May 16. This is the date when the fed­eral gov­ern­ment runs out of cash, accord­ing to the Trea­sury Depart­ment. For oblig­a­tions to be met after that, Con­gress must autho­rize an increase in the allowed national debt.

Tim­o­thy Gei­th­ner is tak­ing action this week to buy a lit­tle more time; he’s sus­pend­ing the issuance of spe­cial Trea­sury secu­ri­ties that sub­si­dize states’ and local­i­ties’ infra­struc­ture improve­ments. He has stated that he will take addi­tional actions as we approach the Day of Reckoning.

I’ve talked about this before, but it bears repeat­ing. With­out an increase in that debt ceil­ing, the fed­eral gov­ern­ment will be forced to choose between two options:

  1. Default on the debt
  2. Shut down major por­tions of the government

Default­ing on the debt would have a dis­as­trous effect on the US econ­omy. Assum­ing the US would be able to issue any addi­tional debt in the future, the inter­est rates for those bonds would be sub­stan­tially higher than they have been his­tor­i­cally. For the past cen­tury, there was no safer place to park money than in United States debt. This cer­tainty trans­lates into lower inter­est rates, because the reduced per­ceived risk leads lenders to feel no need for a risk pre­mium (in essence, a higher rate includes a vir­tual insur­ance pol­icy). If a default occurs, it will be at least sev­eral gen­er­a­tions before that risk pre­mium will disappear.

That higher per­ceived risk will also trans­late into a much weaker dol­lar, since the dol­lar will stop being used as the default (sorry) global cur­rency. Just as the US debt has his­tor­i­cally been con­sid­ered the safest place to park money, so, too, have dol­lars them­selves. The Euro­pean Union, who has taken great pains to avoid any defaults of their own debt, will most likely become the econ­omy of choice for safe park­ing, which would result in a dra­mat­i­cally stronger euro.

While I doubt that many in Con­gress are sin­cere about refus­ing to allow the debt ceil­ing to rise, I have no doubt that many in Con­gress see this as an oppor­tu­nity to extort what­ever con­ces­sions they’ve been itch­ing for since the last bud­get bat­tle a few weeks ago. And, given that our exist­ing sys­tem rewards those who make long-​​term dam­ag­ing deci­sions if they have short-​​term ben­e­fits, I also have lit­tle doubt that there will be sig­nif­i­cant saber-​​rattling about default as a means of show­ing how “seri­ous” they are. If the only peo­ple who would be affected by this were mem­bers of Con­gress, I’d be fine with it. But it hurts all of us when they do this, because it changes the per­ceived risk of United States debt.

In other words, merely pre­tend­ing that the US might default is enough to lead investors to start hedg­ing their bets, trans­lat­ing into higher bond rates and a weaker dol­lar. The dol­lar is right now near­ing its mod­ern his­tor­i­cal low point (which it reached two years ago), and this would almost cer­tainly push it to a new low.

Why worry about a weak dol­lar? After all, it makes our exports more afford­able, which should improve employment.

But a weak dol­lar hurts us in caus­ing infla­tion in the one com­mod­ity that dri­ves almost every­thing in our econ­omy: oil. We’re already see­ing some of those effects, which I warned about a cou­ple of months ago in “Dou­ble Dip.” With gaso­line prices firmly above the four-​​dollar mark, people’s behav­iors are now begin­ning to change again, and dis­cre­tionary spend­ing is drop­ping. I’m going to go out on a bit of a limb here and pre­dict that we’ll see worse earn­ings reports in the next quar­ter, par­tic­u­larly in the busi­nesses that depend heav­ily on dis­cre­tionary spend­ing. Let’s see if I’m right. (This is one time I’d rather be wrong.)

I also men­tioned before that we are look­ing at a cut of 43% of total spend­ing, if we do noth­ing to raise the debt ceil­ing. To give a lit­tle per­spec­tive, that is larger than the entire dis­cre­tionary bud­get. We could shut down all dis­cre­tionary spend­ing, and we’d still be left with some “manda­tory” spend­ing not hap­pen­ing. And, of course, we’re not going to cut the defense spend­ing to zero. Or the FAA. Or many other agencies.

So we have to choose at that point what “manda­tory” spend­ing we will not make. Medicare? Med­ic­aid? Unem­ploy­ment insur­ance pay­ments? We could cut all of those to zero, and cut all non­de­fense dis­cre­tionary spend­ing to zero, and that would just barely make ends meet.

I point all of this out to illus­trate the absur­dity of those who sug­gest that the debt ceil­ing can be used as a forc­ing func­tion to solve the debt prob­lem imme­di­ately. We don’t have a choice in the mat­ter. We have to raise the ceiling.

And then work on solv­ing the budget.