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Debt ceiling: With debate on hold, where is US economy headed now?

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The debt-ceiling battle

President Obama wants Congress to authorize an increase that will allow the government to pay its bills for several years. Republicans, while temporarily waiving a demand that increases in the debt ceiling be matched dollar-for-dollar with spending cuts, still hope to use the issue as leverage in negotiations over the federal budget.

How damaging could the battle be?

In mid-January, US Treasury Secretary Timothy Geithner, in a letter to Congress, said the government had, since the beginning of the year, been juggling accounts to meet its debt obligations and pay for such things as Social Security checks, veterans' benefits, and money owed to contractors.

"Even a temporary default with a brief interruption in payments that Congress subsequently restores would be terribly damaging," Mr. Geithner warned.

With the imminent threat of default removed for now, the next potential challenge to the economy could come from sequestration, the across-the-board automatic government spending cuts that were the price of the last fight over the debt ceiling. To avoid sequestration, Congress must find a way to either add revenues or reduce spending by $85 billion by March 1. Then, by March 27, Congress has to pass a continuing resolution to fund government operations.

In a Jan. 13 memo to clients, Pete Davis of Davis Capital Investment Ideas said he expects Congress will figure out a way to avoid sequestration.

"They will go to great lengths to avoid sequester; it is unlikely to go into effect," he says.

Even if sequestration were to go into effect and Congress were to fail to pass the continuing resolution, budget experts don't believe that would drive the economy into a downturn unless the congressional impasse dragged on for a long time.

But the potential for a default on the debt could be even more dangerous for the economy than the fiscal cliff, says Dan Meckstroth, chief economist for the Manufacturers Alliance for Productivity and Innovation (MAPI) in Arlington, Va.

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