Treasury Secretary Jack Lew warns U.S. will default on Oct. 17th unless Congress raises debt ceiling

Treasury Secretary Jack Lew. IMAGE SOURCE: U.S. Treasury via Flickr

In letter to Republican House Speaker John Boehner, Treasury Secretary Jack Lew warned that the U.S. government will be forced to default on its bills unless Congress raises the debt ceiling by mid-October.

Lew wrote on Wednesday that the “extraordinary measures” employed by the Treasury to ensure it has enough cash to pay the debts authorized by Congress will be exhausted by Oct. 17th.

By that time, the Treasury will have only $30 billion cash on hand, which Lew said is not enough to pay all the government’s bills, including Social Security checks for retirees, the disabled, widows and widowers; veterans’ benefits; unemployment insurance; Medicare and Medicaid reimbursement to hospitals, doctors, and other health care providers; payments to government contractors, and debt holders.

“This amount would be far short of net expenditures on certain days, which can be as high as $60 billion,” wrote Lew. “If we have insufficient cash on hand, it would be impossible for the United States of America to meet all of its obligations for the first time in our history.”

Lew pointed out that raising the debt limit simply allows the Treasury to sell securities to raise cash to pay for the past expenditures that Congress approved.

“Extending borrowing authority does not increase government spending; it simply allows the Treasury to pay for expenditures Congress has already approved,” Lew reiterated.

Lew also criticized the “ill-advised” proposal by House Republicans to avoid default by prioritizing payments to certain programs while delaying payments to others or leaving some in effect unpaid altogether if Congress does not increase the debt limit by mid-October.

Such proposal was supported by Daniel Mitchell, a senior fellow at the Cato Institute, who claimed that “an increase in the debt ceiling is not needed to avoid default” at recent Joint Economic Committee hearing on the debt ceiling. Mitchell insisted that the Treasury could avoid default by prioritizing paying the debt interests – totaling about $230 billion annually – over other obligations, which he admitted would “be a messy process for other parts of the budget.”

“Any plan to prioritize some payment over others is simply default by another name. The United States should never have to choose, for example, whether to pay Social Security to seniors, pay benefits to our veterans, or make payments to state and local jurisdictions and health care providers under Medicare and Medicaid,” wrote Lew. “There is no way of knowing the damage any prioritization would have on our economy and financial markets. It would represent an irresponsible retreat from a core American value: We are a nation that honors all of its commitments.”

A report published last week by Sen. Amy Klobuchar (D-Minn.), co-chair of the Joint Economic Committee, estimated that about 57.5 million Americans could potentially be affected if the Treasury is forced to delay Social Security checks because of cash flow problems caused by the unresolved debt ceiling. This could significantly lower consumption, which will affect businesses.

“Without these payments, retirees, widow(er)s, and disabled workers would struggle to make ends meet. In addition, more than $66.6 billion in monthly benefits would not enter the economy when expected – damaging the economic recovery,” according to Klobuchar’s report, “The Economic Costs of Debt-Ceiling Brinksmanship”.

Klobuchar’s report also estimated that about 3.4 million veterans experience delays in receiving their disability benefits if the debt limit is not increased.

Klobuchar also noted that the 2011 debt limit showdown, although resolved at the 11th hour, was very costly to U.S. taxpayers and the economy. She said Congress’s delay in increasing the debt limit resulted in such uncertainty that investors charged the Treasury higher interest rates to cover their risks, costing American taxpayers about $1.3 billion more than otherwise necessary.

The debt limit showdown also caused the stock market to tumble, with the Dow Jone Industrial Average dropping more than 2,000 points in July and August 2011, and resulted in the unprecedented downgrade of the U.S. credit rating. Consumer confidence also plummeted during that period, which slowed the economic recovery.

Lew said a repeat of the debt limit brinksmanship in 2011 would “inflict greater harm on the economy.”

“And if the government should ultimately become unable to pay all of its bills, the results could be catastrophic,” Lew warned.

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One Comment on “Treasury Secretary Jack Lew warns U.S. will default on Oct. 17th unless Congress raises debt ceiling

  1. Pingback: Conservative expert downplays need for debt limit increase, claims U.S. won’t “default” as long as debt interests are paid | What The Folly?!

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