Congress Plays a Dangerous Game of Chicken As the World Watches

By Pam Martens: October 16, 2013

President Obama Walking in Cross Hall at the White House. (Official White House Photo by Pete Souza.)

The People’s House, the U.S. House of Representatives, is now the Obstructionists’ House. Many have forgotten whom and what they represent – the American people and the interests of the United States.

As major financial institutions dump more and more U.S. Treasury bills, once considered the absolute bedrock of safety, the damage the so-called conservatives are doing to confidence in the U.S. is growing exponentially daily.

Yesterday, Fitch Ratings placed the United States sovereign debt on Ratings Watch Negative, meaning it is contemplating a credit downgrade from its current AAA rating on U.S. debt. In 2011, when Congress showed similar dysfunction in raising the debt ceiling, Standard & Poor’s downgraded U.S. debt from its AAA rating to AA+.

A country lacking an unblemished AAA credit pays more in interest when it brings its debt to market. And market participants remember which countries have always had a AAA rating and which have not.

Standard & Poor’s had this to say on August 5, 2011 when it downgraded U.S. debt: “…the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011. Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.”

Given what is happening today, S&P looks absolutely prescient in its 2011 statement.

Fitch sounded a similar chord yesterday, stating: “The U.S. risks being forced to incur widespread delays of payments to suppliers and employees, as well as social security payments to citizens — all of which would damage the perception of U.S. sovereign creditworthiness and the economy. The prolonged negotiations over raising the debt ceiling (following the episode in August 2011) risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S. This ‘faith’ is a key reason why the U.S. ‘AAA’ rating can tolerate a substantially higher level of public debt than other ‘AAA’ sovereigns.”

Fitch also added that “The repeated brinkmanship over raising the debt ceiling also dents confidence in the effectiveness of the U.S. government and political institutions, and in the coherence and credibility of economic policy. It will also have some detrimental effect on the U.S. economy.”

Imagine a People’s House filled with elected representatives of the citizens of this country who are playing chicken with another credit downgrade of U.S. debt – which could last for years or even decades, costing untold billions in additional debt service payments, making the U.S. less competitive on the global stage, and harming U.S. economic growth.

The only good news in all of this is that the Obstructionists may lose their seats (which they have proven they do not deserve) in the People’s House in the mid term elections next year. According to a new poll from Washington Post-ABC News, released on October 14, 74 percent of Americans disapprove of the way Congressional Republicans are handling budget negotiations, up from 63 percent at the start of the shutdown. That compares with disapproval of Democrats at 61 percent, up from 56 percent in the same time period. 

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