abroad.<\/p>\n

Failure to meet these obligations could easily touch off a consumer panic, push the country into a recession, or cause a global financial crisis.\u00a0 The worst case scenario is that we end up with a combination of all three. As most of the U.S.\u2019 payments aren\u2019t due until sometime between\u00a0October 17 and November 1, the ray of hope here is that financial markets and consumers won\u2019t react to the first few days of default. The idea is that the resulting breathing room will give Washington time to figure out a way forward before crunch time, but so far the indications have been less than promising. Over the weekend, Democratic Senate Majority Leader Harry Reid and his Republican counterpart, Senator Mitch McConnell, began negotiations on legislation that would end the government shutdown, extend America\u2019s borrowing authority, and allow America to\u00a0pay its bills<\/a>.\u00a0Under the deal, both the opening of the government and raising of the \u201cdebt ceiling,\u201d as the legal power to borrow is formally known, would keep the nation\u2019s lights on until early next year. In the meantime, real negotiations would take place between the two parties on the nation\u2019s borrowing and spending over the next 10 years with an eye towards a comprehensive solution.\u00a0 Such a result would end the lurch from crisis to crisis that the country has endured since the Tea Party-led takeover fueled the Republican takeover of the House of Representatives in 2010.<\/p>\n

Unfortunately, these initial positive signs were dashed yesterday when Speaker John Boehner announced that the House would take up\u00a0its own plan<\/a>\u00a0to reopen the government and raise the debt ceiling.\u00a0That proposal would include demands for changes to Obamacare which touched off the shutdown of the government. But at press time Boehner is still struggling to get Tea Party votes and his initiative to avoid a possible disaster is in doubt as a result. With only 24 hours on the clock before the period of default commences, the disagreement between the two houses of Congress and within the House Republican caucus seem to put a quick resolution out of reach. The problem is that at some unknown point in the next days and weeks, both the financial markets and average Americans will be forced to respond to the chaos in Washington.<\/p>\n

The key point here is that U.S. debt, issued by the government in cash increments called T-bills, is the backbone of the financial system. Banks hold them as cash and countries hold them as cash reserves. They can be bought and sold like any financial instrument. T-bills are so vital because their value is stable. The U.S. has never missed a payment on them. But if the nation misses a debt payment or even if investors witness a prolonged political deadlock over America\u2019s finances, then T-bills will lose value because they are perceived to be less safe. The inability to value T-bills would set of a financial crisis far more severe than that of 2008.\u00a0 That\u2019s because without a way to asses the worth of their cash reserves marked in T-bills, banks could stop loaning money to each other as well as halt the processing of commercial loans and payments. Banks won\u2019t loan money if they suddenly don\u2019t know how much the cash they have is actually worth. Foreign governments would be in a similar bind. Uncertain of their own balance sheets, other nations could limit exports and imports. With key global commodities like agricultural products and oil bought, sold, and priced in dollars, trade in these key goods could also be disrupted or even freeze up.<\/p>\n

On top of all of this, interest rates for U.S. consumers would surely climb. The uncertainty over the value of the dollar would force creditors to charge more for existing variable loans like credit cards and certain auto loans, as well as home loans. And if in the midst of this financial tailspin, the government missed a vital benefit payment such as on Social Security to 45 million seniors, U.S. consumers would surely pull back overall.\u00a0 Due to the government shutdown, consumer confidence is already the\u00a0lowest its been<\/a>\u00a0since the financial crisis of 2008. The collapse in the value of the dollar driven by a failure to raise the debt ceiling is why financial sage\u00a0Warren Buffet labeled it a \u201cnuclear bomb<\/a>\u201d for the economy.<\/p>\n

The Treasury Department goes even further. It says that the\u00a0economic consequences<\/a>\u00a0of default \u201ccould last for more than a generation.\u201d The problem is that Tea Party holdouts running the show in the House of Representatives don\u2019t believe default\u2019s doomsday scenario. Many conservative Republicans deny that the debt ceiling exists or that the prospect of default is real.\u00a0\u201cThere\u2019s no way to default on\u00a0Oct. 17, CongressmanJustin Amash of Michigan<\/a>\u00a0told the New York Times. But others, rather than seeing it as fake, view it as the event for which they\u2019ve always waited.<\/p>\n

