Still reading? That means you're probably like me. You have savings, and you have them invested somewhere where you hope to see some gain, and don't want to see them decrease in value. That's why the discussion of raising the federal debt ceiling is probably the most important item in the news every day.
Most voters have absolutely no idea what's going on. The latest polling shows only 16% in favor of raising the debt limit. "We simply cannot afford to take on any more debt," a typical voter might say. Ezra Klein points out the fallacy--and the danger-- of that argument in his morning Washington Post "Wonkbook" blog posting:
"There are two important things to know about the debt ceiling. First, because of what we’ve already done, it needs to be raised. Second, no matter what we do next, it needs to be raised."
"It doesn’t matter which budget plan you’re looking at: our accumulation of debt might slow in the coming years, but it doesn’t stop. Obama’s budget requires another $7 trillion in borrowing over the next decade. Paul Ryan’s budget requires $6 trillion. The Simpson-Bowles recommendations would require about $5 trillion. Odd as that sounds, it’s actually okay -- perhaps even good. A gradual fiscal adjustment is far safer for the economy than an abrupt contraction. As Steven Hess, chief credit officer of Moody’s ratings agency, puts it, “You don’t have to have extreme austerity right now to come up with a plan that is long term. It’s the long term trajectory that’s important.”
"But we have to admit the reality of the situation, particularly if we’re going to avoid catastrophe over the debt limit. As Howard Gleckman writes, every legislator who voted for the 2011 continuing resolution “voted for a budget that will result in about $3.7 trillion in spending and about $2.2 trillion in revenues.” That is to say, they voted to add $1.5 trillion to the debt. Now the bill needs to be paid. Going forward, almost every legislator is supporting some budget or another that would increase the debt over the next decade. Those bills will need to be paid also. It’s good and necessary to have a conversation about how to get our fiscal house in order going forward. But the debt ceiling is about what we have already done, and raising it is a precondition of anything serious we might do next. It is not the place for posturing, ...".
Nobody knows for certain what would happen if we default on our obligations, which is what happens if the limit is not raised, because is has never happened before. One thing is certain, it won't be good. Klein links to one possible scenario:
Now, let me see if I can play teacher for a moment and make this a little clearer. I have a portion of my savings in GNMA bonds. These are mortgage-backed bonds in which payment of the principle is backed by the "full faith and credit of the United States of America." The money market fund in which I have other savings is invested, in part, in U.S. Treasury bonds. These are also backed by "the full faith and credit of the United States of America." They are the investment of choice for "widows and orphans" because there is no investment safer.
As we get closer to a decision point on the debt ceiling, I'm wondering if I need to "cash out" and head for the mattress. And others will begin to wonder the same thing, including those who manage huge amounts of U.S. Treasury bonds and other "full faith and credit" obligations of the U.S. And here's the problem: At some point, probably long before any actual default, the holders of those bonds will decide that there is a very real possibility of default, and that there is a very real probability that the value of their investments may take a dive, and they will begin to try to sell. That's the point at which the whole system unravels.
We won't be able to ride the debt limit clock up to 11:59 and then make everything OK by raising the limit just before the clock strikes midnight. Nervous investors will have left the party long before that moment. And when they begin to leave, we will never be able to restore "the full faith and credit of the United States."
It's like moving a lit match closer and closer to a barrel of gasoline. The explosion will take place at some point before the match actually touches the gasoline.
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