Debt Default Fears Hit Wall Street

S&Ps recent downgrade of the outlook on American debt isn't surprising. But the market's rapid decline in its wake should be a warning to Republicans intent on using the debate over the debt ceiling as a political football.

Let's go over the basic arguments about the debt first. An AAA national bond rating lowers interest rates for everyone and stimulates investment. Likewise, the dollars' presence as the default worldwide reserve currency--undergirded by the United States' perfect debt repayment record--gives the country a huge advantage in international trade and stabilizes the world economy as a whole.  Finally, most U.S. debt is held domestically and the main losers would be people who, directly and indirectly, hold massive amounts of Treasury debt.

Plans that claim to avoid default even without a debt ceiling increase by prioritizing interest payments are unworkable (they wouldn't actually prevent default or bond rating downgrades) and deeply unfair (they'd result in oversees bond holders getting paid while government contractors and social security recipients got stiffed).

The downgrade and Wall Street's reaction to it, in short, should be a warning to the GOP: deal with the debt, insist on responsibility, bargain hard with the administration but don't—just don't--think about doing anything else that would even raise the possibility of default on the debt.

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