Tuesday, July 5, 2011

Debt Ceiling Rubicon

In the next few weeks America will turn one way or the other and determine its success as a nation for years to come. I see three outcomes from the debt ceiling crisis, maybe four if President Obama uses a statement in Section 4 of the 14th Amendment (“The validity of the public debt of the United States…shall not be questioned”) to bypass Congress and raise the ceiling by executive order:

1. Pres. Obama gives in to Republican demands for no tax increases (including elimination of deductions) - the debt ceiling is raised

2. Republicans agree to raise taxes (by eliminating some deductions) - the debt ceiling is raised

3. Neither side gives in - the U.S. defaults on its debts

4. Obama raises the ceiling by executive order under the 14th Amendment clause

Only one of these options causes the U.S. to default, but all but the second (Republicans agree to tax increases) would profoundly change the nature, prosperity and influence of our country.

If both sides compromise we return to the normal political operation of our democracy and the Tea Party wing of the Republican Party is discredited.

If Obama gives in then our democracy is over, we will now be governed by blackmail. This is bad for everyone, even those who happen to be in favor of the policy advanced by the blackmail. The "Arab Spring" tells us why - when people feel they don't have a voice the situation is not sustainable. Eventually they will demand to be heard. People like me who voted for Barack Obama don't expect him to do everything the Republican Party demands. If there's 40-50% of the population who feel similarly that's a big problem. When we see democracy being frustated we lose faith in the system, which means that at some point the system will fall apart.

If neither side gives and we default then the U.S. will no longer be seen as the ultimate safe haven and icon of financial stability, a status it has enjoyed since WWII. This means big problems for our economy, diminished influence, higher interest rates, and probably a world economic crisis. I include any temporary ceiling extensions in this category; I think that market confidence would still be shaken by such measures resulting in the same outcome.

If President Obama uses the 14th amendment clause to bypass Congress he will be savaged by the Republicans. If you thought the anti-health care demonstrations were bad, get ready for real chaos. This is the most unpredictable outcome. The financial reputation of the U.S. is saved but at the cost of riots in the streets and possibly the fall of our government. Hard to say for sure if it would get this bad, but this is a wild one.

So three of the four options result in a big change for the worse, and the safe option seems the least likely, in my opinion.

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