CNNMoney: Fiscal Cliff, Meet Debt Ceiling

Tuesday, 20 Nov 2012 07:52 AM

By Michael Kling

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While Congress and the president begin a high-stakes game of chicken over the federal budget and coming fiscal cliff, another game of chicken is quickly approaching.

If Congress doesn't soon reach a budget deal to avoid the fiscal cliff, it may end up fighting another contentious battle over the debt ceiling at the same time.

The federal government might hit its $16.394 trillion debt limit by the end of the year, CNNMoney reports, adding that it could delay the risk of defaulting into early 2013 through "extraordinary measures" like temporarily suspending investment in federal worker pensions.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

Congress has until Dec. 31 to reach a deal to avert automatic tax increases and spending cuts. It might continue negotiating into 2013 after tax rates increase, but make tax cuts retroactive to Jan. 1.

The last time Congress raised the debt ceiling, in 2011, its controversial fight roiled financial markets and prompted Standard & Poor’s to downgrade the United States. In a game of political brinkmanship, Republicans seeking spending cuts publically talked about letting the country default.

In May, House Speaker John Boehner, R-Ohio, said Republicans would demand that spending cuts must exceed increases in the borrowing limit.

Some observers are optimistic that Congress will reach a deal before Dec. 13. Ben White of Politico believes Republicans are more likely to concede in negotiations after losing in the elections.

"Nearly every signal from Republicans suggests they understand they have lost the war over taxes going up on the wealthiest Americans and are just trying to figure out how to get the least objectionable deal that includes real spending cuts and a trigger for tax and entitlement reform," White writes in his newsletter.

Republicans understand that they will be blamed if taxes increase on Jan. 1 and if the economy suffers, he says. Besides losing the presidential election, the party lost seats in Congress but hang onto their House majority.

"So while talks will continue and the public kabuki will play out for a few more weeks," he writes, "we are really just waiting on a final score."

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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