Mr. President, in just 3 days, barring some action by Congress, the Treasury Department of the United States will run out of options for preventing default on this Nation’s debts for the first time in our history, setting off a chain of economic events that will be felt around the world and by every family and business and State and community in our country.
We have heard a great deal on this floor the last few days about how we arrived at this point and who is to blame. There is a lot of concern and consternation about exactly who owns this and how we got here. I am not going to spend time today on that. I am going to skip the politics and the drama for now and just talk about the facts and the policy. I just want to talk to Delawareans about what would happen if we actually go over this impending cliff, if we do default, and which of the options for addressing this are viable.
First, let’s be clear about what we are talking about.
What is the debt ceiling? Defaulting on our debt by failing to raise the debt ceiling is not the same as cutting up America’s credit cards. It is not the same as denying the President the right to sign more checks into the future. Raising the debt ceiling does not give Congress or the President a blank check to spend more money. It allows the United States to borrow more money, yes, but only to pay bills for goods and services already incurred, to meet pledges already made.
We have had some kind of a national debt ceiling since 1917, when Congress allowed the Treasury Department to issue long-term Liberty bonds to pay for our engagement in the First World War. Over the course of the next two decades, caps were placed on other kinds of debt as well, and finally, in 1939, Congress decided to place a ceiling on the total amount of debt the country could have.
The last time Congress raised the debt ceiling, it was up to $16.99 trillion. Technically, we reached that limit a few months ago — actually on May 19 of this year. The Treasury Department has since been using what it calls “extraordinary measures” to keep paying our bills, but, as Secretary Lew has communicated to this Congress over and over in letter and in testimony, in just a few days the Treasury Department will no longer have enough money to keep up. These extraordinary measures will have run out, and in a week or two later we will have come up to zero.
What are the bills we need to raise the ceiling in order to pay? It is the salaries of all Federal employees, including our military; it is Social Security and Medicare payments; it is unemployment benefits, tax refunds, and interest on our sovereign debt. Raising the debt limit allows the Treasury to borrow the money it needs to pay these bills. That is it.
If on any particular day more bills come due than we have cash in our accounts to cover, then the United States of America will default on some or all of its obligations. That day is coming and coming quickly. Frankly, we cannot let it happen.
For decades investors have bought U.S. debt because it was seen as a sure thing, a safe investment. When people buy a Treasury bill, a T-bill, they do so because they know they are going to earn interest on one of the safest investments in the world. American debt is considered unimpeachable. That is what makes the dollar the reserve currency for much of the world, which is something that benefits every American company and community and family in ways that are hard to see but cumulatively powerful — the absolute certainty that we will repay our national debt.
Who are these investors? Who are the folks who buy these T-bills? Some are everyday Americans. A large number of retirees invest in our government bonds because they are such a safe bet. Pension funds and mutual funds invest in government bonds for the same reason. Some investors are the governments of other nations that look at the United States as such a good investment that they tie their financial stability to ours. So when it starts to look as if Congress will not live up to that standard, will not take the steps necessary to pay all of our bills on time and might actually default on some of our debts and transform us into a deadbeat nation, it makes investors really nervous.
Just the talk of defaulting on our debts sends a shockwave through our economy and through the markets. For proof we need only look back to August of 2001, when Congress last brought the Nation to the brink of default. Although we didn’t cross the line, just the talk of it, the mere possibility that we might for the first time default had an array of consequences.
First, it slowed job growth and led to an increase in part-time employment.
Second, consumer confidence in our economy fell. The Consumer Confidence Index — the index of consumer confidence — is a reliable indicator of Americans’ willingness to spend money and fuel our economic growth. We want consumers buying products at their local stores and keeping people employed, right? The index was already on the pessimistic side of the line when this last crisis began but has fallen substantially since the government shutdown. Instability and uncertainty reduces consumer confidence and takes money out of our economy.
Third, the yield of our Treasury bills had to increase in order to prop up demand. As U.S. debt becomes perceived as a riskier investment, we have to incentivize investors by increasing what we will pay them. That means taxpayers will have to pay more over time in order to compensate. The debate in 2011 will cost American taxpayers an additional $19 billion over the next decade. Again, just the debate as we ran up to the possibility of default in 2011 added $19 billion in debt service costs to the bonds that were issued in the days and months after.
