Goldman Sachs Adds Voice to Debt Ceiling Chorus
As much as 4.2 percent of the annualized U.S. gross domestic product could vanish if Congress doesn't raise the $16.7 trillion debt ceiling this month—potentially knocking the U.S. economy into a quick downward spiral, Goldman Sachs Group Inc. warned investors over the weekend.
The U.S. Treasury Department will run out of cash by October 31—if not sooner—if Congress doesn't increase the debt limit by October 17, according to a Goldman Sachs report released Saturday, "The Debt Limit: How, When, and What If" [PDF]. Failure to raise the debt limit before Treasury exhausts its cash balance would force the agency to rapidly cut its spending in an effort to avoid hitting the debt ceiling, possibly triggering the pullback of more than 4 percent of GDP, the report says.
"The effect on quarterly growth rates (rather than levels) could be even greater," the report says. "If this were allowed to occur, it could lead to a rapid downturn in economic activity if not reversed very quickly."
The Treasury, the U.S. Chamber of Commerce, and other business organizations from across the country also have said an economic catastrophe is at hand if Congress doesn't act on the debt limit. A recession brought on by the debt ceiling impasse in Washington, D.C., could be worse than the Great Depression, according to a report from the Treasury.
Representative Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, said Friday that Congress doesn't have to vote to raise the debt ceiling before October 17 to stave off default. Treasury has the power to pay the interest and principal on bonds before it takes care of other government expenses, he said.
If the debt limit increase doesn't happen this month, Treasury would figure out how to make interest and principal payments, Goldman Sachs expects. But prioritizing other obligations could be unfeasible.
"Technical complexities and legal uncertainties might prevent a full prioritization of all payments, but we do believe that the Treasury could ensure that enough cash is available to make interest payments on Treasury securities," the Goldman Sachs report says.
During a tour Sunday of Washington interview shows, Treasury Secretary Jacob Lew said the consequences of prioritizing obligations—including interest and principal payments—are "very bad."
"What happens if you don't pay millions of people on Social Security?" he asked on Fox News Sunday. "What happens if you don't pay hospitals and health care providers across the country?"