With the Redskins season having been on hold pending a resolution of the NFL lockout (cross your fingers all goes well today football fans!), the only equivalent soap opera for those of us in the Washington D.C. area to focus on has been the debt ceiling drama.
What I find amazing is how the discussion has driven economists from Adam Smith to John Maynard Keynes from dusty library shelves to the front page of many daily newspapers. Maybe it is a natural outcome of the last couple of years, when our collective attention has been more focused on the economy. Seeing your 401(k) decline 50% in just a couple of months has a way of making anyone look more closely at the economy.
I’m not going to delve into the political side of the equation, as fascinating as that has been to watch. Nor am I going to offer an opinion on what the outcome should be. Half of my undergraduate degree was in economics, and I came away convinced that you can find a very reputable economist who can support practically any side of a given argument with very credible arguments and data. Try reading Freakonomics and Super Freakonomics, and then go online to read the debates they kicked off on so many issues!
What makes this debt ceiling discussion a bit different is how the ratings agencies are influencing the process, which is completely ironic given the role that they played in getting us into this mess in the first place. By threatening to downgrade the AAA credit rating of the United States, they have raised the stakes on the debate well beyond the traditional economic arguments, or even the political ones as well. We may all be Keynesians, and we can talk about deficits as a percentage of this or that indicator 15 or 20 years hence, but a downgrade at this part of the recovery cycle would have real and dramatic effects.
But how likely is it to happen? Hillary Elder, the Vice President/Director-Money Market Strategies for the National Investment Fund for Credit Unions (NIFCU$, our short-term investment fund) has written an excellent piece on the topic of the fiscal budget deficit debate.
Hillary is based in California, and has some first-hand insight into what happens when expenses exceed revenue. I won’t give away all of the article, but Hillary sees default as a remote possibility – you’ll have to read the rest of her article to find out why!
Post written by Dave Frankil, President, NAFCU Services Corp.