The writer is a professor of finance at Creighton University. He writes as an individual and not on behalf of Creighton.
Congress will soon vote on whether to increase the debt ceiling. It is truly unfortunate, but they will be voting on the wrong issue. They should be voting to eliminate the concept of a debt ceiling.
Before you leap to the conclusion that I am advocating unfettered government deficit spending, think again. I am a fiscal conservative and very much in favor of the U.S. government getting its fiscal house in order. But that is a separate issue from the debt ceiling.
Raising the debt ceiling simply allows the U.S. government to make good on obligations that have already been incurred. The time to show fiscal restraint is when the appropriations are being approved, not when they come due.
One of the biggest truisms in investments is that the financial markets dislike uncertainty. A quick read of the markets leads one to believe that there is some concern, but the consensus is that default on U.S. obligations will likely be avoided, that the possibility of default is remote.
If market participants truly believed that default was imminent, we would see significant weaknesses across the globe. What we are seeing in Washington, D.C., is political posturing — grandstanding — by both political parties.
Both parties see this as a great opportunity to stake out their philosophical turf. Coupling the vote to raise the debt ceiling with a measure to defund or delay Obamacare would be reprehensible and illustrative of the worst of American politics. Deciding to make good on the obligations of the U.S. should not be tied to political considerations of any kind — period. They are separate issues.
If the unthinkable happens, and cooler heads do not prevail, and the debt ceiling isn't raised, the economic fallout would be catastrophic for the markets around the globe. This would send shock waves through the entire global financial system.
The markets in the United States would likely fall by amounts commensurate with or exceeding those witnessed around the failure of Lehman Brothers or Black Monday. These events would cripple the economy, significantly raise our borrowing costs and reduce the value of the investments and retirement accounts of individuals.
The most curious aspect of this situation is that the debt ceiling is entirely unnecessary. It is an artificial borrowing limit, and it creates uncertainty every time it is approached. It doesn't actually do anything to promote fiscal restraint, yet it is causing tremendous discomfort with investors throughout the world.
Other developed and even developing countries throughout the world seem to be able to operate without the concept of a set debt ceiling. In fact, the only democratic country in the world with a debt ceiling other than the United States is Denmark.
The bottom line is that in all likelihood the debt ceiling will be increased. The stakes are simply too high not to do so. Neither party wants to risk the fallout from default.
What is needed is a bipartisan deal to cut spending and reform entitlements. The deal that ends this current standoff is not likely to be a major one. It would not significantly help solve the long-term structural debt problem but would be a smaller, temporary agreement allowing the debt ceiling to be raised and postponing any noteworthy actions to the future.
In other words, the legislators in Washington are likely to continue to “kick the can down the road” instead of making any changes to substantively reform the fiscal situation. This is an extremely disappointing development — but one that is not surprising given the political rancor in our nation's capital.