Tuesday morning, Fitch ratings warned that using the debt ceiling as a mechanism for fiscal discipline is ineffective and potentially dangerous, “In Fitch’s opinion, the debt ceiling is an ineffective and potentially dangerous mechanism for enforcing fiscal discipline. It does not prevent tax and spending decisions that will incur debt issuance in excess of the ceiling…”
Fitch ratings is global ratings service. Tuesday morning, they joined the head of the U.S. Chamber of Commerce and the Treasury Secretary in warning Republicans that they need to raise the debt ceiling or else. They wrote, “… failure to raise the debt ceiling in a timely manner will prompt a formal review of the U.S. sovereign ratings. A repeat of the August 2011 ‘debt ceiling crisis’ would oblige Fitch to review its current assessment of the reliability and predictability of the institutional policy framework and prospects for reaching agreement on a credible medium-term deficit reduction plan.”
Fitch points out that the Republican strategy of using the debt ceiling as a mechanism for lowering debt is an ineffective and potentially dangerous plan, “In Fitch’s opinion, the debt ceiling is an ineffective and potentially dangerous mechanism for enforcing fiscal discipline. It does not prevent tax and spending decisions that will incur debt issuance in excess of the ceiling while the sanction of not raising the ceiling risks a sovereign default and renders such a threat incredible.”
In other words, Republican talking points on the debt ceiling are absurd. This is not the way to go about tightening your belt because it does nothing but lower your credit rating. This should be obvious, since the debt ceiling represents money Congress already spent, but apparently things need to be spelled out slowly for modern day Republicans. If you don’t pay off your credit card, they jack up the rate and you fall deeper into the hole. That’s the same idea as not raising the debt ceiling.
Refusing to raise the debt ceiling is only going to make things worse, and add more debt, so this Republican threat is obviously not coming from real concern over actual debt.
Republicans keep saying that spending is the problem and so they must get cuts or else. If that is their position, they need to take it up with themselves. Why haven’t they made defense cuts if they’re so worried about spending?
The Washington Post reported a few days ago that the U.S. Chamber of Commerce is calling out the strategy of using the debt ceiling as a hostage. They indicated that the Tom Donahue, President of the U.S. Chamber of Commerce, “called on Republicans to stop using the threat of default to get the spending cuts they want.”
Higher interest rates mean more debt, not less. And that’s not even touching what they would do to the economy, as Republicans are well aware.
Yesterday the New York Times reported on Tim Geithner’s warning to Congressional Republicans threatening to fail to raise the debt ceiling:
He (Geithner, Secretary of the Treasury) also said that Congress could cause “irreparable harm” to the economy by failing to lift the debt ceiling in a timely manner. The country makes about 80 million separate payments a month, to seniors, soldiers, bondholders and thousands of others. Were Congress to fail to raise the ceiling, Treasury would miss an estimated 40 percent of those payments. It might also throw the financial markets into a panic, compounding any economic damage caused by the missed or delayed payments themselves.
Uncertainty is already hurting the economy. “Uncertainty” used to be the hammer Republicans used to get anything they wanted — but now they are standing firm against a global ratings company, the U.S. economy, the U.S. Chamber of Commerce, and the Treasury Secretary. Party of business? Not so much anymore.
Fitch ratings poked a huge hole in Republican talking points by warning that using the debt ceiling as a mechanism for fiscal discipline is ineffective and potentially dangerous. The debt ceiling is NOT AN EFFECTIVE MECHANISM TO PREVENT TAX AND SPENDING DECISIONS.
What possible reason do Republicans have for refusing to pay their bills?
Image: David Parkins for the Economist