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The Treasury's Aug. 2 deadline for reaching the federal borrowing limit is rapidly approaching,
but prospects of a budget deal remain unclear.
House Republicans seem resolved to shun compromise until that deadline, perhaps until well beyond it. But dire warnings about financial Armageddon if the deadline is breached seem vastly exaggerated.
As House Republicans proceeded to pass their Cut, Cap, and Balance legislation, President Obama has shifted his position with increasing frequency. He initially painted himself into a corner by ruling out a short-term budget deal. Later he embraced the McConnell plan, only to soon switch in favor of the Gang of Six approach.
He now appears to be backed into a corner, suggesting a temporary stop-gap measure would be acceptable "if it is tied to an agreement by both parties on a broader deficit-reduction deal" — whatever that means.
House Republicans appear steadfast in rejecting all deals between Senate leaders and Obama that include tax increases and do not include a balanced budget amendment to the U.S. Construction. They ask why such an amendment to ensure that we never return to a similar fiscal precipice is so unreasonable when Americans must do the same — a question that resonates with their constituents.
And they strongly believe that pushing the deadlock through Aug. 2 will only increase their leverage with the president and other leaders.
But House Republicans also risk being characterized as unreasonable and intransigent — if prognostications by administration officials of a financial Armageddon after Aug. 2 without a higher debt ceiling prove true. Do such dire warnings have much merit?
Markets view U.S. treasury securities to be the safest of all financial securities because the U.S. is considered to be most resilient of economies. This also confer reserve currency status to the U.S. dollar, reducing the price of foreign products and savings for Americans.
Those features and the Federal Reserve's historical anti-inflationary monetary policy stance support the highest credit rating of U.S. treasury securities and investor confidence in the U.S. economy.
If the U.S. government misses interest payments on public debt soon after Aug. 2, rating agencies will downgrade U.S. treasuries, prompting investors to dump those securities and sell dollars en masse.
Such a market reaction would increase U.S. and world interest rates, decimate investment spending and trigger an inflationary spiral as the Fed is forced to monetize U.S. debt.
But given the high likelihood of such an adverse market reaction to a debt default, would the Obama administration fail to make debt-service payments a top priority after Aug. 2?
The debt ceiling looms. Confusion reigns. Schemes abound. We are deep in a hole with, as of now, only three ways out: the McConnell plan, the G6 plan and the Half-Trillion plan. The McConnell essentially punts the issue till after Election Day 2012. A good last resort if nothing else works. ...
When governments want to encourage what they believe is beneficial behavior, they subsidize it. Sounds like good public policy. But there can be problems. Behavior that is beneficial for most people may not be so for everybody. And government subsidies can go too far. Subsidies create incentives ...
The World Trade Organization just ruled against the U.S. again. A "dispute resolution panel" of WTO representatives from Pakistan, Portugal and Switzerland ruled that U.S. laws requiring Country of Origin Labeling violate free trade. It's time for the U.S. to wave goodbye to this impertinent New ...
As uncertain and unruly and disheveled as the debt-ceiling debate may be, there are still good grounds to reach a deal. It could help the economy. It could keep the policy ball moving in the direction of smaller government. It could add a key business tax incentive for economic growth. And it could ...
Is there a health insurance horror story put out by the White House and its allies that ever turned out to be true? ObamaCare advocates have exercised more artistic license than a convention of Photoshoppers. Now, a prominent sob story shilled by President Obama himself about his own mother is in ...
Posted By: JohnGault2012(5) on 7/23/2011 | 5:24 AM ET
Jagdeesh, I believe you allowed your spelling-checker to incorrectly substitute "Construction" for a misspelled "Constitution". I would add that the consequences pale in comparison to the mistake the President made when he allowed Congress to substitute their policy for his intended Obamacare.
Posted By: TomQ(5) on 7/22/2011 | 9:16 PM ET
The only way to reduce spending is to allow the default to occur. Payments to Medicare, SS, military personnel, interest on debt ... ample revenue for these to be paid timely. Oops - sorry about the Deptartments of Energy & Education, EPA, and a few others; they'll just have to reduce their budgets! The State of Minnesota just saved a bundle of cash using this same backdoor maneuver - publicly, both parties looked tough while avoiding non-vital expenditures for a a pre-arranged period
Posted By: Brian Stinson(15) on 7/22/2011 | 8:45 PM ET
The part that I don't understand is why the Credit Raters would downgrade the debt without raising the debt ceiling. Presumably, not borrowing any more money would enhance our credit rating.
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