Listening to the dire warnings of President Obama, Treasury Secretary Geithner and the messengers of Big Government the American public lives in fear of what might happen if the debt ceiling is not immediately increased. We hear three recurring themes: we could relapse into economic crisis, interest rates will rise, and the US will lose credibility in the international investment community. But are these warnings true? Absolutely not! Let’s look at them in order:
One. If the debt ceiling is not increased immediately the existing debt can still be serviced through tax revenues for quite some time. While it is true that the US has gotten into the habit of servicing old debt by issuing new debt there is nothing wrong with using tax revenues to service the debt while a realistic budget is being worked out. It is possible that some of the current government programs may have to be cut back depending on how long the negotiations persist but isn’t that the whole point? If we can eventually cut government enough to live within our means we will never have to worry about debt ceiling limits and the repercussions of sensible negotiations.
Two. The principles of supply and demand apply just as well to the capital markets as they do to our local farmer’s markets. If bumping up against the debt limit causes fewer new bonds to be issued, and demand stays the same, then interest rates will likely decline not rise. Scaring the citizens into approving an increase in the debt limit without a budget deal will not cause the rules of the marketplace to magically change.
Three. If the US does not approve an increase in the debt limit it will not suddenly cause a loss of international credibility. What will cause a loss of credibility is if the US approves an increase in the debt limit “without” making any serious attempt to work towards a balanced budget. Foreign investors have been increasingly wary of US fiscal policy as evidenced by the decline of the dollar versus gold and foreign currencies. If we were serious enough to not increase the debt limit until we had a reasonable budget agreement the result would likely be “increased” credibility not a loss of credibility.
The political scare tactics of the current administration are not helping the situation. The people deserve a government that lives within it means. To be frightened or bullied into anything less is not worthy of the principles upon which this nation was founded.
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