Hitting the Ceiling: Disastrous or Utterly Disastrous?

Obama won’t, can’t negotiate over the debt ceiling, and Republicans still haven’t figured that out. So you have to say that it’s pretty likely that we will indeed hit the ceiling. Suppose that Obama’s lawyers tell him that extraordinary measures like just ignoring the ceiling or minting the coin are out. Then what?

Well, Goldman Sachs has a short paper (not online) arguing that the government probably could prioritize payments on Treasury bills, avoiding the breakdown of markets that would come from putting the world’s key safe asset into default. They don’t sound too confident. But even if they’re right, the government would still go into arrears on many other payments, from contractor bills to medical bills. And it would be forced into savage spending cuts, around 4 percent of GDP, that wouldn’t just cause hardship (Surprise! No Social Security for you this month!) but amount to a severely contractionary fiscal policy, sending us into recession if it lasted any length of time.

I think this is important. Lots of people have been focusing on the possibility of a mega-Lehman event, but even if we somehow avoid that, this will be a catastrophe.

http://krugman.blogs.nytimes.com/2013/10/06/hitting-the-ceiling-disastrous-or-utterly-disastrous/