The markets and the raters and world sources are being quite clear what would happen should we refuse to raise the debt limit and default:
Moody’s Investors Service warned late on Wednesday that the U.S. could lose its top credit rating in coming weeks if a standoff between the White House and congressional Republicans over raising the statutory borrowing limit is not resolved.
Earlier on Thursday China, the United States’ biggest foreign creditor, urged the U.S. government to adopt responsible policies to protect investor interests after the Moody’s warning.
Another ratings agency, Standard & Poor’s, also privately told U.S. lawmakers and business groups that it might still cut the U.S. government’s rating if the government fails to make any of its expected payments — on debt or other obligations — a congressional aide said on Thursday.
China, who owns a lot of our debt, is not being subtle:
The authorities in Beijing added their voice of concern Thursday, though in more muted terms.
“We hope that the U.S. government adopts responsible policies and measures to guarantee the interests of investors,” Hong Lei, a Foreign Ministry spokesman, said in response to questions about the Moody’s report.
The comments echoed those made by officials in Beijing in April, when Standard & Poor’s lowered its outlook on the United States from stable to negative because of the country’s high budget deficit and rising government indebtedness.
China holds more than $1 trillion in United States Treasury securities, making it highly sensitive to any developments that could lower the value of those holdings.
Yet still, the wingnut intelligentsia think they can defy reality through the power of ideology, and are doing so by attacking the ratings agencies:
The ratings agencies — all-knowing, all-seeing, omniscient — have weighed in on the U.S. federal debt “crisis,” talking about downgrading U.S. paper in anticipation of a Beltway failure to cut a deal to raise the debt ceiling, thus engendering a “default.”
Oh, please. Can anyone believe that the global capital market cannot distinguish between a Greek-type situation, in which the government literally cannot service its debts, and the U.S. condition, in which a political dispute might delay some interest payments for a few days? The question answers itself. More generally, has there ever — ever– been a case in which Moody’s or Standard & Poor made an announcement in light of information not already known by everyone? The ratings agencies, always closing the doors on empty barns, are virtually worthless, and would be unlikely to survive an elementary market test were it not for some legal requirements that their ratings constrain certain investment decisions.
Moreover, even the underlying premise is incorrect: In the event that the debt ceiling is not increased, federal revenues will be far more than merely sufficient to service the existing debt, roll over maturing debt, etc. Revenues will be sufficient to pay Granny, our servicemen, and other such untouchables. The ethanol producers and myriad other interests might have to extract their snouts from the federal trough for a few days; but so what?
Look, I can not stand the ratings agencies and think they got away with widespread fraud in the financial meltdown. I would love it if we reformed the process. But I realize that this is what I want to change, and not how things work now. This really is not hard to understand. People who run up debt and then either can not or will not pay it back are not credit worthy individuals. Every single person on the street understands this. If you have a bad credit rating, it is harder or impossible to get credit, and should you get credit, you will payer higher interest on your debt. That’s how it works. That is the system we have. So even if you hate the ratings agencies and think they are wrong about everything, if we default and fail to make debt payments or pay any of our obligations, our rating will be downgraded. They ratings agencies and the world won’t buy into the wingnut belief of American Exceptionalism in all things. They aren’t going to say “Oh, well, this is different.” How do I know that? Because if you read above, THEY ARE TELLING US AHEAD OF TIME WHAT WILL HAPPEN. We will then start a death spiral of higher interest rates and higher debt repayment rates and so on. And that is on top of the cataclysmic effects this will have on the markets and the overall global economy.
And no one will be safe. No one. Every single investment will be at risk- pensions, mutual funds, 401k, you name it. Again, this is just not hard to understand.