Treasury Secretary Timothy Geithner announced on May 16 that the federal government had reached its borrowing limit. With the $14,294,000,000,000 cap on debt imposed by Congress firmly in place, the Treasury began a series of "extraordinary" measures designed to stave off a potential government default until August 2.
If Congress fails to raise the debt limit by August 2, the Treasury has only two options: It can default on its debt-meaning, stop paying its creditors around the world-or continue to pay creditors but halt any other federal spending above what the government collects in taxes. In effect, that would mean an overnight spending cut of about 40 percent.
Here are six consequences if the Treasury is forced to choose one of those options:
- Cut $125 Billion Per Month - Right now, the federal government must borrow an additional $125 billion each month to finance all of its commitments. If the Treasury chooses to continue to pay creditors but stop all other federal spending, the government will have to begin reducing its spending by $125 billion every 30 days--mmediately. These cuts could affect everything from NASA and the FBI to congressional salaries and White House operating expenses.
- Treasury Bonds Collapse - If the government defaults on its debt, economists say that prices for Treasury bonds would collapse and interest rates would probably soar to record highs. The centrist Democratic think tank Third Way estimates that the bond rate increases alone would eliminate nearly 650,000 jobs in the United States.
- Cut Medicare and Social Security - To reduce spending by $125 billion a month, the government would have to make deep cuts to the two giant entitlement programs for the elderly, Medicare and Social Security.
- Stock Market Plunge - Wall Street generally agrees with Geithner that it would be a disaster if the U.S. defaulted on its debt. In addition to damaging the nation's creditworthiness in global markets, most experts agree it would torpedo the stock market and very possibly trigger a double-dip recession.
- Government Furloughs or Mass Layoffs - The federal government would most likely turn to furloughs or mass layoffs to immediately cut spending, possibly including the salaries earned by the approximately 2,000 people who work at the Bureau of Public Debt, the department that borrows the money to keep the federal government running. This could drain even more money from local economies and the states' tax bases.
- Sky-High Mortgage and Interest Rates - If the government defaults, interest rates on mortgages would shoot up and homebuyers and small businesses would have trouble getting loans even if they could afford the higher interest.