Let us give you our take on this debt crisis. You can’t eat chicken wings every day of your life and then when the doctor tells you that you need to take some medicine to lower your cholesterol, you decline and say that you are just going to stop eating chicken wings.
How does the above relate to the debt crisis? Americans, all of us, have overspent (chicken wings) and built up more than $14 trillion in public debt. In our opinion, the solution is for the government to increase revenue through a combination of increasing taxes, broadening the tax base and practicing fiscal restraint by a reduction in spending. This is the correct approach. We can’t just cut spending (stop eating chicken wings) without raising the debt ceiling (medicine). If we do we risk defaulting on our debt, the equivalent of a financial stroke.
Nobody knows how the impact of a default on our debt will be felt on either Wall Street or Main Street. However, the risk is worth more than the reward. Market pundits and economists have forecasted anything from a muted response from a default to another severe recession. We believe that the already slowing economy will slow even further, quite likely coming to a halt, one that will be temporary and short-lived assuming that the political wrangling over this subject is also short-lived. Politicians have the uncanny ability to do the wrong thing at the wrong time. However, once they realize that their reelections are in jeopardy, they will do the right thing as outlined above.
Despite the fact that the United States has never defaulted on its debt and as such we would be in uncharted territory, we believe that some of the following might occur. Almost certain would be a downgrade of America’s AAA credit rating to AA by Standard & Poor’s which could very well lead to hiring borrowing costs for both public and private entities. In addition, investors in U.S. Treasuries may become reluctant to continue to invest or require higher interest payments for the additional risk. Continued uncertainty over the debt issue would also cause businesses to remain cautious therefore slowing an already slowing economy. This will also filter down to individuals. Finally, the value of the U.S. dollar, the world’s reserve currency, will also be called into question. That will ultimately be inflationary, once again eroding America’s standing as the global economic power.
THE BOTTOM LINE – Fiscal responsibility is of utmost importance to the long-term financial health of the United States. However, this is a process and cannot occur overnight. It therefore becomes imperative that Congress approve a raising of the debt ceiling as it begins to reign in spending.