Fourth, the credit rating agency Standard & Poors — one of the big three — lowered the credit rating of the United States, causing markets to drop more than 5 percent in a single day and 17 percent over the course of that crisis. It was one of the worst declines in the equities markets in history, and it was only because we talked about defaulting.
Just threatening to default is terrible for our economy in all these four different ways.
Financial analysts across the world have said Congress is already causing potentially lasting damage to the strength of the dollar just by repeatedly threatening to default. Said one:
“There is a negative confidence shock rippling through the economy, and foreign investors have taken fright at developments in Washington.”
Said another:
“A U.S. government default is not a zero-probability event now. Although it remains very unlikely, a low-probability high-impact event like this is naturally making investors cautious.”
So we simply cannot afford this talk. We cannot let our Nation default.
What happens if we do? What would actually happen if we get to the end of this week and have not resolved this crisis? I am encouraged by rumors of some resolution. I am encouraged that there are negotiations and conversations going on. But I think we need to look in a clear-eyed way at what would happen if default should happen to occur.
For starters, we don’t really know. The situation has never been this bad before this, and the United States has never defaulted on its debt.
Here is what the managing director of the International Monetary Fund said this weekend:
“If there is that degree of disruption, that lack of certainty, that lack of trust in the U.S. signature, it would mean massive disruption the world over, and we would be at risk of tipping yet again into global recession.”
We simply cannot afford that.
Let me share another quote from history, from President Ronald Reagan, who back in 1983 had this to say about the potential threat of default and its impact on our economy:
“The full consequences of a default — or even the serious prospect of a default–by the United States are impossible to predict and awesome to contemplate. Denigration of the full faith and credit of the United States would have substantial effects on the domestic financial markets and the value of the dollar.”
As it was true back in 1983, so it is true again today. The comments from the head of the IMF and from a whole array of economists and bankers this past week remind us of the simple and enduring truth that the modern era has been one where the dollar has been the reserve currency for the world, and the strength of the American market has been critical to the strength of the American nation, our communities, and our economy. Frankly, to put that at risk over short-term political differences is reckless indeed.
What we know is we will wake up this coming Friday with about $30 billion in the Federal Government’s account, according to Treasury Secretary Lew. What we don’t know is how long it will last. The moment we can’t pay one of our bills, we will default. That is what is known as X date. The government will still collect revenue, but it won’t be enough to keep pace with our daily bills.
Over the last year, the government collected $7.5 billion a day and spent an average of $9.7 billion a day. That means we come up about $2.2 billion short on our bills every day if we are not borrowing enough to make up the difference.
Analysts at the Bipartisan Policy Center suggest that we will run out of cash–hitting the X date — roughly on October 22. To be clear, part of why we don’t know exactly what date this would occur is because money flows into the Federal Treasury at uneven rates, and it flows out at uneven rates.
Let’s look at a few of the bills that are about to come due in the next few weeks. On October 23, $12 billion in Social Security benefits are due; on October 28, $3 billion in Federal salaries would go unpaid. On October 30, $2 billion in Medicaid payments are due; on October 31, $6 billion in interest payments on our sovereign debt are due; on November 1, $58 billion in Medicare, Social Security, and SSI payments, as well as veterans’ benefits and military pay.
Those are just the major bills. There are thousands, even millions, of smaller payments that are due from every agency and entity of the Federal Government that go up and down day in and day out and where our failure to pay in a timely fashion, while technically not defaulting on our sovereign debt, would put into question our ability and willingness as a government to pay our bills when due.
With what we have left, we will not be able to pay them all, and we will be in violation of the 14th Amendment to the Constitution, which says that the debt of the United States of America shall not be questioned.
If we have not raised the debt ceiling by this Thursday, we are likely to see disturbing losses in global markets. We have already started to see them as uncertainty takes over and volatility begins to spread. Investors are already pulling money out of our T-bills. If 2011 is an indication, stock prices will soon begin to drop in the absence of some progress toward a resolution.
Deutsche Bank, one of the world’s most prominent investment banks, predicted the S&P 500 index will fall by a staggering 45 percent if we default. We heard loudly and clearly when we met with the credit ratings agencies after the 2011 incident that they would almost certainly downgrade the credit rating of the United States, which would reduce demand for Treasuries, particularly among investment funds that are required to hold a large number of AAA-rated securities.
