I feel comfortable stating that on August 3, with or without an increase in the debt ceiling, the sun will still rise in the East and set in the West, as it has for all time.
If you listen to the apocalyptic fear mongering over the debt ceiling drama -- much like that which surrounded TARP in 2008 -- you may be led to believe otherwise.
Don't buy the hype about default.
Why?
Because the US has defaulted before... and (believe it or not) the earth still kept spinning on its axis.
In 1933, FDR authorized the "Great Gold Robbery," in which, through the Emergency Banking Act, he was able to order Americans to turn over all their gold to the government. Later, the Congress passed a joint resolution making it illegal to "require payment in gold or a particular kind of coin or currency, or in an amount in money of the United States measured thereby."
In other words, the US would no longer honor the repayment of its debt in gold, creditors would only receive fiat money in exchange. The US Government had defaulted.
In 1971, when Nixon closed the gold window -- the dollars last tie to gold -- the US Government began a slow and steady form of default, a course our government has continued down for the last 40 years.
This seems to be the case John Tamny, an editor at RealClearMarkets and Forbes, argues in his latest article.
He discusses Treasury Secretary Tim Geithner and Senator Pat Toomey, both men would appear on opposite sides of the debate, yet both seem to agree on the consequences of not raising the debt ceiling -- catastrophic domestic and global economic damage.
Of course if what Geithner and Toomey say is true, the answer is very simple. Geithner's Treasury collects far more than enough each month to stay current on Treasury interest obligations, so if default really would be the catastrophe that he says, he should make sure to put the U.S.'s creditors first in line for monies available, after which a Congress that's really never cut spending (thanks to Larry Kudlow for clarifying this) in nominal dollars terms would have to find a way to make do with less money to spread around.
The above naturally begs the question why the Republicans are even negotiating at all. They talk an awful lot about the importance of smaller government, they've been handed a legal barrier that will necessarily make it small as interest costs on Treasury debt rises, so if they truly believe their own rhetoric, they ought to hold firm.
A government that borrows less tautologically means more credit will remain in the private economy, and with investment an essential driver of economic progress, the alleged party of growth could achieve a smaller government alongside more investment in the private sector in one fell swoop. The answer to the debt ceiling question seems obvious. Do nothing.
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