As I have laid out, for almost four decades leading conservatives have argued that the best way to halt a government run amok was to\u00a0\u201cstarve the beast.\u201d<\/a>\u00a0By the \u201cbeast\u201d they specifically mean the programs which promote economic opportunity and racial fairness. It\u2019s a sentiment which animates the current House GOP\u2019sfinancial blueprint<\/a>\u00a0The Roadmap to America\u2019s Future and was echoed by Congresswoman Virginia Fox, member of the House Leadership, who argued on the House floor just days ago that the nation began to pile up debt when \u201cthings started to change\u201d with the New Deal of President Franklin Roosevelt and the Great Society of President Lyndon Johnson.<\/p>\n

But these proposed facts don\u2019t line up with reality.\u00a0Almost all<\/a>\u00a0of the nation\u2019s debt before Obama took office is attributable to the wars in Iraq and Afghanistan as well the Bush tax cuts, along with the Reagan\u2019s tax cuts and defense build up in the 1980s. During the first two years of Obama\u2019s presidency U.S. debt increased, but that was due to the fact that the nation was in the worst financial crisis in almost 100 years. Since the economy has officially entered into recovery, government expenditures have grown slower than at any time in almost 60 years.<\/p>\n

Additionally, debt is not the greatest threat to the US economy.\u00a0 As a sign of our creditworthiness, financial institutions and governments during the last several years have wanted to loan the U.S. more money than it even country needs.\u00a0 The truth is that a hit economy solves all problems.\u00a0 Even the modest improvements in the U.S. economy recently, have sparked the\u00a0deficit to fall\u00a0<\/a>faster under Obama than at any point since World War II.<\/p>\n

But in the current debate economic evidence is all too often cast aside for race-infused economic theory. The sad truth is that if the U.S. defaults\u00a0tomorrow its out of choice rather than necessity.\u00a0 And though the scale of the possible economic crisis that might flow from it is unimaginable, we must for our own protection begin to grasp the possibility.\u00a0 But if Congress\u2019 failure to act breaches the historic sanctity of America\u2019s full faith and credit, it will only underscore that the emergence of a truly post racial America has a long way to go.<\/p>\n","protected":false},"excerpt":{"rendered":"

by Imara Jones, Colorlines click here for original article Tomorrow October 17\u00a0the United States is poised to default on its debt for the\u00a0second time\u00a0in its history.* \u00a0Within 24 hours the Treasury Department effectively loses the authority to borrow money and pay the country\u2019s bills, including interest payments on the nation\u2019s debt. Should it happen, such […]<\/p>\n","protected":false},"author":1,"featured_media":2355,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"nf_dc_page":"","om_disable_all_campaigns":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":false,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[8],"tags":[],"class_list":["post-2354","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-news"],"acf":[],"aioseo_notices":[],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"https:\/\/i0.wp.com\/peaceeconomyproject.org\/wordpress\/wp-content\/uploads\/2013\/10\/shutdownceiling-thumb-640xauto-9373.jpg?fit=351%2C458&ssl=1","jetpack_sharing_enabled":true,"jetpack_likes_enabled":true,"_links":{"self":[{"href":"https:\/\/peaceeconomyproject.org\/wordpress\/wp-json\/wp\/v2\/posts\/2354","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/peaceeconomyproject.org\/wordpress\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/peaceeconomyproject.org\/wordpress\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/peaceeconomyproject.org\/wordpress\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/peaceeconomyproject.org\/wordpress\/wp-json\/wp\/v2\/comments?post=2354"}],"version-history":[{"count":1,"href":"https:\/\/peaceeconomyproject.org\/wordpress\/wp-json\/wp\/v2\/posts\/2354\/revisions"}],"predecessor-version":[{"id":2356,"href":"https:\/\/peaceeconomyproject.org\/wordpress\/wp-json\/wp\/v2\/posts\/2354\/revisions\/2356"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/peaceeconomyproject.org\/wordpress\/wp-json\/wp\/v2\/media\/2355"}],"wp:attachment":[{"href":"https:\/\/peaceeconomyproject.org\/wordpress\/wp-json\/wp\/v2\/media?parent=2354"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/peaceeconomyproject.org\/wordpress\/wp-json\/wp\/v2\/categories?post=2354"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/peaceeconomyproject.org\/wordpress\/wp-json\/wp\/v2\/tags?post=2354"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}