The bitter tug of war over the U.S. debt ceiling
could be seen as a mere prologue to the 2012 presidential elections.
But the dispute could hardly be more serious, posing a threat not
only to the credit rating of the U.S. government but to the entire
economy.
"Armageddon" is not a word that President Obama throws
around lightly. After last week's fruitless negotiations about
raising the $14.3 trillion debt limit, the president used it to
underline concern about disastrous consequences: "If Washington
operates as usual and can't get anything done, let's at least avoid
Armageddon."
Since the legal debt limit was first enacted in 1939, Congress has
voted 89 times, mostly routinely, to raise the cap. Obama's Treasury
officials say that without an increase by Aug. 2, the federal
government will be unable to meet all its obligations, including
payments to bondholders and pensioners.
Republicans and Democrats alike dismiss any suggestion that they
would actually allow default to happen, but the brinksmanship in the
dispute has markets on edge, with the country's top credit rating
hanging in the balance.
"The current wide divisions between the House of Representatives
and the Obama administration over the debt limit creates a high level
of uncertainty and causes us to raise our assessment of ... risk,"
Steven Hess, vice president of Moody's rating agency, warned Monday.
Standard & Poor's agency went a step further: Now that Pandora's
box has been opened on an issue Washington has put off for decades -
a grand political deal to reduce outlays in the coming 10 years - it
can only be closed again with a massive deficit-reducing move.
The U.S. reached its debt limit of $14.3 trillion in May, and
the Treasury has been patching through with other resources.
Conservative Republicans refuse to lift the debt ceiling without
massive spending cuts, and negotiations have focussed on deficit
reduction packages ranging from $1.5 trillion to $4 trillion
over the next 10 years.
And there's the rub. While Obama and even some of his Democrats in
Congress would go along with cuts to social programmes, conservative
Republicans have so far refused to agree to increased revenues that
could come from dismantling tax breaks for high earners and some
industries.
The loss of the AAA rating on U.S. bonds would mean the federal
government would pay considerably higher interest on its loans and
fall deeper into debt. A mere 0.25 percent increase in interest
would add another $27 billion a year to the debt. By 2015,
that number would be $37 billion.
But it's not just the U.S. government that would suffer.
Moody's has warned that bond ratings for all 50 states would erode
in a federal default, further handicapping already-struggling
localities. Home mortgages, car and student loans, credit card rates:
all borrowing would cost more, and some of it could become
prohibitively expensive.
This would be "effectively, a tax increase on everybody," Obama
said Friday.
The debt debate takes place against the backdrop of a stagnant
U.S. economy, where wages have barely risen in five years. Consumers,
whose spending makes up 70 percent of the U.S. economy, are sitting on
their money and spending 7 percent less on discretionary items,
according to the U.S. central bank. Instead of borrowing to fulfill
material desires, Americans are saving more.
"The old consumer economy is gone, and it's not coming back," New
York Times columnist David Leonhardt wrote recently.
