Well, the US Congress is at it again, jerking around with the economic stability of the entire globe just to irritate and oppose President Obama. They’re threatening to not raise the debt ceiling, which I will discuss in a moment, and they plan to tie onto it a resolution to defund Obamacare. Essentially if Congress approves the Continuing Resolution to raise the debt ceiling it will also defund Obamacare–the healthcare legislation that over 40 million uncovered people are depending upon (including myself). If they don’t pass the Continuing Resolution the country will default on its bills and will save Obamacare.
What is this debt ceiling thing anyway? In 1917 Congress created a limit on how much debt the country could have in order to rein in the power of the Department of Treasury to spend money and/or sell Treasury bonds. As the size of the country’s economy grew so too did it’s ability to carry debt and Congress kept on spending and spending. Congress agrees to a certain amount of expenditures every time they approve a budget. Congress typically agrees to spend more and increase the country’s debt causing them to turn around and increase the debt ceiling. The entire concept is an outdated and useless process EXCEPT for the fact that it can be used as a political cudgel against the Executive Branch, who is responsible for paying the debts.
This is all nuts because they playing with fire for the sake of political points. Why is it playing with fire? Below are some simple reasons:
- No Continuing Resolution means the U.S. Government will experience a shutdown, which will harm our already slow moving economy. We only just reached the 2% mark in GDP growth and something like this will drop us below 2% or even make the economy shrink again. Hello, Recession, here we come again!
- No Continuing Resolution means a default and a default would hurt our credit.
- If we default, short term interest rates will shoot up and we’ll end up paying people back eventually anyway with interest. This will only increase our debt and bring us back to this point again at some point in the future.
- If we default, Treasury Bonds will decrease in value. U.S. Treasury Bonds for the last 30 or so years have been considered the safest investment in the world. Hell, even China puts its own money into US T-Bonds and not their own!!!!! Less investment in the US, means a shrinking economy.
- If Treasury Bonds lose value, non-FDIC insured “banks” (hedge funds, structured investment funds, money market funds–you know the guys who handle your 401K and IRAs….) will lose a ton of money. See they invest heavily in T-Bonds because they are so reliable and yield steady profits. They form the core of their investments and function like the lifeblood of our financial system. Cut off the lifeblood and you might get an old fashioned run on the bank.
- If people start making a run on the banks, we’re looking at an economic meltdown on the scale of the Great Depression. Stocks will plunge in value because of the economic panic (it happens any time there is bad news). People will start hoarding cash and the price of metals will shoot up (because gold in hand is better than devalued dollars) and things will start to get really, really ugly.
- If we default and numbers 2-6 happens, the rest of the world, which isn’t recovering from the last Recession (with the exception of China), will take a HUGE hit as well. If we think a Depression here is bad, it will be nothing to what it will do in Europe, Africa, Central and South America….they have a much smaller margin for error because a greater percentage of their population live at or below poverty in those regions. Even the middle classes in England, France, and Germany will lose their savings and retirement funds….the last resort for cash when a family is strapped. They’ll have nothing to fall back on except their governments–or at least those governments that provide socialized services (like healthcare in England). And even those will be cut back severely because what hurts the people hurts the governments.
So Congress is willing to risk all this so they can defund a law that is essentially extremely popular and to give a big middle finger to President Obama. You have to give the GOP credit…they’ve managed to blame the President and trick the American people into believing it’s all his fault when in reality they created the budget that puts us deeper into debt and they created the artificial “debt ceiling”. See how that works? Congress is like a really annoying brother or cousin who follows you around all day picking on you, falls and gets a black eye in the process, and then runs to your Mom to tell on you for hurting him. Can we please elect some grown ups to serve in Congress in 2014 and 2016?