The Constitution of the United States
The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.
The ongoing crisis in Washington is casting a pall over the financial markets to say nothing of putting the workings of Washington, DC, at an inconceivable new low. The debate over how, or if, to raise our debt ceiling and avoid an August default grinds on. The viewpoints of both extremes would be laughable if the stakes were not so high: one side wants to tax the wealthy, the other to simply cut spending. Then there are members of congress, notably associated with the Tea Party, who claim a default would not be a very significant event anyway. And starting a presidential election cycle certainly hasn't helped matters. Welcome to the new Millenium; your government is now run by 10th graders.
Both sides have to give, period. Our problems are too intractable to simply cut spending or tax the wealthy. And we need a workable and credible deficit reduction plan if we want the world to keep lending us money, or at least not call it back, as we continue our manifest destiny of over consumption.
We are scheduled to spend $307 Billion in August versus receipts of $172 Billion1. The largest components of our projected $135 Billion deficit include: $80.9 Billion on Social Security and Medicare/Medicaid, $72.9 Billion on Govt Agency Expenses, $31.7 Billion on Defense, and $29.0 Billion on Interest on Treasury securities. Everything else including Federal salaries is comparitively minor.
Their are myriad pathways depicting how this crisis could turn out, most of them quite negative but we don't have to raise the debt ceiling. Our President, for his gifts and flaws, is a constitutional scholar. He could order the Treasury to raise more debt and then face a suit, or even impeachment proceedings, from the House of Representatives. This would avert any more of that pesky debt default debate. Were this to occur we could avoid a technical default but still face very adverse consequences.
The Ratings Agencies would likely downgrade the U.S. Govt anyway because we had not explicitly come up with a deficit reduction plan at 96.3% US Public Gross Debt to GDP. We haven't seen this ratio at such a high level since the aftermath of the Second World War and it starting to make creditors wonder. A downgrade would likely cause an immediate jump in interest rates across the curve. Meanwhile many holders of our debt would start looking for other places to put their money though that process would take some time to play out. Who would be on the other side of that trade? Banks and other financial institutions around the world could suddenly see massive balance sheet impairments from falling treasury and spread bond prices. Correspondingly, the cost of capital would suddenly jump for every public or non public entity, on this planet anyway. Money market funds could yet again enter a period of turmoil as many of these assets are in govt paper; this gets very complicated but, in essence, entities of all kinds including individuals could suffer losses on their cash deposits. Credit would correspondingly dry up which, in turn, could tip us back into a recession which is pretty close to where most of the domestic economy is right now anyway.
On the plus side, I suppose, we could witness even more political theater as the House took up impeachment proceedings against the President. MSNBC and FOX both win in this scenario.
But that is more for people who enjoy watching the arguments of 10th graders.