Debt Default, Interest Rates and Who Stands to Benefit

Been thinking a lot about the debt ceiling debate taking place in Washington, D.C. right now. Not discussed amidst the dire warnings of a credit rating downgrade from AAA to AA is the consideration of who stands to benefit from higher interest rates, which is what we are told will happen should the U.S. Congress not increase the debt ceiling, thereby allowing the government to go into default.

However, little guys like you and I can think this through and arrive at some interesting conclusions even as we ask some profound questions.

First, higher interest rates will impact home loans with adjustable rate mortgages (does anyone still have this type of home loan?). Higher interest rates will also impact credit card rates,  student loan rates and vehicle loan interest rates. All of this will likely add extra drag to an already very sluggish economy as goods will cost more by virtue of the higher interest rates required when purchasing on credit. (This begs the question about paying cash or not buying it if one doesn't have the cash, but that's actually a rant for another day!)

Second, and the point of these musings, is the "positive" impact higher interest rates will have on savings accounts, investment accounts and other financial instruments for the wealthier class in American society. So here it is: at a moment in U.S. history when corporations and the ultra-rich are stockpiling cash at staggering levels (rather than injecting that cash into the economy in the form of hiring, R&D and increased production), they are also now poised -- if the credit rating is downgraded -- to begin reaping greater amounts of interest on those investments.

Is this a coincidence? Or is this some kind of grand machination that some of our elected officials are complicitly engaged in bringing to bear upon the American people? Why, after all, was the debt ceiling negotiation (which is a discussion about past spending) tied to the federal budget (which is a debate about future spending)? The two issues have never been an issue before. The debt ceiling was always just raised in a pro forma manner. Under Ronald Reagan it was raised 17 times. Under George W. Bush it was raised 9 times. Never was there this manufactured crisis linking paying past debts to future spending.

To personalize it: when my husband and I discuss finances, we don't refuse to pay the bills we have incurred for past expenses (debt ceiling) because we don't like the shape of the budget for future spending (family budget). Rather, if the budget for future spending is not adequate to pay future bills we make one of two choices: either we raise revenue (by selling stuff or working more) or we cut spending (less dinners out or no new shoes). At no point, however, do we ever say we won't pay the bills we have already incurred until we are able to cut spending. The two issues are related but not necessarily intertwined.

Thus, the debate in Washington, D.C. is a manufactured crisis aimed at generating limited choices and poorly designed solutions as a way of obfuscating what is really happening to the American economy. The richest corporations and people have stockpiled vast amounts of cash in the economic fallout of the 2008 recession. Now, those same people are poised to reap huge rewards in the form of higher interest rates, thereby drawing (dare I say sucking) more money out of the average American consumer.

That's my two cents and I am sticking to it.