Failure of debt limit talks could have significant impact on people

2011-07-13T07:00:00Z Failure of debt limit talks could have significant impact on peopleDavid Montgomery Journal staff Rapid City Journal
July 13, 2011 7:00 am  • 

Political leaders in Washington, D.C., are at an impasse over raising the country’s debt ceiling, the congressionally imposed limit on government borrowing that is on schedule to be reached Aug. 2.

Unlike some Washington debates, though, this is an issue that could have real and immediate impact on everyone’s lives.

If Congress fails to raise the debt ceiling by the Aug. 2 deadline, the stock market could tumble and interest rates could rise. But spending cuts or tax hikes in such a deal could themselves hurt the economy -- or energize it, according to local financial planners and bankers.

“We’ve never been there before,” said Rick Kahler, president of the Kahler Financial Group. “We’re going to have to guess and wait and see.”

With the deadline approaching, new developments are occurring every day. On Tuesday, Senate Minority Leader Mitch McConnell suggested that an agreement was impossible and floated a proposal to let President Barack Obama increase the debt limit himself by up to $2.5 trillion if he offsets it with spending cuts.

Democratic officials who participated in the session said Obama did not reject the Senate Republican leader's suggestion, but emphasized it was not his preferred approach. A statement issued later in press secretary Jay Carney’s name said the president "continues to believe that our focus must remain on seizing this unique opportunity to come to agreement on significant, balanced deficit reduction."

Obama, for his part, suggested Tuesday that if Congress misses the deadline, he “cannot guarantee” that the federal government could pay Social Security benefits.

Causing the problem is the federal government’s persistent deficits. Spending has outpaced revenue for the past decade, with the most recent deficits equaling 10 percent of the entire economy. If current policies don’t change, the national debt is projected to increase from around 60 percent of the economy to almost 150 percent of the economy by 2030.

Local financial experts say a failure to reach a deal by Aug. 2 won’t be an immediate economic catastrophe.

“The government wouldn’t default,” said John Hanson, executive vice president at Black Hills Community Bank.

Unlike a true default, in which the government declares that it won’t pay a portion of its debts, failure to raise the debt ceiling will likely mean the government delays payment on its obligations. That could mean holders of government debt don’t get their payments right away, or it could mean a partial government shutdown as other federal spending ceases -- such as Social Security checks, as Obama suggested Tuesday.

“It’s a case of who do you believe?” said Kahler. “There are those that are saying they’ll stop sending out Social Security checks, the markets will go into a tailspin. There’s others suggesting that’s a lot of scare talk, that none of that will happen.”

Economist Don Frankenfeld believes the immediate impact of the country hitting the debt ceiling will be “somewhat remote” -- but “the stock market is likely to take a dive.”

Kahler agreed and said that savvy investors should see such a stock market drop as a buying opportunity if other investors panic and sell.

The day after the country hits the debt ceiling, Kahler said, all the fundamentals of the economy will still be the same.

“What’s really changed?” he said. “It could give us a good chance to buy some bargains.”

Interest rates are also likely to increase if the U.S. government stops borrowing money.

“When money becomes tight, interest rates rise,” Hanson said. “We all compete for the money.”

That means people looking to borrow money to buy a home or start a business will pay more for their loan -- if they can even get one. Kahler said banks expecting to receive payments from the federal government could find themselves in a credit crunch and scale back lending.

“If I was buying a house, I’d lock in the rate today,” he said.

But even if Congress reaches a deal to raise the debt ceiling, there will be economic impacts. Continued deficit spending could have a “crowding-out” effect on private investment.

“The credit of the government is better than the credit of private investors. Everyone else is necessarily down the line … when the money window opens,” Frankenfeld said. “Crowding-out is a problem, and the effect of crowding-out is a larger federal government and a smaller private sector.”

But efforts to end the deficit can also impact the economy.

“If we balance our budget today, which means we cut $1.5 trillion in spending … we will absolutely have another recession,” Kahler said. “You can’t take that spending out of the economy and not feel it.”

Balancing the budget in one fell stroke through tax increases would have a similar effect, he said.

