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Treasury Department: U.S. will Hit Debt Limit Monday, Triggering Tax Increases and Debilitating Cuts Known as “Fiscal Cliff”

The U.S. Treasury Department will begin  taking steps this week to delay hitting the government’s $16.4 trillion  borrowing limit, or else the debt limit would be hit on Dec. 31.

Treasury Secretary Timothy Geithner said in a  letter Wednesday to congressional leaders that the department will take several  accounting measures to save approximately $200 billion.

The government borrows about $100 billion a  month, so that typically would keep the government from reaching the limit for  about two months.

The move comes as President Barack  Obama and  the GOP congressional leadership are locked in negotiations  over how to avoid a  series of tax increases and spending cuts, known as  the ‘fiscal cliff,’ that  are scheduled to take effect next week.

Congressional officials said Wednesday they  knew of no significant strides toward a  compromise over a long Christmas  weekend, and no negotiations have been  set.

After conferring  on a conference call, the  House Republican leadership said they remain  ready for talks, but gave no hint  they intend to call lawmakers back  into session unless the Senate first passes  legislation.

‘The lines of communication remain open, and  we will continue to work with  our colleagues to avert the largest tax hike in  American history, and to address the underlying problem, which is spending,’ the  leadership said in a statement.

Obama  has sought to include an increase in  the borrowing limit in the talks.  But Speaker John Boehner and other Republican  leaders have demanded  concessions in return. The negotiations hit a stalemate  last week and  Obama and lawmakers are returning to Washington this week to  resume  talks.

Geithner says it is harder to predict how  long the delay will last because ongoing negotiations over tax and budget  policies make it hard to forecast what tax revenue and government spending will  be next year.

The borrowing limit is the amount of  debt  the government can pile up. The government accumulates debt two  ways: It  borrows money from investors by issuing Treasury bonds, and it  borrows from  itself, mostly from Social Security revenue.

In 2011, Congress raised the limit to nearly  $16.4 trillion from $14.3 trillion. Three decades ago, the national debt was  $908 billion. But Washington spent more than it took in, and the debt rose  steadily — surpassing $1 trillion in 1982, then $5 trillion in 1996.

It reached $10 trillion in 2008 as the  financial crisis and recession dried up tax revenue and as the government spent  more on unemployment benefits and other programs.

In August 2011, the rating agency Standard & Poor’s stunned the world by stripping the U.S. government of its prized  AAA bond rating because it feared that America’s dysfunctional political system  couldn’t deliver credible plans to reduce the federal government’s debt. S&P  decried American ‘political brinksmanship’ and concluded that ‘the differences  between political parties have proven to be extraordinarily difficult to  bridge.’

A year and a half later, the two political  parties are still as deadlocked as ever.

Despite S&P’s warnings and the political  stalemate, investors still want U.S. Treasurys. Given economic turmoil in Europe  and uncertainty elsewhere, U.S. government debt and U.S. dollars look like the  safest bet around.

That is why the interest rate, or yield, on  10-year Treasury notes has fallen from 2.58 Aug. 5, 2011 to 1.75 percent  Wednesday.

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Posted by on December 26, 2012. Filed under NY News,Slider. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.