WASHINGTON — Treasury Secretary Timothy Geithner informed Congress on Monday that the United States has reached its legal debt limit, setting off a ticking time bomb that could explode in less than three months if lawmakers can't bridge differences and allow more government borrowing.
In hitting the $14.3 trillion debt ceiling — the limit on how much the government can borrow — the Obama administration began temporarily halting payments to federal workers' retirement accounts and started borrowing from those funds, to be restored later.
Geithner sent a letter to Senate Majority Leader Harry Reid, D-Nev., warning that the government can move money around for about 11 weeks, but if a new debt ceiling isn't agreed to by Aug. 2 , the U.S. government could effectively default on its obligations to its creditors.
He warned of "catastrophic economic consequences for citizens" unless Congress raises the debt ceiling.
An increase of about $2 trillion is expected, enough to get the issue past the 2012 elections before Congress would have to lift it again.
Republicans who control the House of Representatives vow to link raising the debt ceiling to cuts in government spending of at least equal measure.
"As I have said numerous times, there will be no debt limit increase without serious budget reforms and significant spending cuts, cuts that are greater than any increase in the debt limit," said House Speaker John Boehner, R-Ohio.
Boehner has called previously for $2 trillion in spending cuts as part of any deal to raise the debt ceiling.
Wisconsin Republican Rep. Paul Ryan, the chairman of the House Budget Committee, repeated the link in a speech Monday.
"For every dollar the president wants to raise the debt ceiling, we can show him plenty of ways to cut far more than a dollar of spending," Ryan told the Economic Club of Chicago. "Given the magnitude of our debt burden, the size of the spending cuts should exceed the size of the president's debt limit increase."
Republicans rule out tax increases and any significant cuts in defense spending. The United States continues to fight wars in Iraq and Afghanistan paid for with borrowing, the only time in U.S. history that wars weren't offset at least partially with some sort of tax.
Democrats insist that Social Security is off the table, as is an end to Medicare, but they are open to changes in Medicare funding.
If Congress fails to raise the debt ceiling by Aug. 2, it would force the Obama administration to choose between paying creditors or paying for military operations, Social Security and Medicare payments, and other commitments.
A government default on debts surely would trigger a harsh reaction from investors and could panic global financial markets, jeopardizing the U.S. and global economies.
It might not even take a default to have severe consequences for the U.S. economy, warned Mark Zandi, the chief economist for Moody's Analytics. Democrats and Republicans alike frequently cite Zandi's research.
Speaking to the National Economists Club last Thursday, Zandi scoffed at the idea that the government could simply prioritize payments to creditors and halt other spending commitments, as some Republicans have suggested.
"The global investors are going to ask themselves how long can policymakers pay me and not a Social Security recipient? So if I were a global investor, I would be bailing well before that, and interest rates would spike," Zandi said.
He added that the idea that deep spending cuts on the order that Republicans are calling for wouldn't harm the economy is "just wrong, dead wrong, particularly in the context of the kind of cuts we're talking about here."