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Posted at 04:35 PM ET, 07/15/2011

Danger of default: ‘This is not some abstract issue’


“[T]his is not some abstract issue,” President Obama said today at his third press conference in 17 days. This and the words that followed are the message that I hope sinks in for folks. Far too many seem to think the obsession over Aug. 2 is the political equivalent of the mania that surrounded May 21. Or they think that default would be a no-big-deal event that will affect only those lazy bureaucrats in Washington. If the United States fails to meet its obligations, the American people will feel the effects almost immediately.

Please keep in mind that raising the legal limit on how much the Treasury can borrow is not giving the feds more money to blow. It’s to cover money already blown. As Obama said at his first press conference, not to pay those outstanding bills would be akin to taking a vacation and buying a car and then deciding not to pay. The United States must pay its bills.

“If we do not, it could have a whole set of adverse consequences,” Obama warned. “We could end up with a situation, for example, where interest rates rise for everybody all throughout the country, effectively a tax increase on everybody, because suddenly whether you’re using your credit or you’re trying to get a loan for a car or a student loan, businesses that are trying to make payroll, all of them could end up being impacted as a consequence of a default.”

Moody’s and Standard & Poor’s let it be known this week that failure to act would negatively impact the credit rating of the United States — for the first time in its history. Again, if you think this won’t affect you, you’re crazy. If the nation loses its AAA credit rating, interest rates will spike not only on the interest attached to the national debt but also for all forms of credit. Hence, the emphasis on credit card, car and student loans. No one will escape this tax increase.

And as I pointed out through the words of Rob Nichols of the Financial Services Forum, even a one-notch downgrade to AA would unleash hell on the American people.

Nichols says that if the U.S. bond rating drops to AA that “interest rates would climb maybe 100 basis points.” For the uninitiated, 100 basis points equal 1 percent. That seemingly small increase, Nichols said, “would create a huge drag on economic growth,” citing a Federal Reserve report suggesting that a 100 basis point increase would lead to a nearly 1 percent decrease in gross domestic product (GDP). . .. Nichols then brought it home: a 1 percent drop in GDP is equal to approximately 1 million jobs.

The president and Congress cannot let this happen. Both sides want to do something big. Safeguarding the full faith and credit of the United States — and the economic security of every man, woman and child who lives in it — is as big as it gets.

By  |  04:35 PM ET, 07/15/2011

 
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