First Rule to Avoid Default: Don’t Assume You Can Miss Oct. 17 and Avoid Default

Photograph by Matthias Clamer/Getty Images

A 100% accurate simulation of the consequences of playing chicken with the debt ceiling.

After markets shot up on the prospect of even a temporary debt ceiling deal, yesterday ended with negotiations dragging on. So despite progress in the talks, we’re now a day closer to what is supposed to be an Oct. 17 deadline. And so far there is no clarity on whether Republicans will support a debt deal that includes ending the shutdown, or Democrats will accept a temporary extension.

That raises the question: So, what happens if we do in fact hit the deadline? There is pretty much universal consensus that the results will be terrible. There is not consensus, though, on whether breaching the deadline actually means “default.” Bloomberg’s Rich Miller and Shobhana Chandra considered the possibilities and  turned to a number of economists to game-play the scenario.

Notably for those who’ve been following the debate on “prioritization,” all the experts they talk to (mainly from the banking world) assume that if we do get to the deadline, Treasury will be able to keep making payments on the debt by making cuts in other expenditures. That in itself is controversial; Matt Yglesias at Slate and other commentators dispute that this is possible, given how Treasury’s payment systems are set up.

Republicans who have experience of government are also skeptical of prioritization. In a story today, one former Bush administration says of the Republican right, “These are the guys who don’t think the government can do anything right. And they’re going to count on Treasury bureaucrats to manage this phenomenal sleight of hand. I don’t believe it.”

If indeed prioritization is technically feasible, just when it would have to start isn’t certain. It may not be Oct. 17 precisely; the current thinking is that the U.S. will run out of money somewhere between Oct. 22 and Nov. 1, as this excellent chart from Bloomberg’s Dave Merrill shows.

Graphic: Dave Merrill / Bloomberg Visual Data

Charting when the money runs out.

All the economists Miller and Chandra talked to this week did agree that resorting to those cuts would invite disaster. They say that even if the Treasury could avoid default by cutting non-debt expenditures, the disordered slashing of essential government functions (remember, the non-essential ones are already shut down) would throw the country into recession.

That would make the current shutdown look like a slow Sunday on the road to church. TMN has speculated before that the administration would pursue other options, like bypassing congressional authority on the debt ceiling by fiat. Most worrisome here may be not the specific scenarios of what will happen if the debt ceiling is not raised, but the assumption that there will still be options to avoid default. It’s a little like discussing how far from the road you’ll fly if you swerve off the highway just before you hit an oncoming car. What if you find out at the last second that the steering wheel doesn’t turn?
(Post updated Oct. 11)

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