Economist Alan Blinder says threatening to default on debt could have dire consequences for the dollar, interest rates and the economy.
"The U.S. dollar would be among the first casualties," Blinder writes in The Wall Street Journal. "If hot money were to flee what was once its safest haven, the dollar would sink and U.S. interest rates would rise," he wrote. “The latter could lead us back into recession."
Other countries pass budgets estimating total receipts and expenditures for the year, which in turn imply how much they plan to borrow, notes Blinder.
(AP file photo)
"Our Congress can pass a budget that implies an illegal amount of new borrowing,” he wrote.
“In fact, it did so last month when the two parties agreed to a fiscal year 2011 budget projected to push the national debt over $15 trillion, even though the law limits the debt to $14.3 trillion.”
Blinder observes that nobody really knows, “but it's not likely to be pretty.” Inflows and outflows of cash to and from the Treasury jump around from day to day as bills are paid and revenues arrive.
However, at average fiscal 2011 rates, receipts cover only about 60 percent of expenditures.
“So if we hit the borrowing wall traveling at full speed, the U.S. government's total outlays — a complex amalgam that includes everything from Social Security benefits to soldiers' pay to interest on the national debt—will have to drop by about 40 percent immediately,” says Blinder.
Reuters reports that the Treasury Department has urged Congress to increase the $14.29 trillion ceiling before Aug. 2, when it predicts it will exhaust other methods for paying its obligations.
Failure to act could bring on a second recession and roil markets worldwide, Treasury officials have said.
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