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Tuesday, July 12, 2011

Debt Ceiling Charade Update

by Calculated Risk on 7/12/2011 09:35:00 PM

I'm frequently asked why I'm not worried about the debt ceiling, and why the bond market doesn't seem to care.

The answer is the debt ceiling is a joke. It serves no purpose except political posturing.

The budget is about the deficit; the debt ceiling is about paying the bills - and the U.S. will pay its bills.

Here is what I wrote two months ago:

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.
We are almost to the "brink".

Let me add: In this case, voters would blame the Republican party, and if the debt ceiling is not raised, the "Republican" brand would become toxic and synonymous with fiscal irresponsibility. The leaders of Congress know that and they will scramble to find a solution. I doubt this is the end of the GOP :-)

Earlier I argued the smart thing to do would be to eliminate the debt ceiling. Maybe we are headed in that direction. Today, Senator Mitch McConnell proposed something along those lines (not clean though).
Senate Minority Leader Mitch McConnell (R., Ky.) unveiled a new proposal that would allow President Barack Obama to raise on his own the federal borrowing limit by $2.4 trillion in three installments before the end of 2012, unless two-thirds of Congress votes to block it.
Somehow the debt ceiling will be raised. Of course there is a huge battle ahead over the budget for the next fiscal year (the fiscal year starts on October 1st). It never ends.