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Tipsheet

Geithner: Debt Ceiling Will Be Hit On Monday

Treasury Secretary Timothy Geithner wrote a letter to Congress today that the federal government will once more hit the statutory debt ceiling on Monday, allowing an unspecified amount of time before the government will have to shut down crucial operations merely to service its debt.
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In the letter, Geithner writes that the ceiling will be hit on December 31, and even though the Treasury Department will be able to undertake "extraordinary measures" to make sure the U.S. won't experience the full effect of hitting the ceiling, there's an unspecified and unknown amount of time before a government shutdown will be forced.

President Obama has been pushing in the fiscal cliff negotiations for the debt ceiling to be abolished. Republicans have been consistently against this, arguing that the debt ceiling is useful as a symbolic measure of out-of-control government spending. While the symbolism is nice, the economic consequences of a government shutdown merely in order to service the debt could be disastrous.

Additionally, Geithner writes, the policy uncertainty created by the fiscal cliff puts the government in an even more precarious position.

Given the significant uncertainty that now exists with regard to unresolved tax and spending policies for 2013, it is not possible to predict the effective duration of these measures. At this time, the extent to which the upcoming tax filing season will be delayed as a result of these unresolved policy questions is also uncertain. If left unresolved, the expiring tax provisions and automatic spending cuts, as well as the attendant delays in filing of tax returns, would have the effect of adding some additional time to the duration of the extraordinary measures.
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The U.S. government won't default on its debt, so some of the worst consequences of hitting the debt limit will likely be avoided. But a government shutdown in order to service the debt would send a shock through the financial markets and the international investing community. International confidence in the American government's fiscal stability. Interest rates would rise, the U.S. dollar would fall, and Treasury Secretary Timothy Geithner would have broad authority to decide how the government function.

Republicans are right. The debt ceiling serves as an important symbolic reminder of the U.S. government's increasingly irresponsible spending habits. Barack Obama agreed with them once upon a time, when he was in Congress himself. But actually hitting the debt ceiling after Secretary Geithner runs out of alternative measures would likely lead to fiscal and economic disaster.

It's likely that a debt ceiling solution will be worked out in the evolving fiscal cliff legislation, and the fiscal cliff legislation will likely be worked out before the Department of the Treasury runs out of "extraordinary measures" to put off the debt ceiling.

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The debt ceiling is an important symbol to remind Americans of the state of the U.S. government's fiscal imbalance, but the ceiling must be raised eventually. The consequences of bypassing the ceiling would be catastrophic.

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