Will the US Have a "Debt Crisis"?

Wednesday 18 May 2011
by: Simon Johnson, Project Syndicate
via truthout

Washington, DC - John Boehner, Speaker of the United States House of Representatives, is leading the Republican Party’s charge on fiscal policy, arguing that his side needs to see “trillions of dollars” in spending cuts in order for Congress to approve an increase in the US government’s debt ceiling. But framing the issue this way creates a major problem for Boehner: it will directly, completely, and quickly antagonize one of the Republicans’ most important constituencies – the US corporate sector.

Focusing on the debt ceiling creates a political trap for Boehner and the Republicans. It is true that the US Treasury’s ability to borrow will reach its legally authorized limit in early August. It is also true that whenever Republicans rattle their sabers about the debt ceiling, and threaten not to raise it, the bond market yawns and there is no significant impact on yields.

If the Republicans’ threats were credible, any news that increased the likelihood of a problem with the debt ceiling would send Treasury bond prices down and yields up. This is not happening, because bond traders cannot imagine that the Republicans would be able – or even willing – to follow through.

(More here.)