Ouch! Uncle Sam Bumps into 'Debt Ceiling' as House Clashes
May 17, 2010 (Knight Ridder/Tribune Business News) Uncle Sam has maxed out his credit cards.
The U.S. government yesterday reached its legally mandated $14.3 trillion debt ceiling -- or about $46,000 for every American man, woman and child.
Weeks of partisan wrangling by Congress failed to produce agreement to raise the cap, leaving the nation on the cusp of defaulting on its debts. That's something America has come close to doing before but never actually done -- and only avoided this time through accounting tricks.
U.S. Treasury Secretary Timothy Geithner used gimmicks to postpone a default until Aug. 2, warning Congress to cut a deal by then to "avoid catastrophic economic consequences."
Josh Gordon of the Concord Coalition, an anti-deficit group co-founded by late Massachusetts Sen. Paul Tsongas, said hitting the debt ceiling means "the clock has officially started for Congress to act to prevent financial chaos."
He and others believe markets the world over will tank if Uncle Sam actually defaults on U.S. Treasury bonds, which Wall Street has long considered risk-free.
Last month, the Dow Jones industrial average briefly dropped 240 points after Standard & Poor's cut its outlook for Treasury bonds to "negative" but didn't actually lower America's bond rating.
Jeff Given of Boston-based John Hancock Asset Management said the Dow could drop 10 percent to 15 percent over "a pretty short time" if a real default occurs.
Given even expects Uncle Sam to pay bills with IOUs that would trade for 50 cents to 75 cents on the dollar in the event of a prolonged impasse.
"They'd try to keep Social Security and Medicare payments going for as long as they could, but at some point they'd run out of money there as well," he said.
However, analysts add that Geithner is bluffing a bit by warning of "catastrophic" problems.
"I'm not going to say a default wouldn't be bad, but it wouldn't be Armageddon," Erik Weisman of Boston-based MFS Investment Management said.
Weisman also believes Democrats and Republicans will ultimately hammer out a deal before the deadline.
"Playing 'Chicken' is great if you're the winner," he said. "But if you're the loser, you're going to pay a very heavy price."