Unlike Megan McArdle, I am not sure that we are “hosed” just yet (at least, I would hope that we are not), but like her, I don’t see what the point of Monday night’s speeches were, other than for each side to have yet another go at saying that the other is worse than Hitler. The most important speeches are not being given in front of television cameras. Rather, they are being given in negotiating rooms, by congressional and White House leaders, and by their staffs. One hopes that from those speeches will spring an acceptable compromise.
By “acceptable,” of course, I don’t just mean “sufficient to raise the debt ceiling before Aug. 2.” I also mean “sufficient to convince the ratings agencies not to downgrade the United States.” Most of the ratings agencies realize that the chances that we will actually default are exceedingly small (though it would be nice to stop tempting fate on this issue).
But they appear to be inching toward a resolution that absent bipartisan deficit reduction (pegged at around $4 trillion over a period of years), the United States will lose its AAA rating. This would be a disastrous outcome. It will be hard enough to raise the debt ceiling in time, though it likely will be done. It will be even harder to satisfy the ratings agencies if they are suddenly determined to play hardball over the details of any deficit cutting agreement, and if our credit rating depends on whether the ratings agencies are happy with what the political class comes up with in terms of a resolution.
What we really need is the $4 trillion in deficit reduction over a period of ten years, and an agreement that does not force us to have to go through this exercise anew in just a matter of months. I am not sure that we will get either condition met, and I am quite worried about what will happen if/when we fail to meet these conditions.