In a Washington Times column, Jeffrey Kuhner downplayed the economic consequences of not raising the debt ceiling, claiming that the "sky will not fall if an agreement is not reached by Aug. 2" and accusing President Obama of engaging in "shameless demagoguery." In fact, economists agree that failing to raise the debt ceiling could have significant negative effects on the economy.
Kuhner Downplays Potential Consequences Of Failing To Raise The Debt Limit
Kuhner: "The Sky Will Not Fall If An Agreement Is Not Reached By Aug. 2." In his July 14 Washington Times column, Jeffrey Kuhner claimed "[t]he sky will not fall if an agreement is not reached by Aug. 2" and accused Obama of engaging in "shameless demagoguery." From Kuhner's column:
For weeks, the administration has argued that unless the government's borrowing authority is lifted, Uncle Sam will default after Aug. 2, leading to economic turmoil - and maybe fiscal collapse. Mr. Obama even has played the Grandma card, threatening seniors with not receiving their Social Security benefits.
"I cannot guarantee that those checks go out on Aug. 3 if we haven't resolved this issue," he told CBS News. "Because there may simply not be the money in the coffers to do it."
This is shameless demagoguery. The president knows full well that Washington will continue to take in more than enough to pay easily for Social Security as well as other basic government services - including the financing of our debt. The sky will not fall if an agreement is not reached by Aug. 2. At worst, there may be a partial government shutdown, but that would take several weeks. Hence, the GOP - and the nation - should not be bull-rushed into accepting any deal. [The Washington Times, 7/14/11]
But Economists Agree Failing To Raise The Debt Ceiling Could Have Disastrous Consequences
Zandi: "In A Post-Default World, Financial Markets Would Unravel And The U.S. And Global Economy Would Enter Another Severe Recession." In a July 15 Washington Post op-ed, Moody's economist Mark Zandi stated: "The Obama administration and Congress must raise the federal debt ceiling by Aug. 2. That's all there is to it." Zandi warned that failure to do so could create "another severe recession" in "U.S. and global econom[ies]." From The Washington Post:
The Obama administration and Congress must raise the federal debt ceiling by Aug 2. That is all there is to it. In a post-default world, financial markets would unravel and the U.S. and global economy would enter another severe recession. The nation's already daunting fiscal problems would spiral out of control as tax revenue plunged and demand surged for unemployment insurance, food stamps, Medicaid and other programs supporting vulnerable Americans.
Yes, it would be wonderful if politicians could agree to rein in future budget deficits as part of a debt-limit deal. But that isn't necessary right now. Simply raising the debt ceiling enough to last through next year's elections would appease global investors and sustain the economic recovery. The 2012 vote will be a referendum on how to address our fiscal problems: The winner sets the agenda, and tough decisions can be made after the next president and Congress take office.
Defaulting on the nation's debt would be cataclysmic. The U.S. Treasury's Aaa rating is the one constant in the world's financial system. When times are bad anywhere on the planet, global investors flock to Treasury bonds because they know they will get their money back. This "flight to quality" has pushed U.S. interest rates to near-record lows and has been vital to keeping our economy afloat. Yet this benefit was earned over more than two centuries by adhering to the bedrock principle that the United States always pays its bills on time. One misstep, and the government would have to pay higher interest rates for years, perhaps for generations. [The Washington Post, 7/15/11]
Gross: "The Debt Ceiling Must Be Raised And Not Be Held Hostage By Budget Negotiations." In a Washington Post op-ed, Bill Gross, founder of the investment firm Pimco, warned that "[t]he debt ceiling must be raised and not be held hostage by budget negotiations." From The Washington Post:
To raise or not to raise the debt ceiling; that is the question: Whether 'tis nobler to suffer the slump and arrows of default today or in some distant future. Oh, bards of Washington, give us your answer.
