Saturday, July 23, 2011

What could go wrong?

The way I see it, there are two bad outcomes that could emerge from the debt ceiling talks. Failing to reach a deal would mean that the US could default on some of its loans. This is bad because it impacts anyone else trying to borrow money. Federal debt is normally a sure thing for lenders. They charge a lower interest rate, but are sure of getting paid. Not so if the US defaults. That added risk will affect how they price loans for the rest of us.

The other bad outcome, and I think this is worse, would be a deal that fails to cut up Obama's credit cards. Raising the debt ceiling, without reducing the size of government, will just lead to endless replays of this same drama year after year. This means more borrowing and an unmanageable level of debt; or, it means astronomical taxes to service that debt. Either would be a bullet to the head of the economy.

All in all, the short term disruption of a default would be preferable to endless debt and taxation.