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Here We Go Again?: U.S. Likely To Hit Debt Limit By End Of 2012

By Travis Waldron on November 1, 2012 at 11:10 am

"Here We Go Again?: U.S. Likely To Hit Debt Limit By End Of 2012"

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The federal government is likely to hit its $16.4 trillion borrowing limit by the end of the year, the Treasury Department announced this week. Even if Treasury utilizes accounting methods to give Congress more time to raise the debt ceiling, the debt limit will be reached in the opening month of 2013. At the same time, the country is poised to hit the so-called “fiscal cliff,” the automatic spending cuts and tax increases that are scheduled for the end of the year.

That could result in another debt ceiling-related disaster, much like the one that brought the U.S. to the brink of default in the summer of 2011. That debt limit fight, brought on by Republicans who demanded spending cuts equal to the amount of the increase in the nation’s borrowing limit, led to the nation’s first-ever credit downgrade, hampered economic and job growth, and put in place the “fiscal cliff” that now threatens the country’s economic recovery. Here’s a reminder of what happened when the GOP took the debt limit hostage in 2011:

Led to a credit downgrade: The U.S. credit rating was downgraded for the first time in history in August 2011, and the ratings agency Standard & Poor’s repeatedly cited the Republicans’ refusal to consider tax increases in their decision to lower the rating.

Hurt the economy: The debt fight and the uncertainty around it stunted economic growth at a time when the nation was limping through an economic recovery. The stock market fell 581 points in the final week of July and another 1,300 points in the beginning of August, immediately after a deal was reached. As Scott Lilly from the Center for American Progress wrote at the time, economic analysts suggested that the policy uncertainty caused by the debt fight may have cost the U.S. more than a million jobs and reduced economic output by 2 percent. Monthly job growth was cut in half during the three-month impasse, and “employment is likely still below where it would otherwise have been,” according to economists Justin Wolfers and Betsey Stevenson. On top of that, Treasury estimated that the debt fight increased borrowing costs by at least $1.3 billion.

Created the “fiscal cliff”: The “fiscal cliff” was spawned in part by the debt ceiling debacle and Republicans’ refusal to raise revenues. The deal that ultimately raised the debt ceiling created a “supercommittee” tasked with negotiating a long-term debt reduction plan. That committee predictably failed when Republican members walked away from the table because Democrats insisted that revenues be a part of any deal, and that failure triggered sequestration, the spending cuts that now make up a significant portion of the fiscal cliff.

Analysis has already shown that the fiscal cliff would trigger a larger dose of austerity than even Europe’s plagued economies have pursued in recent years. Now, negotiations to avoid it are almost sure coincide with negotiations to raise the debt ceiling, creating a disaster scenario that could have perilous effects for the nation’s economic recovery.

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