Today I was contemplating the fiscal cliff. Where would we be if we went over the fiscal cliff? Would I end up not being able to make my mortgage payments? I wasn't able to find answers to such questions. However, I did find the following plot from Wikipedia:
When I saw the plot, I realized that I am a deficit hawk: In the absence of war, I want to see the public debt "reverting" to between 20% to 70% of GDP. I don't have a basis to call for this level of public indebtedness. It is certainly true that our government can borrow much more than that. (And we wouldn't want too little debt -- everyone knows how hard it is to build or rebuild a credit history.)
I was also raised to believe that US government bonds were the safest investment around -- and I think there is no need to put ourselves on the hook for more than that. Furthermore, the bigger the stakes, the more fanatical the other side seems to get. Fanaticism is not what is needed today.
I see tax increases and defense spending cuts as sensible ways to address staggering deficits, and the fiscal cliff seems like almost the right medicine. Maybe after the fiscal cliff happens, the House of Representatives can pass a tax cut for the first $250,000 of earned income, and extend unemployment befits, and tweak Medicare.
But there is still something missing: The Debt Ceiling.
We have now heard from Geithner that we will hit the debt ceiling at the end of 2012; in a few months not even "extra-ordinary" measures will be sufficient to keep paying all the bills. Sooner or later, what will ensue is another credit downgrade. It may mean nothing -- but it could also mean that interest rates on US Government debt will go up. Bond purchasers will see the government as irresponsible about its financial obligations and demand higher yields or perhaps, for regularly reasons, exit the purchasers of US government debt altogether. Failing to raise the debt ceiling is definitely bad medicine.
Lots of things are tied to interest rates on government debt -- but the example closest to home is mortgage rates. Almost certainly, the failure to address the debt ceiling means that we put at risk the still suffering housing market.
It is highly irresponsible that our Congress would refuse to pay the bills on money they had already agreed to spend. (I support any effort to remove the debt ceiling from any future political calculus.) It is also likely that early in 2013, the debt ceiling will be hiked in combination of legislation that remediate the most political unpalatable parts of the fiscal cliff "baseline scenario". But there are no guarantees - and at best, I can foresee another showdown.
I am left with one question: how could the GOP hate America so much to bring our public debt into question and simultaneously jeopardize the American dream?