Ah yes, another 'made for tv' political conflict. Congress could just do away with the debt ceiling entirely. Instead, they keep it in place to have a game of political football to score talking points every year or so. The ending is always the same, one side or another caves and passes it, but not before it's been plastered all over the nightly news for a couple of weeks.
Some small part of me wishes they'd touch that hot stove just once, and be left with an indelible reminder of the consequences of what they threaten.
Hasn't it happened? They basically stop paying all federal employees and it really just ends up making life quite difficult for the low-wage government workers.
The money to pay workers gets reallocated to pay creditors, then it runs out and the US is downgraded as a credit risk making it harder and more expensive to borrow in the future.
We can also view it as a mechanism for transferring wealth to the financial sector. It gives lenders an excuse to increase the fees and interest they charge the state.
> the US is downgraded as a credit risk making it harder and more expensive to borrow in the future.
That isn't the way it works. At least for the US.
The US's rating was downgraded in 2011 (following another debt-ceiling near-miss). What followed was a general market decline, but an increased demand for US treasury bonds, even though that was precisely what had just gotten downgraded.
Presumably what happened was the the downgrade caused some general concern in the market; which in turn caused capital to flee to safer assets. Regardless of its official rating, US bonds are the textbook example of a safe asset, causing the increased demand.
At a higher level, credit ratings are useful because people are not familiar with every lender. The US is so well known as an entity that people don't pay nearly as much attention to its rating as they do for others. Plus, the US government is too big to fail. If you wanted to protect your portfolio against a US default, you probably have bigger concerns than the value of US debt since it would likely be a small part of your direct portfolio but would pull down everything with it.
I wonder if the news outlets lobby for the existing procedure to be kept in place just so they have this in the news cycle? It's a dependable story they can run.
Some small part of me wishes they'd touch that hot stove just once, and be left with an indelible reminder of the consequences of what they threaten.