Seven Reasons Why The Tea Party's Suicide Pact Will Hurt the Economy

As the biggest political cliffhanger in U.S. history draws to its dramatic conclusion, a nagging question remains: What really happens if the debt ceiling is not raised, and what does it mean to me?

Somewhat astonishingly, there is a chance this could happen. Speaker of the House John Boehner, R-Ohio, has stated that at least 60 Republican members of the House will not note vote for any debt ceiling increase — no matter what. None. Nada.

And in the Senate, uber-conservative and Tea Party kingmaker Jim DeMint said that the Republicans should maintain their hard-line position in the debt-ceiling debate even if it results in “serious disruptions” to the economy.

So, there is a real chance that we could all find out the answer to the question: “what would serious disruptions in the economy mean to me?” If it happens, we’re not going to like the answer.

As a report for Citigroup recently put it: “Asking what the U.S. economy might look like after a possible U.S. Treasury default is akin to asking ‘what will you do after you commit suicide?’”

There is no question among mainstream economists and reasonable people in general that the result would be awful. In part because:

  1. The cost of borrowing for the U.S. Treasury will go up. And the cost of borrowing is paid for by your tax dollars going to other people. Both Standard and Poors and Moodys have put the U.S. credit rating on negative watch. If the U.S. defaults, our rating goes down. Even if we don’t have a credible plan for the future, our rating will go down.
  2. City and State budgets will be hit hard as well. Moodys had also said if the U.S. government loses its top rating, at least 7,000 top-rated municipal credits would have their ratings cut as well. Paying more money for credit means having less money for school teachers, police, firefighters and road construction than struggling cities and states have now.
  3. The Stock Market will tank. Standard & Poor’s predicts that investors could suffer losses that “could easily range from $50 to $100 billion” as prices for existing Treasury bonds could fall by nearly 6 percent. And that’s just for bonds. Stocks will tank as well and that 401(k) that was finally limping back, will go right back down again.
  4. Every form of credit that you use will cost more. Mortgages, credit cards, car loans, student loans, and home improvement loans will cost you more, and they’ll be harder to get.
  5. The cost of borrowing for businesses will go up, just as consumers find themselves with less money in their pockets. Business expansion will be curtailed.
  6. Hiring will likely come to an end. Already sluggish economic growth will either slow, stop or drop.
  7. And then there is the mystery element. Just how panicked and chaotic will the markets get? It’s hard to know exactly because of the unknown number of complex derivatives out there that could trigger additional calls for collateral or cash because of a “credit event” like the unprecedented downgrading of U.S. debt.

Some Tea Party balloon heads like Michelle Bachmann have been suggesting that is won’t be such a big deal if we don’t raise the debt ceiling because there will always be enough money to pay the interest on our debts.

But just as any consumer knows – even if you pay all your mortgage payments but start missing your car payments or don’t pay your credit card bills on time, your credit score goes down. That is what would happen to the U.S. if we stopped paying some of our bills. And if we don’t raise the debt ceiling, it would be mathematically impossible to pay all of our bills.

So, thanks to the Tea Party zealots, the largest, most powerful economy in the world has been put on suicide watch. And the worst part of it all is, if the Tea Party decides to pull the trigger and commit economic suicide, it is your dreams and your children’s future that they will probably kill. You have my most sincere condolences.


Marquee photograph by T. Nizovteva/123rf