Image: US Secretary of Treasury Tim Geithner te
JEWEL SAMAD  /  AFP - Getty Images
Secretary of Treasury Tim Geithner testifies before the Senate Appropriations Subcommittee on Financial Services and General Government on the FY 2012 Budget in Washington, DC, on April 5.
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updated 5/16/2011 10:53:01 AM ET 2011-05-16T14:53:01

On Monday morning the Treasury Department auctioned off the last legally permissible U.S. government debt to the public. A $14,294,000,000,000 cap on borrowing is firmly in place, starting the clock toward potential default and turning up the heat on simmering fiscal negotiations in Washington.

While market participants did not expect Congress to raise the limit before it was met, which should preclude immediate economic consequences, the milestone moves the discussion of American default from theoretical to increasingly probable. Concerns about such a scenario could lead to turmoil in the markets, damaging economic recovery.

In a letter to Sen. Michael Bennet, D-Colo., on Friday, Treasury Secretary Timothy Geithner warned of a potential “double-dip recession” if investors lose confidence in the United States’ creditworthiness. Rising interest rates could freeze investment, cause runs on money-market funds, and lower the value of the dollar, threatening its status as the world’s reserve currency.

The Treasury Department will begin a series of “extraordinary” accounting measures designed to delay until Aug. 2 the messy clash between the spending priorities enacted by Congress and its refusal, so far, to allow them to be financed; without borrowing, the country would need to cut approximately $125 billion in spending each month.

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Story: McConnell sets terms for debt ceiling vote

On Sunday, House Speaker John Boehner, R-Ohio, and Senate Minority Leader Mitch McConnell, R-Ky., reiterated Republican demands for significant budget reforms and spending cuts in exchange for lifting the debt limit, but their refusal to consider tax changes is stymieing efforts to reach a deal. Vice President Joe Biden is leading congressional leaders in ongoing talks designed to reach a deficit reduction framework and the passage of the increase; those talks will continue on a staff level with Congress in recess this week.

Story: Obama tells Democrats to be flexible in budget talks

While details of the talks remain sketchy, lawmakers are attempting to reconcile competing budgets to find at least $1 trillion in deficit reduction over the coming years, largely through discretionary spending cuts, including at the Defense Department, and reductions in mandatory spending focused on agriculture subsidies and Medicaid. Democrats also want to close tax loopholes that subsidize the private sector, especially oil companies.

Both sides are interested in a budget enforcement mechanism, with Republicans advocating spending caps and the White House a more comprehensive debt-reduction fail-safe. Similarly, though the two parties have been intently focused on Medicare reform, their divergent approaches make an agreement unlikely. Despite warnings last week from the trustees of that program and Social Security that their financial future is in jeopardy, neither one is likely to be at the center of an agreement.

The stress around the debt ceiling is still centered largely within the Beltway, but pressure from businesses around the country will increase as Treasury draws down its final reserves, especially if markets start to tighten around fears that a deal will not emerge. Last week, a coalition of business groups led by the U.S. Chamber of Commerce, the Financial Services Forum, and the Business Roundtable wrote to lawmakers urging them to reach agreement, and their lobbying will only become more vociferous as talks wear on.

Story: GOP seeks leverage in talks over debt ceiling hike

Public opinion complicates the politics of the debate further: While the business community is united with the economic experts in fearing the impact of a failure to raise the limit, the Gallup polling organization reports that 47 percent of the public believe their member of Congress should vote against raising the ceiling. Only 19 percent say their representative should support an increase.

Story: Geithner gives Congress more time on debt limit

Those numbers might change if the public felt the tangible costs of a seemingly abstract default. In a report released on Monday, the centrist Democratic think tank Third Way estimates that default could cost nearly 700,000 jobs, 1 percent of gross domestic product and $8,816 from the average 401(k). Unfortunately, undoing the damage of such an event would be difficult — just like any borrower, a stain on the country’s credit history will be difficult to speedily erase.

Copyright 2012 by National Journal Group Inc.

Video: Geithner: Congress has to raise debt limit

  1. Transcript of: Geithner: Congress has to raise debt limit

    MR. GREGORY: Good morning. Millions of Americans will rush to file their tax return by tomorrow's deadline at a time when taxes are at the heart of the budget debate here in Washington . The spending fight and high gas prices, with a national average now of $3.83 a gallon, top of mind for the president's chief economic adviser, Treasury Secretary Tim Geithner . I sat down with him yesterday at the Treasury Department . There's so much to get to. I want to begin with the next big fight here in Washington . The government nearly shut down because this year's budget. Now there's the decision to raise the credit limit on America 's credit card, with the debt at $14 trillion. That is, raising the debt ceiling. Will the president agree, as Republicans demand, to tie spending cuts to an agreement to raise the debt ceiling?

