According to Treasury Secretary Jack Lew, the U.S. will bump up against its debt ceiling on Oct. 17. The debt ceiling was enacted in 1917 as part of the Second Liberty Bond Act. Before 1917, congress had to authorize each bond issued by the government, making it hard for it to respond rapidly to something like, say, a world war breaking out. The debt ceiling has been raised by congress 79 times since 1940, or roughly once a year.
The right wing of the Republican Party is fighting to prevent the debt ceiling from being raised again. Their rationale: the U.S. government is too big, reaching into too many facets of American society — especially the government takeover of health care — and needs to live within its means. Their justifications: not raising the debt ceiling doesn’t mean we’ll default on our debt, the predictions of catastrophic economic collapse are overblown, and average Americans won’t even feel it.
The problem with this assessment is reality. The last time we almost bumped up against the debt ceiling in 2011, Standard and Poor’s, a Wall Street ratings agency, downgraded the U.S.’s credit rating for the first time in its history. S&P cited their skepticism that the fiscal policy differences between the Republicans and Democrats will be reconciled any time soon and warned that they could downgrade the U.S. even further if the government faced any new fiscal pressures in the next two years.
Well, here we are, two years later. We have no budget, the debt ceiling will be reached on Oct. 15, and the government is shut down because the Republicans and Democrats are fighting over the exact same things they were fighting over in 2011. Enter the S&P in 3, 2, 1 …
We can also look at other countries as an example of what will happen to the U.S. if our debt ceiling isn’t raised and we default on our debt. Argentina defaulted on its debt in 2002. Immediately, all foreign investment in the country stopped, unemployment jumped from 13.6 percent in October 2001 and peaked at 27.5 percent in October 2002, its gross national product shrunk by 10.89 percent, and the currency became so unstable people were trading pesos on the black market for U.S. dollars.
Argentinians falling back on U.S. dollars in uncertain economic times brings up another important point, which is that the U.S. economy is the world’s pressure valve. Governments of developing nations tie their currency to ours: Jordan, the Bahamas and Hong Kong all tie the value of their currency to the U.S. dollar. In other, more extreme cases, a country’s currency has become so worthless that the government has abandoned it altogether and switched to U.S. dollars.
In Zimbabwe, for instance, the Zimbabwe dollar became so worthless that the government abandoned it and switched to U.S. dollars. In Myanmar’s cash economy, a U.S. dollar is so revered and coveted that vendors will often refuse dollar bills that are folded, wrinkled or torn.
In short, the world economy runs on the U.S. dollar. If congress does not raise the debt ceiling, the entire world’s economy will be affected. The International Monetary Fund estimates that global economic growth will slow by .5 percent if the U.S. defaults on its obligations. This might not seem like much, but in many instances, .5 percent is the difference between a country growing and one falling into a recession. For those countries, like Greece, Spain, Italy and Portugal already struggling with deep recessions, a U.S. default will make it even harder to claw their way out.
In addition, U.S. Treasury bills are the gold standard and considered to be the safest investment in the world. Not raising the debt ceiling and defaulting on our debt, even for a short time, means foreign investors will no longer consider the U.S. a safe bet, and because of that, investors will demand higher interest rates for U.S. bonds. Higher interest rates on U.S. bonds mean our current $17 trillion debt will become more expensive. Having our debt be more expensive means congress will be forced to make decisions no one wants to make, such as fundamentally altering Social Security, Medicare, and Medicaid, ending federal investments for research and development and education, and scaling back on our investments in national defense.
Republicans aren’t just being irresponsible with our economy; by playing with the U.S. debt ceiling, they are being irresponsible with the world economy.
