One of the things about this whole ginned up debt ceiling fight (and we can call it nothing else when the debt ceiling has been raised, albeit with objections from the minority party at the time, without preconditions 89 times) is that it is not just defaulting that can damage the US economy and credit.
It is true that if we reach the end of our borrowing power, there are going to be severe consequences. Even if we used the incoming revenue from taxes to try to keep paying the interest on our debt, or pay our military or pay retirees their Social Security, there will still be little matter of needing to cut all other spending by 44%, and do it right then, to keep under the need to borrow any more money to pay commitments we have already made.
That is what happens if we default, but other things will happen just because we are having this hostage drama play out. The credit worthiness of nations is based on more than just the fact that they are paying their bills, it is also based on the amount of surety a bond buyer can have that they will pay in the future.
What the Republicans have done, and the White House with its desire of a “Grand Bargain of the Republic” deal has abetted, is show that there is some doubt that the U.S will pay its bills going forward. Right now we are not seeing a risk premium on our bonds, because we’ve built up 230 plus years of confidence. We’ve never even come close to default and bond buyers are still using that past performance to judge the safety of our Treasury bonds.
However, once this crisis is over, assuming the ideological madness of the Republicans does not drive our and the world economy over a cliff, there will still be the knowledge that one party in the United States not only was willing to play chicken with the debt ceiling but that they had large groups within that party who do not believe that there will be dire consequences if it is not raised as needed.
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