Debt Ceiling/Government Shutdown

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Congress continues to work on a deal to avoid the deadline to raise the debt ceiling and end the government shutdown. Economists Brian Cary of Salt River Project and Alan Maguire of the Maguire Company will discuss the impacts of the political drama in Washington.

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Ted Simons: Good evening. Welcome to "Arizona Horizon." I'm Ted Simons. Congress continues to work on a deal that would avoid the deadline on raising the debt ceiling and end the government shutdown. Economists Brian Cary of Salt River Project and Alan Maguire of the Maguire Company are here to discuss the economic impact of the political drama in Washington. Good to have you both here. Thank you so much for joining us. We should note, before we get started now, that the Senate -- we're taping this at 5:30 -- that the Senate has as of our taping just moments ago passed the bill and it looks as though the House will be ready to vote. With that in mind, we're almost there -- let's get the parameters, the definitions. What is the debt ceiling?

Brian Cary: Well, the debt ceiling is the legal limit for the amount of debt that the United States can have outstanding at any time. It's a big number. It's in the neighborhood of $16 to 17 trillion, which is the total of one year's annual output of the whole U.S. economy.

Ted Simons: And raising the debt ceiling means borrowing to find that money, correct?

Brian Cary: Yeah, and in simple terms, we're still running a deficit. We're spending more money than we're taking in over time. There are ebbs and flows in the cash flow but sooner or later you have to raise the legal limit that gives the Treasury the authority to issue new securities to refinance the debt to make interest payments and issue new securities.

Ted Simons: And again, as a general issue here, why is raising that debt ceiling so important?

Alan Maguire: It's important because we're, as Brian said, running a deficit. That means we have to borrow money every year to pay all of our bills. That's the real challenge. It's important also because the reason we're having this fight right now is because we have sort of broken the historical appropriations process. It used to be we had a lot of little decisions on the budget process. Now we wrapped them all up into one big C.R., so it's an all or nothing vote. The minority party, regardless of who the president is, the minority party in the Congress typically uses that debt ceiling vote as a lever they can pull on to try to impact the spending pattern.

Ted Simons: They use it as a lever, but has this - it seems like threatening to not raise the limit is somewhat of a recent phenomenon.

Alan Maguire: Oh, 20-plus years. As the appropriations process has evolved, it's become more and more of a big deal, but it's been around for a number of years.

Ted Simons: Let's say this deal that they're working on right now, the Senate has passed it, the House, as we're speaking, is working on it. What happens if the ceiling isn't raised? Do we default on a drop-dead date?

Brian Cary: Probably not. What would ordinarily happen -- we have smart money managers in Washington, believe it or not, like most big companies and small companies do. We have rearranged the furniture a little bit in terms of paying the bills. The first thing we would do wouldn't necessarily be to refuse to make interest payments. We would make good on the debt and do things that we've already seen that are typically happening during the government shutdown, maybe delay spending on some other obligations, lay people off. A variety of measures which in the shore run could allow them to kick the can a little bit farther. But in the end, have to be able to have that authority raised or the risk of default magnifies.

Ted Simons: Again, the default, the risk is there but if something were to blow up here later on this evening, we don't necessarily default tomorrow, do we?

Alan Maguire: You would hope not because the Treasury Secretary has the authority and he has the obligation to pay the interest on the debt first. To give you some perspective about, annual cash coming into the U.S. treasury is about $2.5 or 2.6 trillion a year. Interest on the debt is about $250 billion. So there's about ten times more cash coming into the treasury for all purposes than needs to go back out for interest payments. If you had a $3,000 a month income and a $300 a month mortgage and you ran short, you probably would pay your mortgage first, not do something else.

Ted Simons: With that in mind, if something bad happens again, and we're looking at this again in January and February as far as kicking the can down the road, these are short term solutions here, we could have the same argument in a few months, but if the debt ceiling is not raised, impact on the U.S. economy, impact on the U.S. market, world economy, world markets. What would likely happen?

Brian Cary: Well, anyone can speculate. Not to be a scare monger or anything like that, it would be a pretty grim situation. I think we would see some implications before an actual default would take place. Ultimately, the faith and credit of the United States is a matter of faith. That's what makes the economy go. If there were a sell-off of U.S. securities that would reduce their value, that has huge implications for collateral on loans throughout the entire financial system. That's kind of what happened in a different way back in 2008, where people lacked confidence and faith to make transactions. You're not going to loan money to somebody unless you think you'll get it back. Once that confidence is shattered it's very difficult to restore. Literally what would happen is, yes, a default. That would wreck the value of U.S. securities. That's why I think the saner heads are prevailing. They realize that the results of that would be cataclysmic.

Ted Simons: And we're hearing again from those who say - I'm hearing the debt limit is not that big a deal, that a default would not be that big a deal, that this is scare mongering by some. You agree with that? Does that make any sense?

Alan Maguire: Couple things might help. To pick up on what Brian said, U.S. bonds are the zero risk investment in the world. The entire financial markets worldwide trigger off U.S. debt. It's the full faith and credit of the United States government, the largest economy in the world. It's where everything builds up from. The funny thing is almost all the statements are true in the right context. But what you really want to think about is the word default should never be used in connection with U.S. government securities. That's just a stupid thing to do. We may not pay all of our bills but we would always pay those bills. That's one of the things that is so upsetting to people. We're raising the rhetoric instead of calming it. We should be calming the rhetoric down. America spent 230 years building up its credit rating. It's the best in the world. Alexander Hamilton in 1789 creating U.S. debt for Revolutionary obligations. That's how long we've been working on this, and we're going to throw it all away on some Tuesday afternoon? That would be nuts.

Ted Simons: So is the world's reserve currency, the anchor for everything out there, does it take a hit even with the threat, even with the talk, even with now just a few months before we may go through all this again, does it take a hit? If it does, where does everyone go? Where is there more faith, more credit?

Brian Cary: That's a good question. That's one reason why we have seen the financial markets hold up pretty well. Today the Chinese market was off a little bit. Most every other market in the world was reacting positively to the news of a prospective agreement. But, we can't go on like this forever. If we compromise, if we create cynicism or doubt about the United States being able to manage its own affairs, then smart money might eventually look elsewhere. So far, it's the safe place to be.

Ted Simons: Real quickly, will smart money look elsewhere?

Alan Maguire: Right now there's no place else to go. It took 100 years for the center of the financial world to move from London to New York and America. That doesn't happen quickly. We still have the best rule of law in the world.

Ted Simons: Gentlemen, good to have you both here. Thanks for joining us.

Brian Cary:Economist, Salt River Project;Alan Maguire:Economist, The Maguire Company

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