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Defaulting on the national debt: What's the debate all about?

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Republicans in Congress and President Barack Obama have spent months engaged in a political showdown over America's fiscal course and how to cut the escalating debt and deficits -- but first, they need to deal with the rapidly approaching deadline to raise the debt ceiling.

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Economists and analysts speculate that failure to raise the federal borrowing limit could lower the country's credit rating, spike interest rates and cause ripples in the stock markets over America's tenuous financial footing.

But what would it mean for the Red River Valley? And what would happen if the debt ceiling isn't raised by Aug. 2, the date federal officials have said the Treasury Department could only pay about 60 percent of its bills and entitlement obligations?

"That's the great question," said David Flynn, chairman of UND's Economics Department. "I don't think anybody actually knows, and I think that is one of the factors that scare most of the politicians and policymakers."

'Do they really know?'

Obama and lawmakers continue working toward a deal that will win enough approval to approve a hike in the federal borrowing limit, which now stands at $14.3 trillion. The president has said he wants a large enough raise to get through the 2012 elections, but there is also the possibility of Congress passing a short-term extension to buy more time for a larger deal.

But even with two weeks to go until the Aug. 2 deadline, the United States has already been warned that it could face serious consequences if the government doesn't fully meet its obligations on interest payments, Social Security checks and military spending, among other areas, due to the political gridlock.

Standard & Poor's told lawmakers and business groups last week that missing the deadline could trigger a downgrade to America's coveted AAA credit rating, a distinction the country has held for 70 years.

Moody's Investors Services made a similar threat Wednesday, placing the country on review and warning national leaders that a downgrade could be on the way if the U.S. defaults on its obligations.

Local economist Ralph Kingsbury said he's heard some experts speculate that if America's bond ratings are lowered, interest rates on everything from mortgages to student loans could see drastic hikes.

But there's also talk about only a minimal impact, he said, because other governments will still be willing to buy U.S. bonds since the country would remain "the safest and wealthiest place to put your money."

"The way I feel about it is do they really know?" Kingsbury said. "I don't know that anybody really knows."

Flynn said the threats of rating downgrades come from fear about the debt ceiling "becoming a political hot potato." There might be just a minimal impact if lawmakers miss the deadline by a day or two, he said, but it wouldn't take long before more serious consequences could make a "ripple throughout the economy."

"If it were to be a protracted situation where there is a week or more past this deadline, I would expect you would start seeing lots of things occurring such as increased interest rates and a little bit of financial market churning as people tried to find out what this new normal would be," he said.

More than the debt limit

Without an increase in the debt ceiling, Obama would be forced to prioritize which bills would be paid because the U.S. would face monthly deficits of about $125 billion.

A recent analysis by the Washington-based Bipartisan Policy Center found that tax revenues for August would be enough to pay interest on existing debt, Medicare, Medicaid, Social Security, unemployment insurance and defense contracts.

But that would leave as much as 44 percent of the government's obligations for the month unpaid, former Under Secretary of the Treasury for Finance Jay Powell said in a news release.

"The choices would not be pretty," he wrote.

Without making cuts from the six items listed in the center's analysis, the government would have no money to fund entire federal departments, such as Justice, Labor and Commerce. And there would be no funds to pay for veterans' benefits and military active duty pay, Pell Grants for college students, IRS refunds and federal salaries and benefits, among other programs and services that could go unfunded next month.

Flynn said it would take "some time" to restore America's top credit rating if agencies issue a downgrade because the government would have to demonstrate its fiscal safety and soundness.

For now, he said, lawmakers need to deal with the debt limit and "get that problem fixed" to deal with years of imbalances between government spending and government revenue.

But even meeting the Aug. 2 deadline probably wouldn't be enough to show that the country is on stable economic ground, Flynn said.

"What they really need to be doing today is addressing the deficit situation," he said. "That would instill far more confidence as far as our credit rating goes than just raising the debt ceiling. It's about actually getting the fiscal policy in order so that there aren't these persistent structural deficits."

Flynn said it seems unlikely national leaders will be able to reach a full solution to America's fiscal troubles in the near future because it will take time and "some fairly drastic action."

Most lawmakers and groups working toward comprehensive debt and deficit reduction plans believe it would take $2 trillion to $4 trillion, or even more, in savings over the next decade to get the country back on financial track.

"They need to figure these things out now," Flynn said. "They have to start on it now so that we can build on that and eventually come to a permanent fiscal fix."

Johnson reports on local politics. Reach him at (701) 780-1105; (800) 477-6572, ext. 105; or send email to rjohnson@gfherald.com. Follow him on Twitter: @JohnsonReports.

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