Washington Plays Chicken With the Debt

Suppose Congress fails to raise the national debt ceiling before the federal government reaches the current limit of $14.294 trillion, which is expected sometime around May 16. How bad would it be? Treasury Secretary Timothy F. Geithner, who is paid to worry about these things, says he has a few emergency measures at his disposal. Treasury could keep the government running for approximately two months—by borrowing money from the Civil Service Retirement and Disability Fund, for example, instead of from private investors.

By the beginning of August, however, the Treasury Dept. would be like a besieged homeowner deciding which bills to pay and which to put back in the drawer. The U.S. would begin defaulting on some Treasury notes and bonds as they came due, so creditors would demand higher interest rates on new bonds, as they have done for Greece and other heavily indebted nations. Some pension funds and insurance companies that are huge holders of Treasuries would have to dump them because they're prohibited from owning debt of institutions that are in default. The resulting panic would drive rates higher still—though no one can say precisely how high they'd go, since such a thing has never happened. "Threatening not to raise the debt ceiling is not just playing with fire," says Robert A. Brusca, chief economist at Fact and Opinion Economics, a New York consultancy. "It's playing with fire in a dynamite factory."