Third, if a standoff on raising the debt ceiling lasts for a significant amount of time, the alternatives to borrowing eventually may not be enough to provide the government with the cash it needs to meet its obligations. Even at that point, however, a default wouldn’t be automatic because payments to existing bondholders could be made the priority while payments to others could be delayed for months. There’s no way to know, however, what “eventually” means because the government has never had to resort to such extreme cash management practices. It could be months.
Fourth, all of this means that those who think refusing to increase the federal debt ceiling when it is reached later this year will force the White House to accept budget changes will likely find the administration surprisingly unmoved, perhaps for months to come. If the administration is willing to use all of the cash management techniques available to it, the biggest negative reaction will likely come from Wall Street and those whose payments are delayed. Uncertainty in the schedule for auctioning Treasury securities will upset the bond market and it may express its unhappiness both rhetorically and with higher interest rates.
But the confrontation is far more likely to be a war of words than an actual battle over the budget with both sides fixated on blaming the other. That’s why those who have been forecasting an epic political spectacle because of the debt ceiling are likely to be disappointed and frustrated.
Stan Collender is a partner at Qorvis Communications and founder of the blog Capital Gains and Games. He is also the author of “The Guide to the Federal Budget.”