Congress 'playing with fire' as debt default deadline looms
Treasury Secretary Jacob Lew has issued a categorical warning that the US will default on its $US16.7 trillion ($17.8 trillion) debt and throw the world into turmoil unless Congress agrees to raise the legal debt ceiling by October 17.
"Congress is playing with fire. If the US government ... chooses not to pay its bills on time, we will be in default," Mr Lew told NBC's Meet the Press. "Anyone who thinks that the United States government not paying its bills is anything less than default hasn't thought about it very clearly."
Mr Lew said the Treasury had exhausted its normal funds in May and had been "creating room" by resorting to one-off tricks but these had run dry. The government will have just $US30 billion by October 17, half what is needed to cover needs over subsequent days.
"That is a dangerously low level of cash and we're on the verge of going into a place we've never been," he said. "Even getting close to the line is dangerous."
Mr Lew's dramatic comments mark a further escalation in the game of chicken on Capitol Hill. They suggest the White House has ruled out a drastic fiscal squeeze to balance the books if there is no deal, and is unwilling to contemplate exotic loopholes - such as a $US2 trillion platinum coin - to circumvent the will of Congress.
Goldman Sachs said any bid to balance the budget overnight would require savage cuts, stopping economic recovery in its tracks, going far beyond the shutdown, which has led to the 800,000 "non-essential" staff being sent home. "We estimate that the fiscal pull-back would amount to 9 per cent of GDP [gross domestic product]," Goldman Sachs said. "If this were allowed to occur, it could lead to a rapid downturn in economic activity if not reversed quickly."
Expected tax revenues over the month following October 17 will cover just two-thirds of federal spending. The sheer force of the fiscal shock would be ruinous.
The US Treasury warned last week the dispute could lead to a "catastrophic" collapse. "Credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket, potentially resulting in a financial crisis and recession that could echo the events of 2008 or worse," it said.
Republicans have accused the Obama administration of whipping up hysteria to browbeat Congress. "It is irresponsible for high-ranking government officials to stoke fear into the marketplace," said Senator Orrin Hatch.
House Republicans have refused to raise the debt limit unless the White House agrees to roll back the Affordable Care Act, dubbed "Obamacare". Speaker John Boehner said at the weekend he did not have the votes to raise the debt ceiling unless Mr Obama gave ground, though there were signs Congress was starting to crack, with moderates floating a compromise based on tax reform.
Bank of America said the Republicans' tough line was a high-risk strategy since Mr Obama believed he was on stronger political ground. "The President is very unlikely to agree to cuts in his proudest legislative achievement," the bank said. "He does not have to run for office again, while they are all up for re-election next fall. Surveys show Americans strongly disapprove of the shutdown and put more blame on Republicans. Ultimately, we expect them to drop the effort to weaken the Affordable Care Act, but this could take a while."
The risk for the world is that headstrong Republicans do force the issue.
Mr Lew's warnings suggest the White House may call their bluff, calculating that they will suffer greater opprobrium. Whoever is to blame, it is no way to run a railroad, let alone a superpower.