Will Failure to Raise Debt Ceiling Mean Financial Crisis?

Here are some thoughts on the debt ceiling from economist Dr. Robert Genetski.

Failure to raise the debt ceiling will only produce a financial crisis if the Administration wants to create one.  There are sufficient funds coming into the Treasury from tax receipts to pay for interest on the debt and Social Security as well as for most truly essential federal services.  There are not sufficient funds to pay for the entire range of government programs.  In order to pay for all programs the Administration has to borrow roughly $700 billion just to get through the next 2½ months.

The Obama Administration views every federal program as legally established.  It claims they have to pay for each one regardless of how important or unimportant they might be.  Instead of prioritizing spending, the President suggests he may choose to cut off the most damaging programs, such as Social Security or even interest on the debt, if the debt ceiling is not raised.

House Republican leaders contend federal spending is out of control and the resulting increases in federal borrowing will create a financial crisis.  They are willing to raise the debt ceiling in exchange for a credible agreement to cut a dollar in spending for each dollar increase in the debt ceiling.  Republican leaders in the Senate have already offered to give the Administration the ability to raise the debt ceiling without any spending cuts.

Will failure to raise the debt ceiling lead to a collapse in financial markets? The answer depends entirely on the priorities the Administration chooses.  The Administration can create a financial crisis by choosing to not pay the debt.  It can create a recession by choosing not to pay Social Security recipients.  It can create chaos by choosing not to pay air traffic controllers or other essential personnel.  In each case, the resulting crisis would be a political move made under the assumption the public will blame Republicans for the turmoil that follows.

A responsible administrator would already have begun to shut down nonessential programs in an effort to avoid a real crisis.  Instead, the Administration has deliberately chosen not to do this.  In effect, the President threatens to bring one about a crisis rather than cut any spending.

What can be done?  My recommendation is for the House to pass a bill stating the order of priorities for the payment of US obligations.  First, should be payment of the debt because lack of payment would create the greatest risk of financial collapse.  The next priority would be a combination of Social Security payments and essential services that are necessary for the normal functioning of the economy and defending the public.  If necessary, the bill could offer to raise the debt ceiling temporarily by the amount necessary to continue to provide for only the most essential of services.

If the Senate fails to pass a similar measure, or if the President fails to sign such a measure, it will become very clear who’s responsible for the turmoil that follows.

Robert Genetski

Read more from him at http://classicalprinciples.com/