This Shakespearean financial dilemma hangs in the balance between now and a somewhat theoretical Aug, 2, but I can tell you what an unbiased investment manager thinks: Don't mess with the debt ceiling. Raise it unencumbered if necessary. I say unbiased because my credentials have become very public over the past several months. Pimco owns very few Treasury securities, and its clients would theoretically benefit if yields rose on an under-owned asset class that was technically in default. But default would still be a huge negative for the U.S. and global financial markets, introducing fear and unnecessary volatility into the economy and global trade. The market situation might resemble what happened after Lehman Brothers collapsed in 2008.
The answer to our modern-day Hamlet's question then, is that there should be no question at all. The debt ceiling must be raised and not be held hostage by budget negotiations. Don't mess with the debt ceiling, Washington. Bond and currency vigilantes will make you pay. [The Washington Post, 7/13/11]
Politico: U.S. Going Into Default Is "An Unthinkable Idea To Many Economists And Market Participants." From Politico:
Republicans are growing increasingly concerned about the impact a bruising fight over raising the nation's $14.29 trillion debt ceiling could have on U.S. financial markets.
House Speaker John Boehner (R-Ohio) has had conversations with top Wall Street executives, asking how close Congress could push to the debt limit deadline without sending interests rates soaring and causing stock prices to go lower, people familiar with the matter said. Boehner spokesman Michael Steel said Tuesday night that he was not aware of any such conversations.
Treasury Secretary Timothy Geithner has warned Congress that without new borrowing authority, the federal government could hit the statutory debt limit by May 16.
Treasury could then implement emergency measures to continuing making interest payments on existing debut until around July 8. After that, the U.S. risks going into default, an unthinkable idea to many economists and market participants who say such an event could drive scores of large banks into failure, send interest rates skyrocketing as foreign investors abandon U.S. securities and crush the already slow-going economic recovery. [Politico, 4/13/11]
MSNBC: If Default Causes Interest Rates To "Rise Too Far, Too Fast, The U.S. Economy Could Face The Risk Of Another Recession." From an April 11 article on MSNBC's website:
Washington is gearing up for a battle over how many trillions the federal government can borrow to pay its bills, and it's shaping up to be an even bigger brawl than the one just resolved over funding the government for the next six months.
While investors viewed last week's budget brinksmanship as a minor event, they are beginning to grow concerned that many lawmakers and ordinary Americans, [sic] fail to grasp the implications of even suggesting the United States would default on its debt obligations.
What is a political football to Congress could end up flattening the economy and hurting consumers by lowering the nation's pristine credit rating and sending interest rates sharply higher.
So far, bond market investors apparently are not very worried; the United States has never defaulted on its debt and many have long thought a default unimaginable. On Monday, amid the rancorous aftermath of the budget battle that nearly shut down the government, bond prices were flat.
But some investors are betting that bond prices are headed lower. As the Federal Reserve wraps up a $600 billion round of bond buying designed to keep interest rates low, many investors are wondering what will replace that program when it expires in June. On Monday, the giant investment fund PIMCO, which recently dumped its holdings of U.S. Treasury securities, disclosed that it has gone even further and is now selling U.S. debt short -- a bet that bond prices have further to fall.
Falling bond prices hurt more than the investors who hold them. As prices fall, interest rates rise. If they rise too far, too fast, the U.S. economy could face the risk of another recession. Without borrowing authority, the government would be powerless to pay all its bills, much less assemble another stimulus package to revive the economy. [MSNBC.com, 4/11/11]
Ex-Treasury Official: "This Would Make the Lehman Brothers Bankruptcy Look Like A Walk In A Park ... They're Really Playing With Fire." From The Huffington Post:
If Congress doesn't raise the $14.3 trillion debt limit by mid-May, the U.S. government will have to resort to emergency measures to avoid default. One missed payment, which could happen as soon as July if the ceiling is not raised, would likely set off a widespread global panic, causing borrowing costs to skyrocket and severely crippling the nation's economy.
