Raise the Debt Ceiling
I get this question a lot from my friends who don’t pay any attention to politics. Should we raise the debt ceiling? My answer is invariably a resounding “Yes. Or not, but let me first cash in my 401k for Euros.”
If you are like most Americans at some point in your life you’ve inadvertently missed a credit card payment or experienced a bank overdraft fee. Depending upon the terms you have the result is that your interest rate skyrockets to the “default rate” or you get hit with penalties for a missed payment. These harsh responses make it even more difficult to make ends meet, as now you have to pay the punitive 29.9% APR or struggle with a series of -$34.00 late fees on an already negative balance.
Imagine instead of dealing in hundreds or thousands of dollars, you are dealing in trillions. America has borrowed at excellent rates (think introductory rates on a shiny new card) because the U.S. has fantastic credit. Buying U.S. debt is considered as safe as cash if not more so, and our nation has never defaulted on its loans. Unfortunately, and most likely because our military spending accounts for 39% of the entire world’s defense spending while we have only less than 4% of the population, we sometimes nearly hit our credit limit on the credit cards China, Japan and other countries have given us. If we ever do, we’ll go into default and our interest rate will explode just like it would on your AmEx or MasterCard for those of you playing the at-home game. Treasury bonds are at the core of our debt, and they serve as the benchmark for all other lending in our country by setting the borrowing rate for all other sectors. Hitting our limit and the resulting interest rate hike would mean that mortgage interest rates would go up, corporate and consumer rates would reach suborbital levels and nearly all credit would evaporate.
Sounds dire, huh? Well, remember what happened during the financial crisis in ’08? Financial institutions stopped believing that their loans would be repaid, so they stopped giving loans or demanded dramatically higher prices and credit dried up. In the case of not raising the national debt ceiling, it would be the full faith and credit of the United States that gets damaged, not just confidence on Wall Street. The consequences would be cascading and global, and the increase in interest rates on our debt would make it even more difficult to balance the budget than it currently is.
There’s more to the potential disaster than just triggering a Great Depression. Nations across the world have set the value of their currency tied to the U.S. Dollar, pegging their currency to ours in an effort to stabilize their markets. Many of these nations are looking for a big enough excuse, economically, to switch to other currency. A transition that occurred suddenly where the dollar was immediately and violently devalued as international treasuries cashed out in the event of a default or breach of the debt ceiling would result in a calamity. That loud “whoosh” noise emanating from the United States would be the precipitous drop in buying power of the dollar, and would make the Mexican peso look like a viable option compared. Envision a double cheeseburger at McDonald’s for $538.00 – value menu priced.
The debt ceiling has been raised 10 times in the past 10 years. Of those, the GOP has voted 8 out of 10 times to raise it, and there’s a reason. For all their lip-service to Tea Party folks, the reality of not raising the debt ceiling and the financial apocalypse it would precipitate resonates even beyond the rhetoric in Washington. Republican leadership in Congress will make a good show of posturing to block a debt ceiling increase, racing Democrats in a game of chicken towards the precipice of national economic meltdown again as they have done over and over and over again. Republicans will demand the dismantling of Medicare and Social Security in the name of financial solvency, but in the end the GOP will bail early and hopefully leave the social safety net of the country’s poor and elderly mostly intact.