Wednesday, July 06, 2011 ... Français/Deutsch/Español/Česky/Japanese/Related posts from blogosphere

Should America raise the debt ceiling?

Jon Stewart answered the question in the simplest possible way: he looked into the two future parallel worlds according to Everett's Many-Worlds Interpretation where the debt ceiling was either raised or not:


Via A.A.




More seriously, if America doesn't raise the debt ceiling, it's likely that it will technically go bankrupt for some time in early August. The rating agencies will lower the rating - one of them may even change AAA to D for a little while - and the rating is unlikely to return to AAA. That should be true for all agencies. Of course, most investors won't care.

The short-term culprit of the lowered rating will clearly be mainly the Republicans because they will have refused to raise the debt ceiling. However, from the viewpoint of the eternity, the long-term culprits would mainly be the Democrats because they really wanted to direct America's public spending in the Greek direction. That doesn't mean that the Republicans have been quite innocent.

The temporary default could ultimately be healthy for the U.S. - as a tool to fight against the moral hazard. When a party wants to spend too much, it's at risk that the other party may guarantee that this will lead to some trouble.

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reader VangelV said...

More seriously, if America doesn't raise the debt ceiling, it's likely that it will technically go bankrupt for some time in early August.

First, the US is technically bankrupt if standard accounting methods were to be used. Total federal debt plus unfunded liabilities stand at more than $100 trillion and are growing at more than $5 trillion per year. Try and do the math and figure out how a $14 trillion economy can handle those obligations.

The rating agencies will lower the rating - one of them may even change AAA to D for a little while - and the rating is unlikely to return to AAA. That should be true for all agencies.

Why would that be the case? There is plenty of money flowing in and there is no risk of default on interest payments if that is what Obama or Congress wish. The problem will come from spending commitments that cannot be met but that is a good thing as far as bond holders are concerned because lower spending means a better likelihood that bonds can be paid off in the future.

Of course, most investors won't care.

I do not think that it is normal investors who are buying US treasuries at the moment. The bond market is rigged by the Fed and other central banks.