Tuesday, August 02, 2011

Debt Ceiling crisis resolved

With last night's affirmative House vote, it seems that the country's debt ceiling crisis has passed. The Senate is supposed to vote early this afternoon but with apparent widespread (if grudging) support in that body and the expectation that the President will immediately sign the bill, the risk that the US will fail to pay its bills will be eliminated for another 18 months, at least.

A default by the US government would have been disastrous all around. Late or skipped payment by a government would have the same consequences on future borrowing as they would on an individual: increased interest rates. Because so many non-governmental loans from mortgages to car loans to credit card balances have interest rates tied to that paid by the government, a default would have increased everyone's costs. Now the question becomes whether this phase of fiscal austerity by the Federal government will itself have an adverse effect on the economy. More people and entities that care to admit it are dependent, both directly and indirectly, on government spending and the enormous cutback contemplated by this debt ceiling resolution will have some negative consequences. How severe remains to be seen.

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