There is something incredibly depressing, not to mention cynical, about the so-called Plan C outlined by Senate Minority Leader Mitch McConnell (R-Ky.). The nation is staring default in the face, and he’s more interested in playing political games to save his party from blame than safeguarding the full faith and credit of the United States. Sure, President Obama would be given the authority to raise the debt ceiling. But then Democrats on Capitol Hill would be hammered on the campaign trail next year for casting votes to allow the president to raise the national borrowing limit.
Jennifer Rubin thinks what McConnell has proposed is “genius.” Politically speaking, she is right. But because the consequences of the game he’s playing are so dire, McConnell’s plan qualifies as evil genius. The United States is galloping at full speed toward a cliff. And we could start slipping off that cliff, not on Aug. 2, when the Treasury loses its legal ability to borrow money, but most likely around July 22 or 24.
That’s when the White House says a deal needs to be done to allow for the bill to be drafted and voted on in time for Aug. 2. As a result, the first sign of calamity could come from the ratings agencies. Remember, S&P, Fitch and Moody’s have already warned that the AAA bond rating of the United States is at risk of being downgraded. In fact, last month, Moody’s flat-out warned, “Since the risk of continuing stalemate has grown, if progress in negotiations is not evident by the middle of July, such a rating action is likely.” The minimum rating action any one of them could take is to downgrade the U.S. to double-A, which Moody’s announced two weeks ago “would be the most likely outcome” in a debt-ceiling rated default. And that’s when a world of hurt from inaction would be unleashed on the American economy and 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). This is also featured in a report from JP Morgan Chase on “The Domino Effect of a US Treasury Technical Default.” Nichols then brought it home: a 1 percent drop in GDP is equal to approximately 1 million jobs. A nation with 9.2 percent unemployment and a struggling economic recovery literally cannot afford to let this happen. And, remember, this is the minimum that could happen.
Groups, such as Financial Services Forum, the Chamber of Commerce, the Business Roundtable and the National Association of Manufacturers, have been making additional points in Capitol Hill meetings over the past several weeks. Not only would economic growth and job creation be stunted, but the global financial system itself would be under threat as Treasuries lose their value and banks face insolvency. The ensuing chaos would accelerate calls for a new non-dollar global reserve currency.
Closer to home, the implications for government operations would be immediate. In the month of August, the federal government will have $306 billion in expenses. But it is estimated that it will bring in only $172 billion. To come up with the remaining $134 billion, the government would basically have to rob Peter to pay Paul. This explains why Obama told CBS Evening News anchor Scott Pelley yesterday that Social Security checks and military pay might not go out on Aug. 3. Check out the chilling report from the Bipartisan Policy Center that shows why what the president said is no idle threat.
The situation is so alarming that a vast coalition of Wall Street and Main Street business leaders sent a letter to the president and every member of Congress yesterday demanding action. They want the debt ceiling raised and they want a plan that at least stabilizes the debt as a percentage of GDP. But most important, they want leadership.
Now is the time for our political leaders to put aside partisan differences and act in the nation’s best interests. We believe that our nation’s economic future is reliant upon their actions and urge them to reach an agreement. It is time to pull together rather than pull apart.
McConnell’s plan doesn’t meet that definition of leadership. Doesn’t even come close.