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Buying a business: debt default unthinkable

obama

As the federal debt inches closer to the $14.3 trillion ceiling, the prospect of default seems too catastrophic to countenance.

Congress will surely recoil from allowing the government to default on its borrowings for the first time in its history and sanction an increase in the debt ceiling over the next few weeks.

President Obama has warned that a failure to do so would not only plunge the US into an even deeper recession from that which it has recently emerged, but that the cost of borrowing would soar - and not just for the federal government, but also for entrepreneurs buying a business who want to raise finance.

Speaking to a town hall meeting this week, Obama said: "If investors around the world thought that the full faith and credit of the United States was not being backed up, if they thought that we might renege on our IOUs, it could unravel the entire financial system. We could have a worse recession than we already had, a worse financial crisis than we already had."

Timothy Geithner, the Treasury Secretary, says he can only juggle the accounts until early August to avoid a default.

If investors thought that we might renege on our IOUs, it could unravel the entire financial system

President Obama

Still enjoying a bounce after ordering the assassination of Osama Bin Laden, Obama is in a strong position to gain assent. However, one would hope the issue is of a magnitude that transcends something so trivial as the President's poll rating.

Republicans will try to make the price of their assent an agreement to deeper, faster spending cuts. However, both the Republicans, who are surely calling the Democrats' bluff given the consequences of defaulting for the economy and their electoral prospects, and the Democrats, who will be mindful of appearing reticent to cut spending given the stratospheric deficit, will surely be unusually predisposed to compromise.

Just as the principle of mutually assured destruction ensured the Cold War ended peacefully, the consequences of default are so big that an agreement is likely to be reached and quickly. If not, then politicians are even more obsessed with partisan gain to the detriment of the national interest than most of us fear.


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