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Everything You Need to Know About the Debt Ceiling in 5 Sentences

Like many financial writers out there, I have been watching the debt ceiling nonsense very closely. And like many Americans, I’m fed up with the whole affair.

We all know what’s going to happen here: There’s going to be stupidity and brinksmanship and politicking right up until the last minute. Then Congress will stop being stupid and raise the debt ceiling.

If you are so sick of this mess that you want to tune out altogether, you’re in luck! I have a handy-dandy wrapup of how the debt ceiling will be resolved — in just five sentences:

Democrats will insist spending cuts are not part of the debt ceiling discussion.

Sure, spending cuts are likely to happen in the next year or two as the focus on our deficit looms large — and particularly because the “fiscal cliff” deal included just $1 of spending cuts for every $41 in tax increases. But Obama has made it clear with a presidential address this week that he will not negotiate cuts as part of the debt ceiling, and that House Republicans have an obligation to pay the nation’s bills before any discussion on spending takes place.

Republicans will insist spending cuts are crucial to any debt ceiling deal.

Senate Minority Leader Mitch McConnell continues to demand that spending cuts are mandatory now that the tax issue is “finished.” His Republican counterpart in the House, Speaker John Boehner, insists that the American people demand spending cuts and legislators have a responsibility to refuse any debt ceiling deal that ignores spending. You can understand why, given the fact that they got nothing out of the fiscal cliff deal.

Pundits will blame everybody and fret over an economic catastrophe.

It seems impossible to think the sides will ever agree, right? Consider Obama said he will “not negotiate” the debt ceiling and that it should simply be raised as a matter of course. Republicans are equally stubborn, with one legislator even saying, “We Republicans need to be willing to tolerate a temporary, partial government shutdown.” It seems like a default is a foregone conclusion — we will breach the debt ceiling, plunge into economic ruin and see America’s creditworthiness in the global markets suffer a big black eye as a result.

However, a debt ceiling disaster serves no one — particularly not Republicans.

No government even close to the size of the United States has ever defaulted on its sovereign debt. If you think things got ugly in Greece — which never actually defaulted — amid all the debt uncertainty, just consider that on an American scale. Furthermore, there are ways to avoid a technical default (no, not the trillion-dollar platinum coin), but they are almost as unpalatable. Consider a government shutdown to divert money to creditors by failing to pay workers such as air traffic controllers or even soldiers. That doesn’t just tick off voters — it sucks vital spending cash out of the economy. And if that’s not ugly enough, Social Security benefits might not be paid to those who don’t have a safety net and rely on government assistance to simply survive. Republicans will have a tough time in the 2014 elections if they try to act like this was necessary or unavoidable simply to cut long-term spending.

So at the last minute, we will have a deal … with limited spending cuts.

Just as we saw with the fiscal cliff, brinksmanship is fine up until a point — and then each lawmaker simply has to do the right thing or risk looking like a complete idiot to voters, the media and America at large. There likely will be some nominal spending cuts as lip service to make the debt ceiling deal palatable to Republicans, but no comprehensive budget reform. There isn’t time, and frankly, the GOP just doesn’t have the leverage. Look what happened when Obama held the upper hand in the fiscal cliff: Republicans folded like a cheap suit. His approval rating remains near the highest levels of his presidency, the Democrats have momentum after the November elections and it remains clear that the right wing has more to lose than the left if the debt ceiling thing sours. Perhaps more. And as Josh Brown writes over at The Reformed Broker, never underestimate the predictability of wealthy white people to protect their own interests.

That is not to say there will be no discussion on spending cuts. In fact, you can expect things to get brutal immediately after this debt ceiling deal because House Republicans have been forced to raise taxes on the wealthiest Americans via fiscal cliff negotiations, and now they will be forced to raise the debt ceiling without significant concessions from the left.

Considering most House Republicans face greater risks in primary contests than in a general election, returning lawmakers are going to have a tough time proving their conservative credentials based on the last few months of legislation.

That means it’s all or nothing after this to prove how red Republicans really are. Which means spending and gun control battles that are set for later this year will be ugly indeed.

Anyhow, this is not to say I agree with any of the motivation on either side — it’s just my take. What do you think? Do you believe Congress will come to its senses at the last minute, or are we really going to default? Who do you blame?

Speak out below! And check out the related reading for more context.

Related Reading

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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