July 28th, 2011
10:54 PM GMT
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Recent history reminds us that politicians often get rather creative with their language during times of crisis.

The vernacular becomes even more varied when the crisis in question is one of a financial nature; one which offers leaders ample opportunity to blind the electorate with science and, sometimes, mask the blindingly obvious.

Recently we've been treated to terms like "debt-mageddon" and "technical default."

And as the war of words in Washington continues, the world remains none the wiser.

Today I will attempt to use numbers to answer a question tackled by many but left unanswered for millions across the U.S. and beyond.

Namely: What happens if the U.S. does not raise its debt ceiling before August 2?

Put this question to U.S. Treasury Secretary Timothy Geithner and the answer will be "a catastrophic economic impact," as he wrote to House Speaker John Boehner in May.

Default, he said "would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover."

Boehner says "a debt limit deal that raises taxes and fails to rein in spending will hurt" the U.S. economy - not help it.

The U.S. is unique among its G7 peers in that it imposes what is effectively its own credit limit and the government must gain approval from lawmakers each time it wishes to raise it.

The debt ceiling has been in place since 1917 and since then it has been raised more than 100 times under both Republican and Democratic presidents.

Economists and politicians are in agreement that while the recovery remains fragile and unemployment persists past nine percent, the U.S. will at some point have to boost its spending by issuing more sovereign debt or Treasuries.

What is less clear is what will happen if it doesn't do so by next week, when politicians have warned the country will run out money.

To many outside the U.S., the prospect of the ultimate economic superpower having empty pockets appears surreal, if slightly ludicrous.

Which begs the question: does the U.S have enough cash to pay its bills and stave off a default?

Research by the Bipartisan Policy Center - a think tank founded by four former Senate Majority Leaders – Republicans Howard Baker and Bob Dole and Democrats Tom Daschle and George Mitchell - shows the U.S. will have enough to pay its creditors as long as spending is radically cut.

The BPC estimates the U.S. will likely receive $173 billion in federal revenues during August but has a bill of $306 billion for the month.

So, to stay in the black the country will have to slash its budgets temporarily by 44 percent.

Okay, then where will the axe fall?

These are the figures policymakers will have to get to grips with:

- Interest on debt: for the month, that bill amounts to $29 billion.

Assuming the U.S. will want to maintain its coveted AAA credit rating and keep the dollar steady, it will have to write this check first.

- Social security: $49.2 billion

- Medicare and Medicaid $50 billion

- Troops on active duty: $2.9 billion

- Veterans programs: $2.9 billion

So we've covered the bases? Not exactly!

By the time they've got this far, Washington will have just $39 billion remaining to spend on services that usually get by with $172 billion.

These include: defense contracts, tax refunds, food stamps, unemployment benefits, justice, education and housing allowance.

It may feel like monopoly money but in this political game of brinkmanship the stakes couldn't be higher.

While it may not be true the U.S. will be totally broke next month, it's not hard to see why those with the least there are the ones worrying the most.

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Filed under: Business


soundoff (3 Responses)
  1. icon design

    Logical question

    September 22, 2012 at 3:43 am |

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