President Obama, his shirt collar open and cuffs rolled up, is meeting in the Oval Office with Jack Lew and Tim Geithner, his incoming and outgoing Treasury Secretaries, and a small group of senior advisers. Brows furrowed, complexions pale, they are going over a soon-to-be-broadcast national address about the day’s events. Behind them, lights are set up, a lens is trained on the Resolute Desk.
This will be his third Oval Office address since assuming power: the first came as oil gushed from the Deepwater Horizon rig in the Gulf of Mexico, the second when American troops ended combat operations in Iraq.
Overnight, Asian markets suffered their worst fall since the financial crisis, and in the morning the Dow followed suit. They’re calling it Black Friday. Nouriel Roubini, the economist known as ‘Dr Doom’ for his bearish pronouncements during 2008, has been on television, warning of another catastrophe.
What will the President say? That after Congress failed to raise the debt ceiling, he has been saddled with a series of tough choices. Every month, his government makes around 80m payments, all of which have been cleared by Congress. Cheques go out to military personnel, social security claimants, the unemployed and the more than 2.5m full-time staff on the federal payroll, including him.
But now, he will say, Congress has in effect blocked his power to write those cheques and countless others. His government is expected to book revenues of around $277bn (£171bn) in the four weeks to 15 March. But in the same period, it needs to pay bills totalling about $452bn.
He can’t make up the shortfall unless Congress raises the $16.4 trillion debt ceiling. He will keep pressuring the Republicans. But meanwhile he has to continue paying America’s creditors because, as he said during a January press conference, “we are not a deadbeat nation”. That will cost just over $38bn between 15 February and 15 March, though interest rates could spiral.
Throw in Medicare and Medicaid, military pay and pensions, tax refunds, social security and unemployment insurance, and the tab already hits the magic number of $277bn.
That means he can’t fund benefits to America’s veterans (worth around $28.8bn) or pay cheques and benefits to federal employees($19.9bn). He can’t fund the education department ($16.8bn) – meaning, for example, no special education programmes. He will have to suspend the courts and the FBI. There will be fewer flights because he can’t pay for the air traffic controllers to show up to work.
He could do the sums differently. But there’s no escaping the fact that America – and the world – is in uncharted territory. He thought about opening up Fort Knox, and selling the country’s gold. But that wouldn’t raise more than few months’ cash. And imagine what would happen to the gold price if the US floods the market with its reserves.
Other escape routes were fraught with legal tangles. There was the idea of minting a $1 trillion platinum coin and depositing it with the Federal Reserve to free up the government overdraft, or using the 14th amendment of the US Constitution, which says the “validity of the public debt of the United States... shall not be questioned” to unilaterally raise the ceiling. But his lawyers stamped on both ideas. Besides, who would buy American debt if it came with the threat of a legal battle over its credibility?
It wasn’t supposed to be this way. For weeks now, the President and Congressional Republicans have been holding competing press conferences about raising the ceiling. Failure to do so, the President said before his second inauguration, “would be a self-inflicted wound on the economy”. He warned: “It would slow our down our growth, might tips us into recession... So, to even entertain the idea of this happening, of the United States of America not paying its bills, is irresponsible. It’s absurd.” As the talks continued, headlines changed daily. One minute, the two sides were making progress on raising the limit, the next there was a yawning, partisan gulf. But everyone – papers, pundits, markets – expected a deal in the end.
Last week, Vice President Joe Biden entered the fray, talking directly with the Senate minority leader, Mitch McConnell. The dynamic duo had cracked the debt-ceiling nut before, in 2011, and more recently sealed the (partial) pact on the ‘fiscal cliff’. They were expected to bring the two sides together again. Until they didn’t.
Now, the country faces spending cuts deeper than ones that had been due to come into force in January. An even bigger threat is a catastrophic default. As the bills add up and the markets convulse, higher interest rates on US debt could push the Treasury into a corner not unlike Greece. Except, of course, the US, whose dollar is the world’s reserve currency, is not Greece. It can’t renegotiate its debts without triggering a global economic catastrophe. It won’t, the President will say. The idea – it’s absurd.
* The 15 February date is the earliest estimate in a recent report by the Washington-based Bipartisan Policy Center of when the US government might exhaust the special measures put in place two weeks ago to buy time while negotiations continue over the debt ceiling.
The measures, which give the government about $200bn in extra cash, could last until 1 March, according to the report, which also projects the $175bn shortfall between February 15 and March 15, and other figures mentioned above. Without tendering exact dates, Tim Geithner this week confirmed the timeline of mid-February to early March.