The August 2 deadline to raise the debt ceiling is drawing closer each day.
The United States Treasury has repeatedly warned that the U.S. government will begin to default on some of its debt obligations if the debt ceiling isn’t increased. An increase in the debt ceiling is necessary to ensure that borrowing can resume and all government obligations can be met in a timely manner.
President Obama and fellow Democrats have been wrestling with Republican congressional leaders over the debt ceiling increase for some time. The president has made repeated warnings that failure to increase the debt limit will have devastating effects on the national economy and could result in a downgrade of U.S Treasury bonds, leading to an increase in interest rates and even greater expenses to the U.S. government.
Downgrading U.S Treasuries wouldn’t necessarily mean that the U.S. government would default on all of its debt. As long as the U.S. Treasury is able to pay the interest on its debt and pay for retired bond issues, then no default will take place. Currently, there is sufficient cash inflow from ordinary tax revenues for the Treasury to pay interest on its debt. Thus, U.S. Treasury bond holders in the Houston area and elsewhere need not worry too much that their interest payments will be postponed.
So, with the holders of T-Bonds still receiving their interest payments, is the U.S. Treasury exaggerating its claims about the necessity of increasing the debt ceiling? Well, yes and no. It is true that the debt ceiling needs to be increased as quickly as possible if the U.S. government wants to remain on solid financial ground and keep its credit ratings high. But at the same time, it isn’t like the U.S. government has no other funding options. There are still several emergency measures that can be taken to keep the government afloat.
Regardless of what happens over the next few weeks, financial markets are likely to react negatively as the deadline draws near. Markets are reactionary, and the constant gloom and doom talk from congressional Republicans and Democrats, as well as from President Obama, is bound to result in an increase in volatility and uncertainty in the stock market, bond market, and beyond.
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