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02 May 2011


Paul Emery

The bigger issue is how Wall Street will react if there is a possibility the debt ceiling might be raised. Here's from a recent article in the Huffington Post.

Tony Fratto, a former Treasury and White House official in the Bush administration. “Investors already believe that Congress doesn’t understand the financial markets. A failure to raise the debt ceiling will confirm this to them."

If the markets get spooked, U.S. treasury bond yields will spike, driving up interest rates and increasing the price of borrowing money for everyone from the federal government to municipalities to consumers, Fratto warned. The cascading effects on the economy would be severe and long-lasting.


Todd Juvinall

Any rise in interest rates will wreck the economy so fast our heads will spin. Bernake has quite the conundrum.

George Rebane

In my 'You Would? Really?' post I attempt to also communicate that not raising the debt limit would give greater comfort to those creditors already holding Treasuries that must be rolled over, instead of being rolled over and then added to.

What those who support raising the debt limit (including the Bushman cited above) must do to continue the conversation on a reasonable basis is to give ANY alternative path to rapidly limiting deficits and halting the growth of national debt. Since they don't (can't?), their participation in the conversation is a non-starter that appeals only to the non-thinkers.

Todd Juvinall

The debt ceiling need not be breached at all. The debt is required to be paid first then the rest is portioned out. This would actually be a easy political way to balance the budget. The left thinks the money the feds get is going to stop coming in I guess. We know the money will still be arriving, Also, I have never bought into the discussion of when we lower taxes, w then have to pay for them. The left does have a way of twisting reality. I also could care less if more money flows into the government when taxes are cut because the economy takes off. Money is power to the government, I would rather adjust the feds income to be lower and let the people keep their money.

Paul Emery

I see your point George and from your perspective it is sound. However, the jitters this might cause to the stock market will have a lot of influence on the proposals to raise or not raise the debt ceiling. This economist is pretty assertive in his prediction that the market will freak at the possibility of a debt ceiling. I don't pretend to be an economist and I have no special insight into the situation but it seems to me if Wall Street lines up against the ceiling cap it's dead in the water.

George Rebane

Paul, you raise two separate and important points - 1) the possibly emotional reaction of Wall Street, and 2) given that the reaction is emotional, what is the fate of the "ceiling cap"?

On 1) I stand by the assessment that America's creditors, foreign and domestic, will see the imposition of such a cap as proof positive testimony that the country is turning toward fiscal soundness that will reflect itself in the soundness of the bonds they hold.

On 2) I would tend to agree with you. Congress doesn't have the balls to pass a cap into a gale of Wall Street criticism. One then wonders what the Wall Street worthies are thinking about - are they getting ready to start playing musical chairs?

(BTW, given the record of the economists, go ahead and pretend to be one, I do. Doing so can only lift the aggregate standard of their performance.)

Account Deleted

The point missed here is that there is a hard debt limit. That is the point at which we can no longer borrow at a favorable market rate against a general feeling that the US govt is no longer a good risk. At that point, the interest needed to obtain capital would go instantly to an extremely high rate due to the large amount of money our country requires. We can test that now, and have manageable results, or we can keep borrowing until we discover the "true" debt ceiling and events will cycle out of our control. The markets have "freaked" many times over various events and we have recovered. We can have controlled burns now, or wait until the firestorm comes. It appears to me that the Dems want to keep borrowing and then blame the markets for the extremely high interest rates that will result. The cuts in the budgets referred to in the HuffPo post are so small as to be worthless. They are not the signal to the markets that the US govt is serious about cutting our spending.

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