The debt debacle has obviously been well covered in the news and on the blogosphere. James Fallows puts the impact of policies into perspective:
The point is that governments can respond to but not control external shocks. That’s why we call them “shocks.” Governments can control their policies. And the policy that did the most to magnify future deficits is the Bush-era tax cuts. You could argue that the stimulative effect of those cuts is worth it (“deficits don’t matter” etc). But you cannot logically argue that we absolutely must reduce deficits, but that we absolutely must also preserve every penny of those tax cuts. Which I believe precisely describes the House Republican position.
He also includes “the chart that should accompany all discussions on the debt ceiling”:
Tyler Cowen offers a few different ways to view the fact that the US government issued 59% of outstanding AAA soverign debt:
Of the world’s share of AAA sovereign debt, we issue 59 percent of it. (Next is Germany with ten percent and then France with nine percent of the total.) You can read this a few ways:
1. Wow, we really abuse that AAA privilege.
2. Losing the AAA rating would spell disaster for repo markets and the like.
3. The world trusts us enormously, isn’t that wonderful?
4. All of the above.
Building on point number two, losing that rating would also spell disaster for money market mutual funds. Investors treat these funds as cash, and in the few historical cases when funds have “broken the buck” — or dropped in value below $1/share — the markets have panicked and the “broken” funds have generally subsequently failed.
Only this time would be much, much, worse. Money market funds currently hold $301 billion in US debt, which represents about 11% of total money market fund assets. Since the SEC mandates that these funds must hold only AAA assets, they would likely be required to flood the market with treasuries, desperately trying to replace them with AAA rated securities. It would be a bloodbath. And I’d bet that quite a few money market funds would fail in the process, undermining an important class of investments that help provide stability in our financial system.
I seriously doubt it will come to that. I seriously doubt the US debt rating will be downgraded. But it’s absurd that we’re even having these discussions.
And on a lighter note, here’s a time lapse video of an acorn turning into an oak tree: