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July 27, 2011, 11:09 a.m. EDT
By Howard Gold
NEW YORK (MarketWatch) "” It's been a hot summer, and it's been even hotter in Washington, where Democrats and Republicans have been burning down the House with a pitched battle over the debt ceiling, the cap that Congress puts on the national debt.
Usually it's a mundane bit of legislative business barely worthy of C-Span. Congress hikes spending and then authorizes an increase in the debt ceiling to pay for it. It's happened 78 times since 1960.
The House vote on Speaker John Boehner's debt-reduction plan been delayed until Thursday after the Congressional Budget Office reduced the expected savings the plan would provide.
But this year it will likely cause the U.S.'s prized AAA credit rating to go up in smoke.
Newly elected tea-party Republicans have held fast to their campaign promises to cut spending. So they have demanded spending cuts at least equal to the roughly $2 trillion the debt ceiling will have to be increased from its current $14.3 trillion to cover rising expenditures.
If that doesn't happen by Aug. 2, President Obama and many others have warned the government won't be able to meet all its obligations, including interest payments on the debt, military pay, Social Security checks, what have you. If we can't, it could mean a default by the U.S. government, just like Argentina and Mexico did in days of yore.
Read Howard Gold's earlier piece on the debt cloud overhanging the market on MoneyShow.com.
Speaker of the House John Boehner and other Republican leaders also have said that default is not an option. But as a polarized Washington seems incapable of reaching a compromise, the ratings agencies have stepped in with more and more dire warnings.
Standard & Poor's, Moody's Investors Service and Fitch Ratings all have warned that failure to raise the debt ceiling would trigger a downgrade of U.S. government debt.
S&P in particular has also raised the stakes, and quite publicly. The kind of short-term fix so popular in Washington "” like the ones that are being bandied about as I write this "” that raises the debt ceiling for six months or so, with maybe $1 trillion or so in spending cuts, may forestall a technical default but still may result in a downgrade, S&P officials have said.
I'll save who I think is primarily responsible for this mess for my political blog, but I will say this: You can kiss the AAA rating of U.S. Treasury debt goodbye.
Read Howard's commentary on the tea party's moment of truth on the Independent Agenda.
If a miracle happens, we may be able to forestall it for a while. But without a huge turnaround in Washington's broken political culture, I don't think this Congress and president will enact the dramatic changes S&P has strongly suggested are necessary for us to stay in the elite club of AAA-rated sovereigns.
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