Debate begins in earnest as U.S. hits debt limit

Rather, that ringing sound you hear is the opening bell in a fight that's likely to last a full 15 rounds.

It's a moment the Obama administration has warned about for months. Without congressional action, the Treasury Department will be shut out from the bond markets and the country could eventually default on its obligations, an event that would roil markets and economies across the globe.

There will be little immediate financial impact when the United States reaches its existing $14.294 trillion debt ceiling, as the Treasury Department says it can stave off a default until early August. Observers don't expect Congress to swing into action until the last possible minute.

Bond markets have remained placid as traders calculate that despite the theatrics in Washington, the chances of default are extremely small.

"I don't think this is a big story yet," said Dan Ripp, an analyst with Bradley Woods, a securities firm in New York.
Budget experts say the debt limit provides an opportunity to address the country's long-term fiscal problems before it courts a Greek-style debt crisis.
"Nothing blows up next week, but the clock is ticking now. We need to get on top of this problem," said Alice Rivlin of the Brookings Institution.
Unlike nearly every other developed country, the United States can't increase its borrowing authority without legislative action.
This is a mixed blessing for Congress: The public is overwhelmingly opposed to a debt-limit increase, and the vote to raise the limit is always politically painful. But it gives lawmakers further leverage over federal spending.
"The beauty of the debt ceiling issue is it gets results," Senate Republican Leader Mitch McConnell said on Thursday.
Lawmakers from both parties say they won't back an increase without steps to ensure that debt remains manageable.
Urged on by the conservative Tea Party activists who handed them control of the House of Representatives last fall, Republicans are calling for trillions of dollars in spending cuts. Democrats say tax hikes need to be part of the solution.
As the two sides maneuver for advantage, the Treasury Department will have to dip into other pots of money, such as government employee pension funds, to pay the bills.
The agency has plenty of experience in using what it calls "extraordinary measures" to keep the wolf from the door. According to the Congressional Research Service, Treasury has had to use alternate sources of funding six times since 1985.
Treasury will run out of options eventually, as the government currently spends each month about $125 billion more than it takes in.
According to CRS, the government would have to boost tax revenues by two-thirds or eliminate spending on the military, scientific research and all other discretionary programs to avoid a default.
The other alternative -- refusing repayment of its bonds -- would likely destroy the country's sterling credit reputation, push stocks down by at least 6 percent, for a start, and possibly lead to another recession, according to an analysis by the centrist think tank Third Way.
TAKING A HARD LOOK
The debt ceiling debate is forcing lawmakers to take a hard look at the country's fiscal path, which has changed dramatically for the worse over the past decade.
In January 2001, the non-partisan Congressional Budget Office projected the country would run a surplus of $5.6 trillion over the coming 10 years.
Instead, debt more than doubled as President George W. Bush cut taxes, waged two wars and expanded health benefits. The 2008-2009 recession blew a deeper hole in the budget, pushing annual deficits to their highest levels relative to the economy since World War Two.
By the end of the decade, CBO's projected surplus was nowhere to be found and the country had instead racked up an additional $6.2 trillion in cumulative deficits.
Experts say the United States will need to trim deficits by roughly $4 trillion over the coming 10 years to keep debt from rising to dangerous levels relative to the economy.
Democrats and Republicans agree on some programs, like crop subsidies, which should come under the knife, but those are dwarfed in dollar terms by the areas in which the two sides disagree, such as healthcare programs and taxes.
As the 2012 election cycle gets underway lawmakers will have more incentive to dial up the rhetoric.
Markets may impose a discipline of their own. Standard & Poor's warned last month that it might downgrade the United States' top-notch debt rating if Washington doesn't tackle its fiscal situation, and bond yields could rise if a substantial deal does not emerge from the debt ceiling talks.
"That's the kind of thing that could emerge over the long term," Ripp said.