U.S. Markets closed

Republican Threats About Not Raising The Debt Ceiling Are Just A Bunch Of Hot Air

Fin - Daily Ticker - US

The next big money fight for the U.S. government is whether to vote to raise the country's debt ceiling.

By mid-May, unless Congress agrees to raise the ceiling, the country will max out the amount it can borrow. Because the U.S. is running a massive deficit that can only be sustained by massive additional borrowing, not raising the debt ceiling would mean forcing the country into default.

Many commentators, from Wall Street to Washington, have observed that not raising the debt ceiling would be "catastrophic." The creditors who support the country's enormous spending habit might immediately freak out and refuse to lend us any more more money. Meanwhile, holders of U.S. Treasury bonds, who have been forever told that Treasuries are "risk free," might suddenly be looking at a loss. Interest rates could skyrocket. The panic could flow through the entire global financial system.

Given the likely ramifications of not raising the debt ceiling, it's hard for me, at least, to take Republican threats on this issue seriously. If the Republicans want to use the debt ceiling vote to force the country to face up to its massive financial problems, fine. But I can't imagine that any Republican who actually cared about doing the right thing for the country would ever vote against raising the debt ceiling.

My colleague Aaron Task, however, is less convinced. He thinks some in Congress might actually be stupid enough to vote against raising the debt ceiling.

In any event, in the meantime, the U.S. stock market is tanking on news that one of the bond rating agencies, S&P, just placed the outlook for U.S. debt on "negative." This is S&P's euphemism for saying that the U.S.'s finances are going to hell in a handbasket and that, if the country doesn't deal with this problem, S&P might eventually take away the country's triple-A rating.

The responsible way to deal with the problem, of course, is to agree on a long-term plan to reduce the debt and deficit--not to force the country into default or demand that the budget suddenly be balanced, say, next year. If the Republicans are as responsible financially as they say they are, they'll recognize that, and they'll vote to raise the debt ceiling.

See Also: Harvard Professor Niall Ferguson Explains Why The US Is Screwed