We had the unique opportunity to interview FOX Business Network reporter Adam Shapiro about the ongoing U.S. debt crisis and the intense debate surrounding the possibility of raising the national debt ceiling.
The current situation is an extremely complex one with differing opinions coming from all sides. For more analysis of the issue, check out the FOX Business Network special report on Monday, August 1st at 5AM Eastern.
Interview with FOX Business Reporter, Adam Shapiro
The debt ceiling issue seems like it must result in a default, credit downgrade, or serious spending cuts, all of which could have a serious impact on the recovery. Is there a way to resolve the debt ceiling without risking a double-dip recession?
Adam Shapiro: I don’t think the debt/default issue in and of itself would be the single cause of our economy slipping back into recession, but it will contribute to a slowdown and here’s why:
The United States still has money flowing into its Treasury, roughly $172 billion this August according to the Bipartisan Policy Center, and more than enough to meet the interest payments on our debt, which is roughly $29 billion in August. The default threat comes from the short-term debt we have to refinance in August, which is about $500 billion.
The administration has made paying our interest a priority. That alone should be enough to entice lenders to buy our debt and allow us to roll over the $500 billion. The problem is that they will expect a higher interest rate on the new debt and we will wind up paying more than $29 billion in monthly interest. That means more of the money flowing into the Treasury will have to be used to finance our debt, resulting in less money being available to spend on programs like food stamps, roads, housing assistance, defense contracts, Medicaid, and the list goes on.
Also, as interest rates rise for the government, they will rise for average consumers, meaning car loans, small loans to buy appliances, credit card interest rates, and mortgage rates will all rise. That could in turn cause people to spend less, and hold on to the money they have as they become less confident about the future. That would lead to a slowdown in the economy, and with GDP growing now at an anemic 1.3%, we could fall back into a recession.
The only way to resolve the debt/default issue and avoid a double dip recession is to keep our credit rating from getting reduced, which will send a signal to financial markets and U.S. consumers that allows them to feel confident about the future.
Do you think S&P or Moody’s would really risk causing turmoil to the world economy by cutting the U.S. credit rating or are they bluffing to influence fiscal policy?
AS: S&P and Moody’s are not bluffing. They are required to assess the credit worthiness of debt and in this case, government debt. However, I think it is tragically ironic that these are the same ratings agencies that helped bring about the financial collapse (remember that these organizations grossly misrated subprime mortgage-backed securities).
What should make every single American furious is that nobody from the credit rating agencies has been held accountable for the horrid and possibly criminal job they performed in the years building up to the financial collapse. Even worse, the agencies continue to maintain their government-mandated monopoly.
How harmful do you think a downgrade of the U.S. credit rating would be? Would a default send shock waves through the U.S. economy? Didn’t we briefly default in the 1970s without triggering a crisis or losing our AAA rating?
AS: The past only tells us where we have been, not necessarily where we are going, and when you mention the 1970s, several factors today are different. So first, yes, I think downgrading the U.S. credit rating will be harmful to our national confidence. Economists always say that confidence is the foundation of a strong economy.
I think we will be downgraded and I think our borrowing costs will rise. The days of easy money are over. But I do not think the United States of America will default on its debt. We are not Greece. We have money and assets and the ability to finance our debt. It would be horribly irresponsible and truly disastrous if we did default, but I don’t think that will happen.
If Speaker Boehner doesn’t get the debt ceiling passed in the House, what are the chances that a new plan (by him or Reid) will get passed before the August 2nd deadline?
AS: I think it’s unlikely that any plan of any type will be passed by August 2nd. There is not enough time.
Do you think Reid’s plan has a better chance of getting passed than Boehner’s? What do you see as the pros and cons of the two plans?
AS: Both plans, Reid’s and Boehner’s, fail to accomplish two key issues laid out by the President’s bipartisan Debt Commission. The first was to cut spending over the long term by $4 trillion. Both plans fall horribly short of that figure. The second was to simplify the tax code and eliminate loopholes to raise revenue for the U.S. government. Neither plan does that. When you ask me which plan has a better chance, my only thought is that both plans still get an “F.”
If Boehner’s plan really made it to the White House, would President Obama legitimately consider risking a default by vetoing it?
AS: The President has said he would veto it, so I think you have to take the commander-in-chief at his word. With that said, the Boehner plan won’t get to his desk. The Senate will kill it.
What are the chances we would lose our AAA rating if the debt ceiling is passed but adequate spending cuts aren’t made?
AS: The number to avoid a drop is $4 trillion. We need to map out $4 trillion in spending cuts over the long term to maintain our triple-A credit rating, but nobody is remotely close to that number.
Our discussion with Adam clearly illustrates the urgent issues the U.S. is currently facing, and the difficulty in getting them solved. The various political parties have all proposed different solutions that have not only challenged one another, but have also come up short of the $4 trillion in cuts required. The decisions made over the next month will have profound and rippling effects on the U.S. and world economy.
What are your thoughts on the U.S. debt crisis situation? Do you think a downgrade is inevitable? What is the best strategy to achieve the necessary spending cuts?