I alluded to this yesterday, but let’s take a closer look at the coming fight over the debt limit. The Treasury Secretary gave a formal timeline for when the limit would be reached, which he pinpointed at between March 31 and May 16 of this year. He said that the Treasury could suspend certain payments to drag that out a bit, but only by a matter of several weeks. Tim Geithner laid out the stakes pretty starkly, and asked for immediate action, by the end of the first quarter of the year:

Failure to raise the limit would precipitate a default by the United States. Default would effectively impose a significant and long-lasting tax on all Americans and all American businesses and could lead to the loss of millions of American jobs.” Even a very short-term or limited default would have catastrophic economic consequences that would last for decades. Failure to increase the limit would be deeply irresponsible. For these reasons, I am requesting that Congress act to increase the limit early this year, well before the threat of default becomes imminent.

Geithner adds that Congress set up the spending targets for the near future, they passed the bills that authorized and appropriated that spending, and even cutting back to 2008 levels of discretionary spending would delay the need for the debt limit by about two weeks. He paints a pretty clear picture of the catastrophe of failing to increase the debt limit, and independent analysis backs it up.

John Boehner responded to this by taking the debt limit hostage and demanding spending cuts in return.

“The American people will not stand for such an increase unless it is accompanied by meaningful action by the president and Congress to cut spending and end the job-killing spending binge in Washington,” Boehner said.

“While America cannot default on its debt, we also cannot continue to borrow recklessly, dig ourselves deeper into this hole, and mortgage the future of our children and grandchildren.”

So how will this game of chicken play out? So far, the Administration has expressed a desire to deal with spending and deficits separately from the debt limit. I imagine you’ll hear something along the lines of “Give me a clean bill” from the White House. In his letter, Geithner says that the President “believes strongly in the need to restore balance to our fiscal position, and he is committed to working with both parties to put the Nation on a fiscally responsible path.” They don’t want to offer more than that, but remember the theory: if the hostage is being harmed, you can negotiate with terrorists. And as Geithner’s letter makes clear, the hostage will be harmed.

But you can also see some cracks in the armor. Yesterday on Bloomberg, House Budget Committee Chair Paul Ryan basically said the debt limit would be increased, and that the consequences of not raising it would be disastrous (the question starts at about 1:30). So at least a subset of the Republican caucus understands the results that would come from default. Nevertheless, Ryan wants to “extract some serious fiscal controls” and not rubber stamp the increase, in his words.

Harry Reid and the Senate Democrats basically dismissed John Boehner’s threat. So this is a matter of who blinks first. And the President has a reputation for blinking.