The Fool on the Debt-Ceiling Crisis

These past weeks have witnessed much dysfunction in the federal government of the United States. I think that the Motely Fool has a few good points to make about it in their recent posting titled "What You Need to Know About the Debt-Ceiling Crisis". Here are a few excerpts:

• What is the debt ceiling? It's a self-imposed limit on the Treasury's ability to borrow. Reaching the debt ceiling does not mean the U.S. is bankrupt. Investors around the world are breaking down the doors at the Treasury to lend us money. This is a purely self-inflicted crisis.
• Importantly, raising the debt ceiling is not merely about making room for future spending. It's about Congress deciding whether it wants to pay for the laws Congress has already passed and is committed to. The ceiling has been raised 87 times since 1945, almost always without fanfare.
• What happens to the government if the ceiling isn't raised? The Treasury says it will run out of cash on Tuesday. Others think higher-than-expected tax receipts could extend that by a few days. President Obama has indicated he's open to extending the debt ceiling for a few days if more time is needed to hammer out a last-minute deal. If the Treasury does indeed run out of cash, someone won't get paid.
• What happens to markets if the ceiling isn't raised? That's the trillion-dollar question. In an actual default, there would undoubtedly be some degree of panic, particularly in the banking sector (think September 2008). Banks and money-market funds that rely on Treasury bonds as bedrock assets would be thrown into disarray. The financial system is held together by confidence. Losing it is not something you want to play with. But the odds of default are low. More likely is a credit downgrade.
• A downgrade wouldn't be catastrophic, but it shouldn't be taken lightly. In general, an AA-rated nation pays more to borrow money than an AAA-rated nation -- interest rates are higher by 0.7%, on average. A rise of that magnitude could hammer the stock market and increase the cost of mortgages, credit cards, and other forms of borrowing. As I wrote this morning, a 0.7% rise in interest rates would add $100 billion a year to federal borrowing costs and could slow economic growth by around 1% a year. As a rule of thumb, that could cost roughly 1 million jobs.

The fools ends by giving this advice to investors: There's never a good time to panic, and decisions made during emotional upheavals are usually regrettable. If you were happy with your portfolio last week, you should be happy with it next week.