Most proposals being discussed at the federal level involve less drastic cuts, on the scale of $200 billion or $400 billion per year over a decade.

But sharp reductions in the country’s deficit could also benefit the economy, by opening up more space for private businesses and ending uncertainty about the country’s fiscal future.

“The accumulation of debt is … scaring the capital markets and the private sector,” Kahler said.

In the long run, experts are unanimous that massive deficits need to end.

“That is our prescription for prosperity,” Frankenfeld. “But … in the long run, we’re all dead. We need to worry about the long run, but we need to worry first about Aug. 2.”

The Associated Press contributed to this report

Contact David Montgomery at 394-8329 or david.montgomery@rapidcityjournal.com

 

 

Copyright 2015 Rapid City Journal. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

(8) Comments

  1. Carolina
    Report Abuse
    Carolina - July 13, 2011 1:53 pm
    PatriotofPast perhaps you didn't hear but Mr. Bush dipped into those funds to fight wars.
  2. shunkaska
    Report Abuse
    shunkaska - July 13, 2011 11:05 am
    This is all about spending, period. We have enough taxes being paid its about the pork in the budget. It like all of us deal with it every day. I have x amt of money, It is not the money I make its what I think I deserve, new cars, bigger house, not so much needs as wants that lead to trouble. We have way to many standing in line for hand outs. I was helping at our HS Lunch program. This young lady was searching the internet on her cell phone, had a I Pod listening to music and 3 tats on her leg...she gets free lunches. At $1.50 a day for a meal her internet service for her phone could pay for her meals, yet we abuse these programs. I feel the federal gov has us on the edge of the cliff already, we need to step back. The media is showing Obama threatening our elderly about their checks, yet the ruth is we have money for SS and other programs, it just misleading info dumped on us.
  3. Jim Stewart
    Report Abuse
    Jim Stewart - July 13, 2011 10:58 am
    I heard all this doom and gloom back in May when the country was supposedly up against the debt limit. But lo and behold the Treasury Department found a way to keep going. The same thing will happen in August, the feds have billions coming in every month and, for once, they will have to prioritize their spending.
  4. Lucius Vorenus
    Report Abuse
    Lucius Vorenus - July 13, 2011 10:49 am
    An Owe-bama flashback: “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure,” he said. “It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Leadership means that ‘the buck stops here.’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt and a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America’s debt limit.”

    Back to the future: Owe-bama has now abolished the notion of leadership failure. He and his newly formed Pea Party are wholly devoted to raising the debt ceiling, thus penalizing the citizenry with additional trillions of debt.
  5. PatriotofPast
    Report Abuse
    PatriotofPast - July 13, 2011 10:40 am
    Obama said he could not garantee Social Security Benefits would be paid if the deadline is missed...
    I always thought Social Security Funds were in a seperate account, Not the General Fund? Did those Politicians SPEND all the Social Security money? Get the Pitch Forks!
  6. Sicangu Warrior
    Report Abuse
    Sicangu Warrior - July 13, 2011 9:49 am
    Chicken Little said mainstream America will be thrust into an economy like Tribal Nation communities in South Dakota have been enduring since at least 1924. If the sky was really falling Senator Thune, Senator Johnson and Representative Noem would be preparing and protecting those most vulnerable in our State for a catostraphic blow. Their silence must be an indication of the "All clear, nothing going on here"
  7. Inthemiddle
    Report Abuse
    Inthemiddle - July 13, 2011 9:27 am
    Rickdm said: "I say lets use the politians fund raising money ( like Obama @ $86 million ) to help pay the debt and it will be put to good use. Do away with the lifetime money our reps get and a few things like this. "

    There's a man that has tried a couple of times (without success) to run for the Presidency that has been in Congress for many, many, years. He has never signed the entitlement package (lifetime benny's)and has loudly stated he never will. He is known in the Congress as 'Dr. No'.... might be worth looking into and I do not mean using the mainstream media for this information.
  8. Rickdm
    Report Abuse
    Rickdm - July 13, 2011 7:36 am
    I say lets use the politians fund raising money ( like Obama @ $86 million ) to help pay the debt and it will be put to good use. Do away with the lifetime money our reps get and a few things like this.
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