Legislation introduced by Senator Pat Toomey (R-PA) would force the United States government to make interest payments on the national debt a first priority if Congress fails to raise the debt ceiling.
The bill is intended to prevent the US from defaulting on its loans by forcing the government to re-routing massive amounts of income to China, other countries and financial institutions before paying for domestic obligations, such as Social Security.
"Under no circumstances is it acceptable for the US to default on its debt," Sen. Toomey wrote at the Wall Street Journal last week. "Not only are we morally obligated to honor our debts, but we benefit greatly from the nearly universal conviction that those who lend to us will always be repaid, on time and in full."
Sen. Toomey notes that under his legislation, spending cuts would be sudden and severe in the event that Congress fails to raise the debt ceiling, but claims that "it would be even worse simply to raise the debt ceiling without regaining control of federal spending."
House Speaker John Boehner (R-OH) said Sunday that not raising the debt ceiling would mean a "financial disaster" for the US and the world, warning Democrats they must support big spending cuts before the GOP-controlled House will support the raising the ceiling.
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Deputy Secretary of the Treasury Neal Wolin addressed the proposed legislation in a statement, saying that "while well-intentioned, this idea is unworkable."
"It would not actually prevent default, since it would seek to protect only principal and interest payments, and not other legal obligations of the US, from non-payment," Wolin explained. "Adopting a policy that payments to investors should take precedence over other US legal obligations would merely be default by another name, since the world would recognize it as a failure by the US to stand behind its commitments."
"It would therefore bring about the same catastrophic economic consequences Secretary Geithner has warned against, including sharp rises in mortgage interest rates and other borrowing costs for families; reductions in the value of homes, 401(k)s and other retirement savings; and negative effects on the dollar and the safe haven status of Treasury bonds and other Treasury securities," he added.
In early January, President Barack Obama's chief economic adviser Austan Goolsbee echoed Geithner's warning.
"The impact on the economy would be catastrophic," he said. "The debt ceiling is not something to toy with."
"I don't see why anybody's talking about playing chicken with the debt ceiling. If we get to the point where you've damaged the full faith and credit of the United States, that would be the first default in history caused purely by insanity."
According to the Deputy secretary, "the only way to prevent default and protect America’s creditworthiness is to enact a timely increase in the debt limit."
