Wednesday, July 13, 2011

United States and the Debt Ceiling

If Congress fails to raise the debt ceiling by the August 2nd, it is estimated the the Treasury Department of the United States won't be able to pay at least 40% of its bills.

Ben Bernanke, the head economist of the Federal Reserve, said that if Congress blows it on debt ceiling talks and fails to raise the ceiling, the economic fallout would be catastrophic. He said it before and he has said it again.

Now, I'm young. I don't know if I'm a democrat or a republican. I think of myself as fiscally conservative, but find the 'no-tax' policy of Republicans to be ineffectual. However, I am old enough and educated enough to know that no matter what party you are from, it is imperative that Congress vote to increase the debt ceiling before August 2nd. The United States Treasury security is seen as the most liquid and the safest in the world. When investors compare the interest rates of bonds, they compare to the 'risk-free rate'. That risk free rate is the rate of US Treasury Bonds. That means the failure to raise the debt ceiling would raise interest rates and send shockwaves through the entire world economy.

There have been arguments by the Right saying that if the Government uses whatever incoming cash flows they receive after the Aug 2nd deadline to pay off the interest (totalling in at around $1 bil/day) then the US would keep their pristine credit rating. Not true. Bernanke has said that defaulting on the obligations to even just citizens could potentially cause a rating-downgrade... afterall, try paying only 60% of your bills. The US has never in its history been downgraded.

Like I said... I'm just a young student. Like Bernanke said... raise the debt ceiling. I think in this situation we are both right.

United State Debt Ceiling

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