You can spin all the scary tales of default you want, and they won’t believe you. | AP Photos Back in force: Debt limit deniers

Wall Street and the White House are warning that failure to raise the nation’s debt limit will result in an economic apocalypse. “There is no silver bullet. There is no magic wand that allows us to wish away the chaos that could result,” President Barack Obama said on Tuesday.

But there is a hard-core group of Republicans in Congress who say it’s just not true. Yes, the debt limit deniers are back in force.


You can spin all the scary tales of default you want and they won’t believe you. They say if the $16.7 trillion borrowing limit is not raised by Oct. 17, as Treasury demands, then the U.S. government will still collect more than enough cash each month to keep paying bondholders. And if Uncle Sam can’t pay Social Security recipients or anyone else while it forks over interest payments to the Chinese?

( POLITICO's full government shutdown coverage)

“Tough luck,” these people say. The nation spends too much as it is. Blocking a debt ceiling increase will provide the radical shock therapy the nation desperately needs to start living within its means.

“We have 10 times as much tax revenue as we’ve got annual interest on the debt obligations,” Rep. Mo Brooks (R-Ala.) said in an interview, offering the key talking point of the debt limit denial caucus. “So if the president does not want us to default on our credit or obligations, we won’t.”

Other members say they based entire campaigns on not boosting the borrowing limit.

“I ran on not raising the debt ceiling,” said Rep. Ted Yoho (R-Fla.). “We will not default. And I think it’s a lot of hype that gets spun in the media.”

( Also on POLITICO: Liberals talk 'nuclear option' on debt hike)

The persistence of this point of view helps explain how raising the debt limit transformed over the past three years turned from a largely pro forma exercise in grandstanding into a high-stakes game of political chicken with the fate of the global economy hanging in the balance.

The party out of the White House has long used debt limit votes as opportunities to score political points by arguing for spending restraint. Obama himself did this while a senator in 2006, voting against raising the debt ceiling, something the president now says he regrets. The debt limit deniers often point to that vote when making their case.

But these votes were generally done with an understanding that they were symbolic and that a debt limit increase would still pass. That cozy consensus is now pretty much gone, blown away by tea party candidates elected in 2010.

( WATCH - Debt ceiling showdown: By the numbers)

“Spending a day highlighting the debt and the deficit in Congress as part of raising the debt ceiling is probably a healthy thing,” said Tony Fratto, a consultant at Hamilton Place Strategies and a White House and Treasury official under President George W. Bush. “But the moment you start talking seriously about not raising the debt limit it becomes dangerous. And a lot of members of Congress are now saying things that give evidence that they have no idea what they are talking about when it comes to the debt limit and the way government financing works.”

Fratto was speaking about the most fervent believers in the debt ceiling denial caucus, including Yoho, who recently told The Washington Post that failure by the U.S. to raise the debt limit “would bring stability to world markets.”

Yoho’s view is belied by current action in the global markets: Stocks are dropping triple digits each day, volatility is rising and Treasury is already facing far higher borrowing costs on short-term debt.

( WATCH - Shutdown: Flashback to November 1995)

There is growing fear that investors could start pulling cash out of money market funds, which hold large amounts of short-term government debt, possibly freezing up credit markets the same way the collapse of Lehman Brothers did in 2009, leading to the worst financial crisis since the Great Depression.

Richard Burr, Republican senator from North Carolina, said this week that he was “not as concerned as the president is on the debt ceiling, because the only people buying our bonds right now is the Federal Reserve. So it’s like scaring ourselves.”

This statement ignores that nearly $6 trillion — almost half of outstanding debt held by the public — is owned by foreign governments, including $2.4 trillion by China and Japan alone. Both of those nations this week warned the United States against doing anything that would put these massive investments at risk.

And it would not necessarily take a technical default on an outstanding bond for China, Japan or any other holder to start dumping Treasury securities over fear that so-called “prioritization” of payments to bondholders and some others would eventually fail and the U.S. would default.

Then there is the matter of cutting spending quickly enough to make sure incoming tax receipts match up with government commitments to Social Security, bondholders and other mandatory commitments.

Goldman Sachs estimates this would amount to immediately pulling 4 percent out of gross domestic product. For an economy growing only around 2 percent, that figure is an almost guaranteed ticket back to recession. And even ardent proponents of slashing government spending argue this big a cut this fast would be highly dangerous.

“I want to cut 20 percent of government spending if not more,” said Mark Calabria of the Cato Institute. “But this is the worst way to go about doing it.”

For current and former administration officials, getting across this message — across that none of the approaches put forward by the debt limit deniers is likely to forestall economic crisis — is like playing whack-a-mole: Knock down one argument and it just pops up somewhere else.

Treasury recently put out a long report on the potentially disastrous effects of breaching the debt limit and Secretary Jack Lew made the rounds of the Sunday talk shows to reiterate that there was no option but to boost the limit.

None of it changes the opinion of members like Rep. Steve King (R-Iowa), who told POLITICO that the possibility of a disastrous default was “a false narrative that’s been perpetuated by this administration.”

That kind of talk sends many heads to many desks.

“We feel like we have whacked this mole so many times,” said Mark Patterson, a senior fellow at the Center for American Progress who until recently served as chief of staff at Treasury. “One way to think of it is if you are a home owner and you keep paying your mortgage but you stop paying all your other bills. The next time you try to buy a house you won’t be able to. Your credit will be wrecked and your borrowing costs will skyrocket.”

Wall Street has been hammering this view as well, with CEOs meeting with Republican members of Congress to argue that there is no difference between defaulting on an actual bond payment and defaulting on other payments the government must make. Markets will view it the same way.

And they say splitting hairs over the actual date that Treasury runs out of money — most agree it’s probably at the end of October — is totally pointless. The day is coming, and when it arrives markets will react in a brutal fashion.

“A Federal debt default would rank as one of the more unprecedented economic and financial events in the country’s history,” Michael Cembalest, global head of investment strategy at J.P. Morgan Asset Management wrote in a note to clients. “The ghosts of Lyndon Johnson and Everett Dirksen are rumbling around the Capitol building, wondering what has gone wrong.”

Those warnings mean nothing to debt limit deniers, many of whom would not dream of listening to anything Wall Street has to say.

“They are trying to overstate their case to get their way,” said Sen. Rand Paul (R-Ky.) “I think if the president were a true leader, he would take default off the table and he would say, ‘We’re not going to default.’”

The hopeful view among Washington insiders is that most of the deniers don’t really believe what they are saying but are trying to harden their negotiating position and get Obama to cave in and offer concessions in return for a debt limit hike.

“Everything is a game in D.C.,” said Calabria. “And you grab what leverage you have. This is the only leverage they have. Are they playing a game of chicken? Yes, but that’s the only way things get done.”

Manu Raju and Burgess Everett contributed to this report.