Is Government Shutdown 2011 An Opening Act? Debt Ceiling Debate Is Yet To Come

From ABC’s Dan Arnall , who covers business and the economy:

A government shutdown could result if lawmakers can't agree on how to close the $5 billion gap between what spending cuts Republicans want and Democrats can stomach. But their standoff over funding for a fiscal year that is half over is not a big deal. Relative to what’s coming.

In the next month, the Congress will have to pass an increase to the Federal Debt Limit – which currently stands at $14.294 trillion – or risk defaulting on interest payments on the nation’s debt.

Imagine the Congressional wrangling over a vote which would expand the Federal government’s borrowing authority by an additional trillion dollars (the nine most recent increases since 1997 have averaged $977 billion in new borrowing authority).

The Treasury says that Congress must act by May 16 to insure the continued functioning of the government – with some financial high-wire acts, that could be pushed a few weeks into June.

Without it, administration officials and private sector economists say, the U.S. government and private sector economy would face a catastrophe. Imagine the world’s biggest debtor – Uncle Sam – missing a few payments on his credit cards. Is anyone going to want to lend him money at a reasonable rate moving forward? Probably not.

“If Congress failed to increase the debt limit, a broad range of government payments would have to be stopped, limited or delayed, including military salaries and retirement benefits, Social Security and Medicare payments, interest on the debt, unemployment benefits and tax refunds,” writes Treasury Secretary Tim Geithner in an April 4 letter to Congress.

“This would cause severe hardship to American families and raise questions about our ability to defend our national security interests. In addition, defaulting on legal obligations of the United States would lead to sharply higher interest rates and borrowing costs, declining home values and reduced retirement savings for Americans. Default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover.”

Enjoy the opening act – private sector economists say the current shutdown would shave 0.2% of GDP a week, which will be quickly restored once a deal is made.

The headliner – this Debt Ceiling mega group – could very well push the country back into recession in an instant and fundamentally hamper the government’s ability to fund its programs for decades.

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