SalemNews.com, Salem, MA

Nation/World

October 9, 2013

Q&A: Why breaking debt limit sparks fear

(Continued)

Q. Could the president just ignore the debt limit?

A. Some experts say he could. The 14th Amendment to the Constitution says, “The validity of the public debt of the United States, authorized by law ... shall not be questioned.” But the White House has said its own lawyers don’t think he has the authority to do so. Nor is it clear that many investors would buy bonds issued without congressional approval.

Q. Are global investors panicking yet?

A. The stock market has drifted lower over the past couple of weeks. But investors aren’t panicking. And long-term Treasury yields have been mostly unchanged. Stocks could sink further just before Oct. 17 if the government remains partially shut and no sign of a deal on the debt limit seems near. Investors would likely also dump Treasurys.

“There would be a rush to the door,” predicts Steve Bell, an analyst at Bipartisan Policy Center.

Interest rates on some short-term Treasurys have risen slightly in the past week. That shows that the deadline might be making some investors nervous. Bell’s group estimates that the 2011 fight over the debt limit inflated federal borrowing costs by $1.3 billion, or about 0.5 percent, that year. Over 10 years, the estimated cost comes to nearly $19 billion.

Q. What would the economic impact of all this be?

A. Many foresee a nightmare. No longer able to borrow, the government could spend only from its revenue from taxes and fees. This would force an immediate spending cut of 32 percent, the Bipartisan Policy Center estimates.

If the debt limit wasn’t raised through November, Goldman Sachs estimates that government spending would be cut $175 billion. That’s equivalent to about 1 percent of the economy.

On top of that, stock markets would likely fall. Household wealth would shrink. Consumer confidence could plunge. Americans would cut back on spending. Higher rates on government debt would raise other borrowing costs, including mortgage rates.

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