Watching the debt-ceiling debate currently taking place in Washington I am reminded of the 1955 James Dean movie “Rebel Without a Cause”. In the movie, James Dean’s character and his rival challenge each other to a game of “chicken”. In this game, the contestants drive their cars at full speed toward the edge of a cliff as a mob of teenagers looks on. The loser, or “chicken”, is the first contestant to lose nerve and stop his car or jump from it. The winner is the guy who remains in his car longest while hurtling toward the cliff. In this case the winner got his jacket sleeve caught on the door handle and drove off the cliff.
There are parallels between the movie and the debt-ceiling debate. The political parties are the contestants each driving their vehicle at full-throttle toward the cliff’s edge. The rest of us are the teenagers looking-on in a mix of fear and excitement. Unlike the movie, however, the onlookers in the debt-ceiling debate are tethered to the vehicles. If one of the parties decides to drive off the cliff, they take the rest of us with them.
The risks in the debt-ceiling debate are real and potentially catastrophic for the US. Most of the discussion among political observers and cable TV pundits is focused on the possibility of a US financial default. What none of these observers seem to recognize is that financial catastrophe does not require a US default. Failure to reach an agreement in Congress, in and of itself, may provide sufficient justification for debt-rating agencies to lower their current triple-A rating for US government obligations. If the US rating is lowered, interest rates will immediately begin to rise and both economic recovery and our ability to reduce the level of US debt will be made immeasurably more difficult, if not impossible.
A one-percent rise in interest rates would add $143 billion in annual interest to the US budget at current debt levels. If rates do start to rise no one could predict how high they will go. Consequences would be swift and painful. Current non-government holders of US debt would likely attempt to sell-off much or all of those holdings and traders would begin short-selling US obligations on world financial markets. The immediate result would be downward pressure on bond prices driving interest rates even higher. Foreign investors and governments, including China, would be highly reluctant to invest even more cash in US government obligations regardless of the interest rate.
Failure to reach an agreement to lift the debt-ceiling could create an economic catastrophe from which the US would never completely recover. The US would never again be viewed as a bastion of economic and political stability. We would join Greece, Portugal, Spain and Ireland in begging the rest of the world for economic rescue.
Our leaders should think carefully before deciding to drive us all off the cliff.
Filed under: Debt-Ceiling Debate, Economy, Politics, US Debt
