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Why You Shouldn't Stare Up At The Debt Ceiling And Yawn

Unless Congress raises the debt limit by Nov. 3, the U.S. Treasury may be left with only incoming taxes and fees to cover expenses, which would not be enough to pay all bills.

Most likely, Congress will — as it always does — find a last-minute way to dodge a debt-ceiling crisis.

It's easy to get bored with it all. Scores of times over recent decades, lawmakers have taken the country to the brink of financial catastrophe only to swerve away by voting to allow more debt.

Now here we are again. Treasury says it will run out of money to pay bills — in full and on time — as early as Nov. 3. That means Congress will wait until the last minute, vote — and we can all go back to ignoring this weird debt drama until the next time. Right?

Well, what if this year, the House is too cranky and distracted to pull off another late save? Remember that the Republican-led chamber is in the midst of a leadership change, with a vote for House speaker set for Thursday, Oct. 29 — mighty close to Nov. 3.

And don't forget that several senators are running for their party's presidential nomination. They may want to make lengthy debt-related speeches on the Senate floor — a time-consuming process that might push votes past Nov. 3.

So what if, amid these political stresses, Congress actually blows the deadline and the country runs out of money? What does that even mean?

This may help you understand what's happening:

  • Debt Ceiling: The term used to describe the limit Congress sets on how much money government may borrow. The current cap is $18.113 trillion.
  • Hitting The Ceiling: Unless Congress raises the cap by Nov. 3, Treasury may be left with only incoming taxes and fees to cover expenses, which would not be enough to pay all bills.
  • Fixing The Problem: Congress can raise the ceiling, or suspend it or eliminate it entirely.
  • Why This Is Happening: The White House and Democrats want to simply raise the ceiling, but many Republicans see the deadline as an opportunity to force deeper spending cuts and other reforms.
  • Why It Matters: Having a reputation for always paying its debts allows the U.S. Treasury to borrow at very low interest rates. Investors everywhere count on the United States to be the one safe haven where they can park money and always get paid the principle and interest. It's not a stretch to say the global financial system is built around U.S. stability.

If the United States were to run out of cash, the injured parties would be too numerous to count. Here's a short list:

  • Social Security and Medicare recipients: Treasury Secretary Jacob Lew told Congress the U.S. makes about 80 million payments a month, "including Social Security and veteran benefits, military salaries, Medicare reimbursements and many others. In the absence of congressional action, Treasury would be unable to satisfy all of these obligations." Not getting a government check could mean going hungry for millions of Americans.
  • Bondholders: If the Treasury were to run out of cash, it may not be able to pay public investors, including foreign governments. That default could trigger bond market chaos that sets off a global financial panic.
  • Stockholders: Trouble in the bond market would spill over to stocks. Share prices took a huge hit in August 2011, when a bruising debt-ceiling battle led to a U.S. credit downgrade.
  • Homebuyers and other borrowers: If Treasury were to default even briefly, the result could be a lower credit rating. A lower rating potentially could mean higher interest rates, and many consumer loans are pegged to Treasury rates.
  • Taxpayers: If Treasury ends up having to pay higher interest rates, then maintaining the huge U.S. debt would become even more expensive for taxpayers.

As chairman of the House Ways and Means Committee, Rep. Paul Ryan, R-Wis., said last month that "if the United States missed a bond payment, it would shake the confidence of the world economy."

If the House speakership election goes as planned next week, Ryan would be in charge of rallying his troops behind a solution. But his path forward is not clear because Republicans disagree with each other about what to demand in exchange for approving a higher ceiling. They promise action next week.

Democrats sent a letter to Republicans Friday, begging for a "clean" bill to lift the cap. "Raising the debt ceiling will ensure that America pays its bills for expenses already incurred, and does not authorize any new spending," they wrote.

At a press conference Friday, Minority Leader Nancy Pelosi, D-Calif., said Republicans who want to address spending cuts should save their arguments for a separate debate over funding legislation needed to avert a government shutdown on Dec. 11.

"We stand ready to cooperate, to negotiate on the keeping-government-open legislation," Pelosi said.

While the arguments continue in Washington, on Wall Street, there is no debate. Economists and investors are urging Congress to act. Citi strategist Andrew Hollenhorst summed up the sentiment in his understated note to investors. A failure to solve the problem next week would be "highly imprudent," he wrote.

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