Sobering Warning from Treasury on the Nation's Debt Limit

You know those letters they send out when you are late on a bill -- the letters that come in an official-looking envelope and read like they were written by the Supreme Court. They include dire warnings about credit ratings that will never recover. They hint your kids will end up wearing sack cloth. Your good name forever smudged!

That's the kind of letter the Treasury sent to Congress today.

The issue is the nation's debt limit. It's not really that different than a credit card limit, except this is kind of like the world's credit card limit. Everyone who has invested in the United States expects this credit limit to be lifted. If that doesn't happen, the Treasury warns, the financial world as we know it will come to an end.

A couple key points. First, because the deficit is so large, the accounting games the Treasury used to play to keep writing checks and avoid default in the face of a debt limit restriction -- those games only buy a few more weeks, eight at the most.

Second, the debt limit is not a government shut down. Congress can close down Yellowstone Park and reopen it a week later. No one loses except those families planning their vacation.

Third, a default, even on just a few debt payments, would signal the world that the U.S. is in worse shape than anyone thought. Our borrowing rates would jump, costing us untold billions. The Treasury wants to make sure new members of Congress understand the debt limit is not the same thing as a government shut down. The latter is theater, the former is financial Armageddon.

Finally, the Treasury letter -- you can find it here -- makes it clear that it is not a good idea to wait. When the bills come due, it is best to pay them early and save yourself the pain of late fees and annoying calls.

The Treasury says the government will probably run out of borrowing room by March 31, mid-May at the latest. It might be able to stretch those dates by several weeks. That's it. The letter has been delivered. No one can say Congress hasn't been warned.

Source: http://www.pbs.org/nbr/blog/2011/01/sobering_warning_from_treasury.html

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