    SEC'Y TIMOTHY GEITHNER: David , let me tell you how we're going to do this. Congress is going to have to raise the debt limit. They understand that. That's absolutely essential to preserve the creditworthiness of the United States of America. You know, we're a country that meets its obligations, and we have to meet our obligations, and they recognize that. I heard -- in fact, I heard the leadership tell the president that again on Wednesday.

    MR. GREGORY: But you hear so many Republicans saying, "No, no, there's got to be a deal here."

    SEC'Y GEITHNER: But, but, but as we do that, in parallel to that, we're going to work with the Republicans and Democrats and try and get people to come together on a long-term plan to bring our fiscal position back down towards balance so we're living within our means again. We have to do both those two things. And we're going to work very hard again to take advantage of this opportunity to get Democrats and Republicans to come together.

    MR. GREGORY: But does there have to be a link?

    SEC'Y GEITHNER: I think you can do these things in parallel. And I'll -- let me say it this way. You know, we're going to move forward, and we want -- again, we want Congress to put in place a comprehensive framework, a balanced framework, that can reduce our long-term deficits. And we're going to work hard to do that. But if, by the time we need to raise the debt limit, we haven't worked all that out, Congress still has to raise the debt limit. Again, leadership recognize that. They don't -- they know...

    MR. GREGORY: Or, or else what? Because they say a lot of your warnings are overblown. Those like Senator DeMint of South Carolina say those warnings about, you know, the catastrophe are overblown.

    SEC'Y GEITHNER: Oh, that's absolutely not the case. And again, I think -- I've spent a lot of time with Republicans and Democrats on this -- you know, I saw the Senate Finance Committee last week -- and they absolutely understand the stakes in this. And the leadership understand that you can't play around with this, you can't take it too long. And those people up there who are telling people that you can take this to the brink because it gives them some leverage, they're going to own the responsibility for the risk that creates for the American economy .

    MR. GREGORY: And what are the stakes?

    SEC'Y GEITHNER: Well, again, if you just think of it this way, if you allow people to start to doubt whether the United States of America will meet its obligations, that would be catastrophic, and we can't take that risk. But again, the responsible people up there understand that, and I'm very confident they'll do this. And I heard them say that, that to the president on Wednesday. Again, they said that, "We, we recognize we can't play around with this."

    MR. GREGORY: Do you think this risks another shutdown?

    SEC'Y GEITHNER: I don't think so. Again, I think if you, if you listen carefully -- I know there's a lot of politics in the moment, but if you listen carefully to what people are saying, a very important thing has happened. You've seen the Republican leadership say we need to try and cut about $4 trillion from our deficit over about 10 years. You saw a bipartisan fiscal commission the president established lay out basically the same target. And the president of the United States on Wednesday laid out a balanced, responsible plan that achieves about the same level of deficit reduction over about the same period. We take a little longer because we want to go a little more gradually. But when you have leadership of Republicans and Democrats saying that, "This is the right thing to do for the economy now. We all agree on how much you have to do," that's very important. And what we like to -- Congress to do is, again, before we get too far into June we want Congress to agree on concrete targets, deadlines, timelines, and an enforcement mechanism that will force Congress to live within its means over the next three to five years.

    MR. GREGORY: OK, but one more on the debt limit. When he was Senator Obama , he voted against raising the debt limit in 2006 .

    SEC'Y GEITHNER: He did. And he said...

    MR. GREGORY: And he said, he said at the time that the debt problem was a, quote, "failure of leadership , and Americans deserve better." Look, the debt has gone up 35 percent during his presidency. Is that also a failure of leadership ?

    SEC'Y GEITHNER: You know, you, you heard him say this week that that was a mistake. He recognized that's a mistake, and he recognizes that's not something you can play politics with. You know, Steny Hoyer said in the -- on the floor something similar earlier this year. He said that, "I thought this was something you could demagogue. I was wrong at that point. Not something you can play politics with." Again, that it's -- this is a absolutely critical thing for people to understand. This is about the trust and confidence in the American people , and the world is watching us. Markets around the world are watching Washington to see whether this political leadership , Republicans and Democrats , understand that we need to get on with it and start to bring down the long-term deficits. And, of course, as we do that, as we work that out, Congress will pass the debt limit.

Interactive: Debt ceiling

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