By Christian E. Weller | May 11, 2011
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Think the pain of the recent run-up in gasoline prices was punishing to your wallets and pocketbooks? That will be nothing compared to the costs to families’ savings and payments on their debts if Republicans in the House of Representatives succeed in blocking an increase in the federal debt ceiling.
The discussion over the federal debt limit is turning into a political showdown with America’s financial stability and families’ economic security at play. The U.S. government is expected to reach its debt limit—the maximum amount it can borrow without Congress raising the limit—in a few weeks. Republican leaders are forcefully stating they will not raise the debt ceiling or only raise it under conditions that are exceedingly damaging to the economy and therefore unacceptable to Democratic members of Congress.
Holding the line against Republican efforts to torpedo the nascent economic and labor market recovery over raising the debt limit will be critical to the well-being of American families. Failure to raise the debt limit would deliver a serious blow to U.S. financial markets. The stock market would plunge in a panic due to the uncertainty over the U.S. government’s willingness to pay its bills and consequently what that would mean for the U.S. economy. The economy would take a serious hit.
Once government borrowing resumed—as surely it must as both parties will eventually come to an agreement to run the government—lenders to the U.S. government would demand higher interest rates on U.S. treasuries. These higher interest rates would trickle throughout the economy because treasury interest rates are the benchmark against which other interest rates, such as for mortgages and business loans, are set.
The upshot: Families would suffer immediately due to substantial losses in their retirement savings from lower stock market prices, and then would face higher debt payments on their outstanding debt due to higher interest rates once the debt limit debate is resolved. These immediate investment losses could total three to four times the amount of money an average family paid for gasoline in 2008, the last time gas prices soared as high as today, and higher interest rates would equal the extra amount of money the average family paid for gas since the beginning of 2011—with that extra cost locked into place for many families for years to come.
So let’s look a little deeper at the consequences for families should Congress fail to reach a deal on the debt limit due to House Republicans’ determination to jeopardize families’ economic security over raising the federal debt limit. The cost of the recent run-up in gas prices is peanuts compared to what a failure to raise the debt limit will inflict on American families.
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Christian E. Weller an Associate Professor at the Department of Public Policy and Public Affairs at the University of Massachusetts Boston, and a Senior Fellow at the Center for American Progress.