A significant part of revenues (taxes) is spent to pay interest and pay back debts that come due. Logically this would be the least painful short term in impact on voters-taxpayers… Stop making payments. Of course a lot of this debt is owed to the social security fund. This means that problems with SS would be more obvious sooner. Doctors and hospitals would be told they oln get paid half the regular rate. (I assume the “debt ceiling” rules mean no IOU chits instead, but maybe a “nudge, nudge, call us when the mess is settled with congress”.)
The fact that the government -both branches - can’t agree is what will drive distrust and so higher rates in international markets, less confidence, and much weaker exchange rate.
Speaking as a Canadian who remembers a C$ with 63 cents, it’s nice to have a dollar above the US $ one. I really would like to thank GW and 8 years of laissez faire neglect for making my cross-border shopping cheaper.
If you want your own indicators of the seriousness of this issue do this:
[ul]
[li]Do what you can to discount the political chin wagging going on. Those mouths are more interested in political point-scoring (politicians) or ratings (media “experts”). Come crunch time the rhetoric should change.[/li][li]Watch the markets. Not just the headlines but financial indices, especially banking and finance. Are big shots with stocks and stock options cashing out, or exchanging paper for bricks and mortar (literally)?[/li][li]Watch federal agencies. Do their customer service hours change in the lead up to August? If you sell to federal agencies (e.g., office supplies) do their day to day buying habits change, even dry up? Are the number of big ticket contract offers on FedBizOps disappearing?[/li][li]Watch your local federal employee neighbor(s), especially those at mid- to higher levels, say GS-09/11 and higher. Do their overt spending habits change? Say, less non-essential (restaurant use) and more essential (stocking up).[/li][/ul]
Disclaimer. Fed employee. Experienced several of these things in the lead up to threats of not passing a CR (continuing resolution) or full budget for this fiscal year. Lots of internal stuff went down, including implementing plans for mass furloughs, that never made the media because of the eleven hour agreement. Fully expect this to occur again as we near the August 2nd crunch date. Already experiencing internal changes, including federal pension accounts are paying for current fed operations right now. We’re being asked (required really) to absorb budget cuts (even though we are now funded this fiscal year). Lots of vacant positions not being filled, with the telling point being a number of critical, must fill positions are not being filled.
I suppose it’s up to the government how they choose to weasel out of their obligations. Pay any creditor up to $100,000 but no more? (To get out of shafting the people holding Savings Bonds?) Pay everything 50 cents on the dollar? Selectively pay certain debts and certain civil servants?
Short term, logically, they would just say “wicket’s closed, come back next week.” If after the economy crashes and the dollar is effectively worthless internationally and it’s been months; oil costs $1000/barrel in US dollars and gas costs $50/gal , and anyone working for a hospital, military contractor, federal government, or expecting a social security cheque is broke and begging on the street - either congress relents or you’re back to the latin american model, where the Army takes over and runs the economy by fiat.
3/4 of the spending is pretty much mandatory - Social security, defence, medicare and similar, unemployment and welfare. Paying interest on the national debt (so far) is only 4.63% of spending. The government spends (according to Wikipedia) about 50% more than it took in in 2009, 2010. In reverse, the deficit is 1/3 of the budget.
Even if you closed down ALL civil services of the federal government, that’s still only about 20% of the spending. To NOT borrow any more money at all, they would have to cut one of those big-ticket sacred cows.
Note that interest is 4.63% of spending; so why turn off that particular tap and piss off or scare away all future investors? So most likely, debt payment and default would be the last resort.
Despite rehtoric, the feds don’t spend most of their money just for the fun of it. Every one of those categories contains some seriously needed and legitimate spending. If congress really WANTS a balanced budget, then they have to say which of the big mandate like social security and defence they want to cut in half - or all of them. OTOH could the average senior citizen survive if they were told “sorry, from now on your cheque is half what it used to be”? How many hospitals would close their door (at least to medicare patients)?
The problem is, if congress puts a brick wall in front of the runaway spending train, then the economy crashes and taxes (income) is substantially lower than the business as usual projections, and even deeper cuts have to be made if your absolute rule is “no borrowing”. At a certain point, yes, the would default in that scenario.
