As you no doubt have heard by now, there’s a little to-do in Washington over the issue of raising the debt ceiling, the amount of money the U.S. can borrow through the selling of treasury bonds. The limit is set by Congress, and till now has been a rather routine affair, for the most part. But the current Republican caucus is balking at the automatic hike, and according to the Treasury Dept, come August the U.S. could actually start defaulting on its ample debt, an unprecedented occurrence that many analysts say would result in a global financial cataclysm. Here’s just one take from the Reuters Money blog on Friday:
A default on U.S. debt will make the 2008 debacle look like a Simpson’s episode. Interest rates will soar through the roof. Everything from mortgage rates to adjustable credit card financing will skyrocket. Payrolls may be imperiled along with Social Security and Medicare payments. Think economic crash and burn — in a big way. If the credit rating of U.S. debt is downgraded from AAA, that will automatically signal to the global bond market that investors should demand higher yields for taking more risk. Standard & Poor’s has put the U.S. on its ominous “CreditWatch” status and will downgrade unless a debt deal is struck soon.
Money moves exponentially faster than politics these days. If bond managers get even a whiff of actual default, they will move their funds out of U.S. Treasuries at the speed of light. That tsunami may devalue anything measured in dollars, including U.S. stocks; corporations would then fire even more people and halt capital investment. Unemployment would hit Depression-era levels. Americans would wistfully recall the days of nine percent joblessness.
On Friday, State Treasurer Bill Lockyer talked to “This Week in Northern California” host Belva Davis about the consequences for California should the ceiling not be raised, and the steps the state was taking to prepare. Lockyer said California is preparing to borrow as much as $5 billion in short-term loans, as education and health care programs that depend on federal funds could be severely jeopardized by a federal loan default. Watch the video below: