6 Things That Could Go Wrong If We Don't Raise the Debt Ceiling

By Julia Edwards

National default now looks like a real possibility. Why we should worry about the fallout.

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What started as hot air has now become a thunder cloud. Should Congress fail to reach a compromise to raise the debt ceiling, a multitude of economic sectors could take a hit--if not come to a screeching halt. We review the effects as forecasted by economists and ask "Should you worry?" The answer, in short: Yes, probably so.


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1. Global economy: Asian and European stocks "shuddered," on Monday, as William Alden of the Huffington Post put it, after Congress failed to reach a compromise by the end of last week. The tumble was slight for now, but Alden suggests that the fall was just the first tremors of a greater catastrophe waiting when the stalemate in Washington triggers panic on Wall Street.

2. Government programs: If the Treasury loses its authority to borrow, economist Nigel Gault of IHS Global Insight predicts that the government would have to cut its spending by 40 to 45 percent. Highway projects, federal courts, Pell Grants, and food stamps are all on the line.

3. The recovery: Gains made since the bottom fell out in late 2008 could slip away and "would no doubt have a very adverse effect very quickly on the recovery," said Federal Reserve Board Chairman Ben Bernanke.

4. Your retirement: This one's still up in the air. President Obama said recently that Social Security payments are on the line, should the country not be able to borrow. But budget analysts say that the administration could ensure that the checks are paid.

5. America's credit: Standard & Poor's said last week that there is a 50 percent chance it would cut the nation's credit rating within the next three months. If no deal is reached, Standard &Poor's said that the United States' credit would be reduced from AAA to D.

6. Businesses: In a no-deal scenario, businesses could squeak by without paying increased taxes. But when they see a 10 percent decrease in the gross domestic product, loss of confidence from foreign investors, and a consumer base slipping back into a recession, that tax freeze may look less appealing.

Image credit: Brendan McDermid/Reuters

This article available online at:

http://www.theatlantic.com/politics/archive/2011/07/6-things-that-could-go-wrong-if-we-dont-raise-the-debt-ceiling/242555/