What Happens on Day One of Default

Thursday, 14 Jul 2011 08:06 PM

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If no deal on raising the national debt ceiling emerges by Aug. 3, President Barack Obama will be forced to decide which bills to pay, just like any householder trying to turn back the wolf at the door. The choices aren’t pretty, The Washington Post reports.

Obama, bills, deficitThe president would have to choose whether to pay such things as Social Security checks, salaries for members of the military and veterans, unemployment benefits, and student loans, while balancing those needs against payments to investors in U.S. government bonds held by pension funds and the Chinese government, the Post reported.

The newspaper based its assessment on comments from administration officials and an analysis by a former senior George W. Bush administration Treasury Department official.

“You can move the chess pieces around all you want,” Jay Powell, a visiting scholar at the Bipartisan Policy Center and an author of the analysis, told the Post. “You’re going to lose.”

Congressional skeptics in Congress, along with some economists, argue that the president is overstating the risk and that tax revenue could cover as much as 60 percent of government operations. However, Obama’s advisers have said that prioritizing payments is impractical and would be chaotic, the Post reported.

The government would have to cut 44 percent of spending immediately, according to the Bipartisan Policy Center analysis. Although the government could afford Social Security, Medicare, Medicaid, defense contracts, unemployment insurance, and payments to bondholders through August, it would have to eliminate all other federal spending, the Post reported.

That includes pay for veterans, members of the armed services, and civil servants, as well as funding for Pell grants, special-education programs, the federal courts, law enforcement, national nuclear programs and housing assistance.

After the debt ceiling is breached, the bad news increases. According to Powell’s analysis, the Treasury is set to receive about $12 billion in tax revenue on Aug. 3 and is expected to spend $32 billion including more than 25 million Social Security and disability checks at a cost of $23 billion. Obama would be faced with paying half of the Social Security checks while ignoring other bills, including $500 million in federal salaries and $1.4 billion in payments to defense contractors, the Post reported.

Another option is to ignore the Social Security payments and use the money to pay investors in U.S. bonds. Failure to pay the bonds and others coming due could lead to a downgrade in U.S. bond ratings making them more difficult to sell, which in turn would lead to the government paying higher interest rates, the Post reported.

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