On the day that President Barack Obama and Speaker of the House John Boehner were addressing the nation on prime-time television to trade blame for the failure – so far – to come to an agreement about raising the debt ceiling, a Charlottesville financial analyst was challenging the conventional wisdom about the issue.
In an article posted on his company’s web site and published in the Charlottesville Business Journal on July 25, David John Marotta argued that failure to raise the debt ceiling by August 2 will not be catastrophic. In fact, he said, there could be positive economic results.
‘Prices will drop’
Writing at Marotta Wealth Management’s web site, Marotta argued:
“If the debt ceiling is reached, the consequences will be large but not entirely harmful. The dollar will strengthen. The interest rate you get paid for your money will sharply rise. The stock market will drop simply because it will take fewer dollars now that they are more valuable to buy a share of stock. Prices will drop for the same reason.”
In an interview with Henry Graff of WVIR-TV (NBC29), Marotta explained that “the dollar has been getting weaker and weaker as the federal government floods dollars on the market. If we hit debt ceiling and you suddenly have to pay cash for everything, the dollar will get stronger.”
In his article, Marotta compared the federal government’s debt situation to the similar straits faced by the families he counsels about their finances.
Not catastrophe but ‘forced austerity’
“It is like members of a family mired in credit card debt who have reached their $10,000 credit limit,” he wrote. “They are not allowed to deficit spend by charging any more on their card. But they still have salaries coming in. They still are obligated to pay the interest on their debt. And after paying that interest they still have money left over without defaulting on their debt. It won’t be a catastrophe. It will be forced austerity.”
Marotta went on to explain that, since the interest on the debt amounts to just 10 percent of federal revenues each month, the Obama administration can avoid default simply by continuing to pay that interest and cutting 10 percent from other federal spending programs.
“Leadership at this point,” he argued, “could do what every business must do: cut the least essential spending and become more efficient. The judgment of ‘least essential’ is both a political evaluation (getting reelected) and one of statesmanship (what is best for the country). It would certainly be a test of leadership because the administration would have the freedom to withhold Social Security, cut the military or try to eliminate waste.”
Won’t be ‘snookered’
Marotta concluded by noting that “all the dire consequences of not raising the debt ceiling pale in comparison with the dangers of continuing to add to our deficit. I’m certain that partisan forces will push for the worst possible consequences if a deal is not reached, but I’m hopeful that the average American will not be snookered.”
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