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Politics Past and Present: The Upcoming Debt Ceiling Battle

News & Politics

November 2, 2010, fueled by the Tea Party, favorable redistricting, and enthusiastic opposition to the Affordable Care Act among conservatives, Republicans make astounding gains on Capital Hill. They picked up 5 seats in the Senate and 63 seats in the House of Representatives. These wins dawn a new governing relationship between the White House and congress. With President Obama’s majority in the House of Representatives decimated, he will have to negotiate any future legislation with Speaker of the House John Boehner and his increasingly conservative caucus. In the run-up to the midterms, prominent conservatives started alluding to a possible bitter debt ceiling fight. RNC Chair Michael Steele said, “We are not going to compromise on raising more debt. We are not going to compromise on raising the debt ceiling,” Unfortunately, this thinking is still a prominent strategy in the Republican Party, and could cause dire economic consequences in the future.

What is the debt ceiling? According to the U.S. Treasury Department, the debt ceiling or debt limit is the “total amount of money that the United States government is authorized to borrow to meet its existing legal obligations”. It functions to “simply allow the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past.” It’s a rare, practically American-centric mechanism that enables Congress to obstruct our Government’s ability to borrow funds to pay for programs which Congress itself previously appropriated. The only other democratic country with such a mechanism is Denmark. Some might ask the question, “why would it be so bad if we went over the debt ceiling?” Well, according to the Treasury Department, “Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations – an unprecedented event in American history.”

Since the midterm elections, we only once came really close to hitting the debt limit. In the summer of 2011, Speaker Boehner and the House Republicans, fueled by their midterm gains, used the debt ceiling as a bargaining chip to try and cut federal spending. Once stating that he would not support a debt limit increase without equal cuts in spending. President Obama and Speaker Boehner were a part of a much-publicized negotiation in with they tried to hammer out a “grand bargain” that would address the Republican’s spending concerns as well as increase revenue to help curb the deficit. Roughly 2 weeks before we hit the debt ceiling on August 2, 2011 the negotiations fell through over Boehner’s disagreement with Obama’s revenue proposals. Luckily, at the final hour, just 3 days before we hit the debt limit, the two Houses of Congress agreed on a debt ceiling increase and the President signed it into law. However, we did not escape the debacle unscathed. Just three days after the agreement, Standard & Poor’s, the credit rating company, downgraded the United States’ credit rating from AAA to AA+. It dealt a significant “symbolic blow to the world’s economic superpower” and could’ve potentially hurt our bet bond market, previously seen as a safe. It also likely raised the cost of the United States’ borrowing capability, thus ironically costing US taxpayers more money. All that caused by the Republican’s irresponsible strategy, which was to hold the debt-ceiling hostage in order to get spending cuts that would save the taxpayers money.

If that sounds bad,  just wait: They’re at it again. We will hit the debt ceiling again in mid-October, according to Treasury Secretary Jack Lew. Read this statement made by Speaker John Boehner, “Any increase in the debt limit must be accompanied by cuts and reforms greater than the increase.” Sound familiar? The Republicans are planning to hold the debt ceiling hostage again. Except this time Obama is saying no. In a letter addressed to the Speaker’s office he states that he, “has been clear that he is not going to negotiate over the debt limit, and Congressional Democrats stand behind him strongly.” With the President displaying a much different tone than last time around, could this mean that we will hit the debt ceiling and default on our debt? If we do, there will be tremendous economic consequences. The Federal Reserve Chairman said it would be a “recovery-ending event” and would in turn put us back into a recession.

To demonstrate another possible, more dire, consequence, here’s a chart that shows current foreign bond holdings:

foreignUSTreasuries2

A 2011 Congressional Research Service report suggests that a loss of confidence in the debt market could prompt foreign creditors to unload large portions of their holdings, thus inducing others to do so, and causing a run on the dollar in international markets, which could in turn threaten the US Dollar’s global currency status. What would that mean? According to Dick Bove, vice president of equity research at Rafferty Capital Markets, “If the dollar loses status as the world’s most reliable currency, the United States will lose the right to print money to pay its debt. It will be forced to pay this debt.” He went on to say that, “The No. 1 security issue we have as a nation is the preservation of the U.S. dollar as the world’s reserve currency, it’s a thousand times more important than a nuclear bomb being tested by North Korea. It’s a thousand times more important that we keep the dollar as the world’s reserve currency, and yet we are doing everything to abuse that status.” Even with all that said, Congressional Republican’s are still holding a debt ceiling raise hostage for political reasons.

I fear that the GOP’s current obsession with the Affordable Care Act, a law that was properly litigated, deemed constitutional by the Supreme Court and only just went into effect yesterday, could produce the same deadlock that we saw in the run-up to the government shutdown. If it does, our economy will be in for a close shave, but hopefully cooler heads will prevail.

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