Ok, that might be an exaggeration. But it’s definitely dropped farther down my worry list. Much farther.
Why? Because it’s too late to worry about it. Speaker Boehner could agree to a debt ceiling increase to $30 trillion tomorrow (the current limit is about $14.3 trillion) and it wouldn’t matter all that much. The debt crisis isn’t coming. It’s here.
As I’m sure you know, recently several credit organizations have threatened to lower the United States’ credit rating from AAA, including Moody’s and Standard & Poor. S&P even went a little farther than just threatening and lowered the outlook from ‘stable’ to ‘negative’. The Moody’s statement does say a bit about the debt ceiling, but it’s what else they say that’s important (emphasis mine).
Moody's Investors Service said today that if there is no progress on increasing the statutory debt limit in coming weeks, it expects to place the US government's rating under review for possible downgrade, due to the very small but rising risk of a short-lived default. If the debt limit is raised and default avoided, the Aaa rating will be maintained. However, the rating outlook will depend on the outcome of negotiations on deficit reduction. A credible agreement on substantial deficit reduction would support a continued stable outlook; lack of such an agreement could prompt Moody's to change its outlook to negative on the Aaa rating.
The bold area mirrors what S&P said exactly. The credit agencies aren’t just worried about the current debt limit, but about the future ability of the United States to pay it’s debt. And they’re right to be so. Unless we both a) grow the economy, and b) make serious progress in reigning in government spending, we won’t be able to pay our debt. A point I’ve made before.
UPDATE: @drewwill points out that I should say that the credit agencies are also and possibly primarily worried about the risk of the no political deal occurring, thus forcing the U.S. to default. I was a little sloppy here and left that out, as I really don’t think that is going to happen. There are still things Bernanke can do to buy us more time, and in the end, Congress will raise the debt limit. Boehner may try to get as much out of it as he can, but he knows that in the end, the limit will be raised. Still, this is a risk that Moody’s and S&P examine, and it’s in the quote above “very small but rising risk of a short-lived default”.
So, what happens when credit agencies get skittish about the ability of a debtor to pay off it’s debts? The investors get skittish as well. Which finally brings me to my point. As I predicted back at the beginning of May:
It won’t matter how high we raise our debt ceiling, if we can’t get anyone to buy our debt.
As Ed Morrissey says:
We are rapidly approaching a moment of truth. While we debate the finer points of raising debt limits and calculating just how many hundreds of billions of dollars in annual deficits we’ll tolerate, the truth is that the money to fund any deficit spending may soon run out. Fiscal sanity may wind up being imposed on us if we don’t choose that path willingly.
We’re there. Right now. Today. China isn’t buying anymore of our debt, and is trying to dump what it already has. Japan isn’t buying any. And now Russia plans to lower its U.S. debt holdings according to the Wall Street Journal.
Everyone thinks the problem will be when the credit agencies lower our credit rating. They keep talking about what will happen then, interest rate increases, economic woes, etc. I’m sorry to be the one to say this, but that’s the optimistic outlook. We don’t hit the crisis when our credit rating is lowered, but when investors pull out over that fear. In other words, now. We are at the tipping point. The debt ceiling is no longer the crisis. Our ability to pay off our debt is.
In just a few days, QE2 will end. More and more people are expecting a QE3. Unless we get the economy moving, and take steps to reduce our future debt, the investors aren’t coming back. Frankly, I put the likelihood of either of these occurring before January, 2013 at very close to 0. And, until the investors come back, then we are facing either forced austerity or a succession of QE’s, each less successful than the last. Or possibly some combination. None of these scenarios will be at all pleasant to live through. You may to start hearing the words “Great Depression” and/or “Weimar Republic” often. Or possibly, “Greece”.
Europe is a doom-monger's paradise at the moment. Riots in Greece; summary Cabinet reshuffles; meetings between Merkel and Sarkozy to save the single currency — and there's still the potential for things to get worse, much worse. If the Greek government defaults on its debts, then there's no knowing where the contagion will spread, only that it it will spread wide: from Spain and Portugal to markets across the world. Share indices have already been trembling at the prospect, although many of them rallied slightly today.
One consolation, however scant, is that all this crystallises just what can happen to governments who operate beyond their means. Indeed, this seems to be the point that Jean-Claude Trichet, the President of the European Central Bank, makes in an interview with the Times (£) today. As he puts it, "We were not at ease with the idea that, in the heat of the crisis, all countries were called to spend as much as possible, embark on deficits as much as possible." And he concludes the argument with a sober warning: "I believe that the tensions we are observing in Europe today are part of a much more global phenomenon."
And we can look to the riots in Greece as an example of what will happen here when forced austerity happens. People tend not to like it all that much when their free handouts disappear. Greece and several countries in the EU, as well as the United States have arrived at Margaret Thatcher’s predicted socialistic crisis.
Socialist governments traditionally do make a financial mess. They always run out of other people's money. It's quite a characteristic of them.
I suppose we can take some solace in the fact that as we go down, we’ll take down most of the rest of the world with us. The whole world depends on American dollars. Misery loves company, after all. The unspoken corollary to that statement, however, is “company does not reciprocate”.
Of course, there’s always the possibility that I’m just being overly pessimistic today. President Barack Obama (D-USA) and the Democrats in Congress (and even a lot of the Republicans) seem to think so, and surely they’re smarter than me, right?