With the Nation pressed against its debt ceiling and future interest payments uncertain, investors will be hesitant to buy more T-bills. The toxicity of U.S. debt may spread to Treasury notes and bonds, and investors will almost certainly demand higher yields, which will cost our country significantly more over time. This is exactly what happened in 2011 when we flirted with default.
Right now, the dollar is the world’s reserve currency. Instead of keeping their money in cash, other nations buy our debt in order to get interest without risk. America has been a great investment. A default would cause other nations to sell our debt and then sell our dollars, weakening our dollars against foreign currencies, and raising the costs on every single good imported into the United States.
If Treasury interest rates go up just 1 percentage point, it would add over $1 trillion in the next decade to our debt service cost. Anything we saved because of sequestration would be gone, and there is no reason to think that default would cause interest rates to go up by one single point. It could add $2 trillion or $3 trillion to our debt over the next decade. This affects everyone in our community and our country from large to small, from companies to communities to families. When Treasury interest rates go up, your interest rates go up. Mortgage rates, auto loans, student loans, business loans — they all go up, and they would go up fast. Default would make it harder for all of us to use credit responsibly. As consumers buy less, business profits would fall, GDP would fall, and the Nation once again would enter a recession. Defaulting on our debt would be an unimaginable drag on the economic health of our country, our community, and families. We cannot let it happen.
In conclusion, I will briefly touch on our options. We have all heard on this floor Senators suggest that default is really not that big a deal, that we are not really going to default, that there are other ways around this, and that we need not be scared into making some hurried deal. At the end of the day, several Senators have accused the President of fear-mongering and have accused my party of suggesting that default is a major threat to our country and our economy when, in fact, it is not.
Let me briefly touch on the options that have been discussed by other Senators and, frankly, to my surprise. First, some have suggested we can pay our bills not when they are due but when we have the money–sort of on a first-come, first-serve payment approach. Let’s say we ran out of money, as I suggested, on the 20th of this month and could not pay our bills on the 21st. By the 23rd we would have enough money so we would pay the bills from the 21st, late, but go delinquent on the bills for the 22nd and 23rd, and so on. This is crazy. Payments would be delinquent and the United States would fall behind on its debt.
This option would only make our situation worse. We would keep adding over $2 billion in debt every single day while going delinquent on our bills to Americans.
The second way forward. Some have suggested we prioritize certain bills but ignore others. The Treasury Department would continue to make payments on our sovereign debt so the Chinese would get paid, but they would avoid or default on lots and lots of other obligations. Which payments would we choose in this body not to make? Social Security? Medicare? Military salaries? Payments for cancer research? Veterans’ benefits? Food inspectors? Air traffic controllers? Who goes first and who would we possibly choose? These are the ludicrous choices that have been sent to us by the other Chamber as they have attempted to fund the government in piecemeal slices in the past week.
The Treasury Department makes 100 million individual payments per month, making this option a logistical nightmare. If we prioritize our payments, it is not a question of if we go into recession, it would be a question of when. We would be taking $2.2 billion out of the economy a day — 4 percent of our GDP out of our Nation’s economy on an annualized basis. This would push us back into recession, we would still be defaulting on our obligations, and the markets and the credit rating agencies would know it.
The other thing that has been suggested is to work around the debt ceiling. There are a whole lot of creative but legally questionable ideas: The minting of a $1 trillion coin, avoiding the 14th Amendment, a fire sale of U.S. assets, super-premium Treasuries. Each has pros and cons that I won’t go into, but they would face legal scrutiny and would radically increase uncertainty in the market.
There is no better option for us going forward than to reopen the government, pay our national debt on time, raise the debt ceiling, and honor our obligations as a country. That is the fourth and only good option: pay our bills, to prevent default, to put a floor under our economy, to stop these games, and to stop suggesting that there is any way out of this other than doing our jobs, preserving the AAA credit rating of this country, and making this country worthy of global respect again.
In conclusion, I can’t believe that Members in this Chamber, who had the chance to avoid default, on Saturday voted in a way that suggested they chose not to. Not only did it rattle me, it rattled the markets. The idea that a sovereign government would have the ability to pay its debts but actively chose not to is unprecedented.
We cannot allow that to happen. We cannot allow this country to become a bad investment. We will not become a deadbeat nation. We need to pay our bills, do the right thing, and avoid default. We need to stop playing games and do right by the American people.