Get ready America: the debt ceiling is back
Filed under: Investing
Another debt-ceiling cage match is the last thing the American economy needs right now. Remember what happened during last summer's battle? It was ugly. But we may not be able to avoid it this time around, so here's a preview of what we might expect.
All of us have credit limits that determine how much money we can safely borrow to pay our bills. The federal government's credit limit -- or "debt ceiling" -- has a few more zeroes than ours. It currently stands at $16.4 trillion. And unlike those of us who have learned to live within our means, Uncle Sam spends a lot more money than he takes in.
To raise the debt ceiling, both houses of Congress and the president must agree to do it. In the past, that's never been an issue. In fact, the debt ceiling has been raised 74 times since 1962 -- 10 times since 2001 alone.
But last summer, something that had been little more than a formality exploded into a showdown between the Republican-controlled House of Representatives and the Obama administration that brought the U.S. to within hours of defaulting on its debts.
In the end, an agreement was reached, and the country did not default. But as a result of the high-stakes, high-publicity showdown, the U.S. -- for the first time in its history -- lost its AAA credit rating, the highest rating credit agencies can bestow on sovereign or corporate debt.
Our Credit Rating Conundrum
Credit ratings count, because they help determine the interest rate at which the country can borrow. Right now, 10-year Treasuries -- the benchmark U.S. Treasury bond -- are yielding about 1.7%, which is wonderful. It means we only have to pay investors a measly 1.7% or so to buy our debt -- that's cheap. Right now, Spain and Italy are paying investors about 6% for loans.
The rate at which the country can borrow also determines the rate at which consumers and businesses can borrow. As Treasury yields rise, other interest rates go up with them. Higher interest rates mean everything costs more, which could negatively impact our very tentative economic recovery.
Oddly, when the U.S. took its credit rating hit last year, rather than investors fleeing our now "risky" debt and seeking safer havens, just the opposite happened. Investors flocked into Treasuries, which drove yields to record lows. But if we have another public standoff, and our credit rating drops even more, there's no guarantee that weird bolt of lightning will strike again.
Can't We All Just Get Along?
The U.S. is due to hit its debt limit in early 2013, which means Congress and the president will have to agree to raise it once again or let the country face default. A week ago, Boehner said the only way the House would agree to raise the debt limit was if an equal amount of spending cuts was also agreed to.
So, are we headed for a 2013 debt-ceiling showdown? Not necessarily. A lot of things might change by then. Mitt Romney might be in the White House, for one, which would still leave a Democratic-controlled Senate to potentially fight House Republicans on the debt -- unless the Senate switches hands, too. Alternately, Democrats might retain the White House, regain the House, and keep the Senate. Either of these last two scenarios would likely preclude a debt-ceiling fight.
However the politics work out, it would be good to avoid what happened last summer. The fight over raising the debt ceiling went on for so long and with such histrionics on both sides that, to the rest of the world, America looked like a country that couldn't get its act together.
It's not like we were Greece. We could easily make the payments on our debts; we were just choosing not to.
This article originally appeared on Dailyfinance.com.
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