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Saturday, May 14, 2011

More on Debt Ceiling Charade

by Calculated Risk on 5/14/2011 03:43:00 PM

From the WSJ: Geithner Issues Warning on Debt Ceiling

Treasury Secretary Timothy Geithner warned in a letter to Congress that failure to raise the $14.294 trillion debt ceiling would drive up interest rates, push down household wealth, put more pressure on federal entitlement programs and cause a double-dip recession.
The U.S. government debt is projected to hit the ceiling Monday. Treasury officials say they have until Aug. 2 before the country could begin defaulting on its debt.
"This would be an unprecedented event in American history," he wrote. "A default would inflict catastrophic, far-reaching damage on our Nation's economy, significantly reducing growth, and increasing unemployment."
First, even though the U.S. will hit the debt ceiling on Monday, there are games that Treasury can play - so Congress has until August 2nd. And there might even be some more tricks that can delay the date further - like promising to pay defense contractors sometime in the future. But some day in the not too distant future Congress will have to raise the debt ceiling - or suffer the consequences that Geithner describes.

Second, Congress will probably push this to the brink, but they will raise the debt ceiling before the country defaults. The first rule for most politicians is to get re-elected, and the easiest way to guarantee losing in 2012 is to throw the country back into recession. If that happened, I believe the voters would correctly blame the leaders of Congress, and I think Congress knows that too. Therefore it won't happen. I'm not worried and neither are investors.

Summary for Week Ending May 13th