CNBC Analyst Disregards Threat Of Debt Default: "It's Not Armageddon"

Blog ››› ››› CRAIG HARRINGTON

CNBC analyst Michelle Caruso-Cabrera incorrectly argued that there is "next to zero" threat of default at the debt ceiling deadline, accusing White House press secretary Jay Carney of "fear mongering" on the issue.

On the October 1 edition of MSNBC's Morning Joe, Caruso-Cabrera joined a panel discussion of the government shutdown to provide an outlook on its projected effects on financial markets and the greater economy. After downplaying the impact of the shutdown, Caruso-Cabrera addressed comments made by Carney concerning the October 17 debt ceiling deadline. Caruso-Cabrera disregarded the administration's concerns that failing to raise the debt ceiling presented a threat to the American and global financial system, stating:

CARUSO-CABRERA: There is a strong school of thought out there that says if we hit the debt ceiling, that it's not Armageddon, that we don't see skyrocketing interest rates. They keep saying "default on our debt," we just heard Jay Carney say that. The chances of that happening are next to zero because you can prioritize your payments. Defaulting on debt means the U.S. government would not make an interest payment [to] the U.S. Treasury. Highly unlikely, and the other thing is, if you pay that late, if it were even to happen, that is not default. And for investors to suddenly sell U.S. treasuries, because there's going to be a three-day payment late? Highly unlikely, because there aren't many other choices in the world.

Caruso-Cabrera closed the segment by accusing Carney of "fear mongering." 

Her argument is based on two main fallacies. First, the claim that debt ceiling brinkmanship would not result in higher interest rates, which would increase the cost at which the Treasury Department borrows money to finance the government, is false, as demonstrated in 2011.

Two years ago, when the Republican Party last threatened to ignore the debt limit, the United States Department of Treasury bond rating received its first-ever downgrade - from AAA to AA+. According to the Bipartisan Policy Center, that downgrade will cost taxpayers an additional $18.9 billion over the coming decade through marginally higher borrowing rates.

The debt limit was not breached in 2011; the Republican Party merely threatened to breach it and potentially allow a Treasury default. The result was an arbitrary and avoidable multibillion dollar hit to the American taxpayer.

Caruso-Cabrera's second argument, that breaching the debt limit does not equal a "default" and is therefore nothing to be worried about, is extremely misleading.

The "debt ceiling" was officially breached on May 17 of this year. Since that date, the Treasury has implemented "extraordinary measures" to avoid defaulting on American sovereign debt obligations by shifting funds from various accounts. The upcoming October 17 deadline, which right-wing voices have argued is "made up," represents the utmost limit of the Treasury's accounting flexibility. Contrary to Caruso-Cabrera's claim that the Treasury could survive by further prioritizing payments, such as interest and principal payments to bond holders, administration officials have stressed the immediacy of the October 17 deadline specifically because that is the date at which the federal government runs out of options and "meeting our nation's financial obligations... will be put at risk."

Furthermore, even if the government could maintain some accounting flexibility, the Treasury's credit rating could still be downgraded if investors believe political gridlock will continue creating economic and financial risk in the United States. In 2011, when a Treasury default was last seriously threatened, then-Treasury Secretary Timothy Geithner cautioned that Republican prioritization schemes could drive the economy back into recession. Economists agree that a congressional failure to raise the debt limit could set in motion a financial crisis in the United States and around the globe.

Right-wing media personalities often respond to the debt ceiling with schemes and gimmicks that downplay its significance. The return of these failed arguments reveals that right-wing apologists continue to not take the long-term fiscal and financial health of the United States seriously.

Posted In
Economy, Budget
Network/Outlet
CNBC, MSNBC
Person
Michelle Caruso-Cabrera
Show/Publication
Morning Joe
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