We’re just a few days away now from October 17, the date that the Treasury has given as the point at which it will have exhausted its special measures to maintain borrowing under the legal debt ceiling.
If we go past that date without a deal to raise the debt ceiling, we’ll be in uncharted territory, and people can only try to guess what series of measures will be taken by the government, and what the economic ramifications would be.
Zachary Goldfarb and Jim Tankersley at The Washington Post have a nice look at what a post-debt ceiling economy would look like, and the scary thing is that it could be very bad even if you assume there’s some way to go on without an out-and-out default on the nation’s debt.
According to the Bipartisan Policy Center, which has done the most detailed analysis of federal finances in a debt-ceiling breach, administration officials would have to consider delaying or suspending tens of billions of dollars in critical payments to low-income people and seniors.
Under the most alarming scenario, as soon as Friday, payments to Medicare and Medicaid providers, unemployment benefits, Social Security checks and tax refunds would be postponed for one to four days.
Food stamps due to be distributed Oct. 25 could be held until Oct. 30. The same would happen to payments to defence contractors.
With huge payments due in early November, the situation would become grimmer. Nearly $US60 billion in Social Security checks, veterans benefits and pay for active-duty troops is due Nov. 1. Those could be delayed nearly two weeks, according to the Bipartisan Policy Center’s analysis.
Needless to say, just this new dose of austerity could wallop the economy at a time when consumer confidence is already in a state of freefall.
Gallup’s economic confidence index cratered further over the weekend to one of the lowest levels since the Great Financial Crisis.
It’s easy to imagine this turning into a new recession if it goes on for any length of time. Remember, Goldman has said that in a debt ceiling breach, you can say goodbye to over 4% of GDP.
There’s an assumption that a swift market reaction would force a deal very shortly, but you can’t be too sure how things play out, and a spiraling crisis could cause parties to dig in even further, and blame the other side instead.
We should know very soon what the impact of all this would be, as earnings season is starting up in earnest, and corporate managers will have reads on what Q4 economic/consumer activity is looking like.