Some time before July 8th, there will be a vote in Congress on raising the federal debt ceiling. Many Americans think that if you just cap the debt ceiling, the American government will be forced to stop stacking up debts. What it really means is that all of those nations and institutions and individuals who loaned America money in the past will see their repayment threatened.
Markets will be catastrophically impacted. America’s risk premium on all future loan instruments in which others lend us money will rise. In other words, we will be imposing a tax on all future economic activity — a tax that we self-imposed. The “full faith and credit of the United States government” which has not defaulted in modern times will be thrown into doubt.
It is true that both Barack Obama and Steny Hoyer voted casually and carelessly against raising the debt ceiling in the past. These were misguided votes — and they should publicly explain why these votes were irresponsible and threatened the credit position of the United States in the world. We may not like it — and I don’t like it — but the US is the world’s largest debtor nation in the world. We need financing whether we like it or not.
To threaten to cap the debt ceiling now is sending a signal that the US will not be responsible or accountable to those who have invested here.
The Republicans and Democrats who think that this vote is a way to show off their fiscally conservative creds better look back at September 29, 2008.
On that day, the House rejected the TARP — and the Dow Jones plummeted 777 points. Those who failed to understand how vital stimulating the economy was then, as read by the markets, were quickly chastened.
If the Republicans did secure a successful vote against the debt ceiling being raised — even a resolution to that effect, then add a “0″ to that plunge.
– Steve Clemons