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Really, Crashing Into the Debt Ceiling Is a Terrible Idea

Some Republican lawmakers think it's no big deal if the U.S. fails to raise the debt ceiling. They claim the Obama administration is exaggerating the potential economic fallout and that the government can keep paying the bills for a while by shuffling money around.

Economist Douglas Holtz-Eakin, whose Republican bona fides includes having advised Sen. John McCain, R-Ariz., during his 2008 presidential bid, takes less than one minute to show why that view is dead wrong:

OK, but besides not being able to afford to pay for our soldiers, retirees, farmers, Medicare and Medicaid recipients, students, scientists and roads, is there anything else we should be worried about?

Well, I guess there's that little business about how long the U.S. could continue servicing the roughly $300 billion interest on the federal debt. Miss one payment and the government's sterling credit would go straight into the toilet, a credit rating agency official tells Talking Points Memo:

"A sovereign's failure to service its debt as payments come due is a default according to S&P's sovereign rating criteria," writes John Piecuch, spokesman for Standard & Poors, one of the "Big Three" credit ratings agencies, in an email to me. "In that case, the rating would be lowered to "SD" (Selective Default)."
Sure, but is there anyone else besides prominent Republican economists and credit raters who think it's a bad idea to play games with the debt limit?

Well, there's Wall Street, if anyone wants the banksters' take. Here's what two Morgan Stanley (MS) economists had to say this week about the default-skeptics' notion that the Treasury Department can avoid default simply by husbanding its cash:

[T]he approach that they are advocating does not seem at all workable to us. The Treasury's cash flows are too lumpy to simply prioritize one form of spending over another. For example, we would expect a significant political outburst if the Treasury withheld monthly Social Security checks at the beginning of the month (even though there was sufficient cash on hand to make the payments) just in case they needed this cash to make debt service payments at mid-month. Such a scenario is highly impractical -- and probably not even legal.
Fine, so prominent Republican economists, credit rating agencies and the financial community are actually pretty worried about the U.S. breaching the debt ceiling.

Really, though, what's the worse that could happen? Investors could lose faith that the U.S. is good for what it owes. Many would bail out of Treasuries, pushing up interest rates and borrowing costs. The economy would go out like a spent match. Pfffft.

Apart from that, everyone, no worries.


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