Recession Looms If Treasury Uses Tools to Prevent a Default
The U.S. Treasury has the means to avoid a debt default even if Congress fails to raise the government’s $16.7 trillion borrowing limit. The bad news is that it can’t prevent a recession.
Economists at Goldman Sachs Group Inc., IHS Inc. (IHS) and BNP Paribas SA said they expect the Treasury to husband the tax money it collects to make sure it can meet interest payments on the nation’s debt. Other obligations, from salaries of government workers to payments to defense contractors, would face the ax. The result: $175 billion less in government spending during November alone, said Goldman’s Alec Phillips in Washington.
“The cutting would be so huge it would put the U.S. back into recession,” said Jim O’Neill, former chairman of Goldman Sachs Asset Management who is now a Bloomberg View columnist.
Treasury Secretary Jacob J. Lew has said the “extraordinary measures” he uses to avoid breaching the debt limit will be exhausted no later than Oct. 17. He said the Treasury will then have about $30 billion on hand, while net expenditures can be as high as $60 billion on some days.
That would leave the government unable to pay all its bills. The Treasury typically takes in about $7 billion daily in income and payroll taxes, though those amounts can vary significantly from day to day, the Congressional Budget Office said in a Sept. 25 report.
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http://www.bloomberg.com/news/2013-10-09/recession-looms-if-treasury-uses-tools-to-prevent-a-debt-default.html
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