But Republican lawmakers have said they will use the debt limit as a means of enforcing fiscal austerity, insisting they won't raise it without winning concessions from Democrats.
Meanwhile, Jim Millstein, the former restructuring officer at Treasury, who helped reorganize AIG, outlined how disastrous the consequences of default would likely be. Speaking on CNBC on Tuesday, he said that a Treasury default would affect investors of all sorts, and he criticized those who downplay the consequences.
"This would make the Lehman Brothers bankruptcy look like a walk in a park on a sunny day," he told CNBC's David Faber. "They're really playing with fire." [The Huffington Post, 4/13/11]
Right-Wing Media Have Repeatedly Downplayed Debt Ceiling Fears Or Outright Called For Government Default
Napolitano: "If I Were In The Congress, I Would Encourage Everybody To Vote Against Raising The Debt Ceiling." On the April 11 edition of his Fox Business show, Freedom Watch, host Andrew Napolitano interviewed Rep. David Schweikert (R-AZ). During the interview, Napolitano spoke repeatedly about the debt limit and at one point said, "If I were in the Congress, I would encourage everybody to vote against raising the debt ceiling." [Fox Business, Freedom Watch, 4/11/11 via Media Matters]
Napolitano Has Repeatedly Spoken Against Raising The Debt Limit. Napolitano has frequently used his Fox Business show as well as guest host positions on Fox News to speak against raising the debt limit. As a guest host on the March 10 edition of Fox News' Glenn Beck, Napolitano urged Rep. Jason Chaffetz (R-UT) and Sen. Jeff Sessions (R-AL) to vote against the debt limit. During the January 4 edition of Freedom Watch, Napolitano said, "It's an easy one for me -- the debt ceiling should not be raised." [Fox News, Glenn Beck, 3/10/11; Fox Business, Freedom Watch, 1/4/11]
Hannity: "I Would Not Vote To Raise The Debt Ceiling." During a panel discussion on his April 12 show, Sean Hannity said, "If I was in Congress, I would not vote to raise the debt ceiling." [Fox News, Hannity, 4/12/11, via Nexis]
Bolling: "I Say Let Them Default." On the April 13 edition of Fox News' Fox & Friends, guest host Eric Bolling told Fox Business host Stuart Varney, "I say let them default. ... What's going to happen?" [Fox News, Fox & Friends, 4/13/11 via Media Matters]
Carlson: "Some Republicans" Are Asking Whether Debt Ceiling Deadline Is A "Democratic Ploy." On the July 12 edition of Fox News' Fox & Friends, co-host Gretchen Carlson claimed that "some Republicans are saying that August 2 deadline, as I alluded to at the top of the show -- is that a Democratic ploy, or is that a hard and fast date now? Remember, back in April that was the first deadline date, and everyone kind of pooh-poohed it, and before you knew it, in the middle of that horrible earthquake tsunami in Japan, the Treasury secretary moved it." [Fox News, Fox & Friends, 7/12/11 via Media Matters]
Hannity: Democrats' "Doomsday Rhetoric Would Have You Believe" That If The Ceiling Deadline Passes, The "Economy Would Crumble." On the July 11 edition of his Fox News show, Hannity said: "As the deficit reduction talks continue in Washington, Democrats have been ramping up their efforts to scare the American people into supporting this deal. Now, the left's doomsday rhetoric would have you believe that if Congress does not vote to raise the debt limit by August the 2nd, the American economy would crumble." [Fox News, Hannity, 7/11/11 via Media Matters]
Dobbs Calls Debt Ceiling Deadline A "False Date" And "Pure Fiction." On his July 11 Fox Business show, host Lou Dobbs called the August 2 deadline for raising the debt limit a "false date" and "pure fiction." Dobbs made his comments in response to J. Dennis Hastert, former Republican speaker of the House, who said that "the federal government can decide what it's going to pay, when, and where." [Fox Business, Lou Dobbs Tonight, 7/11/11 via Media Matters]