Despite all the ink and coverage of the debt ceiling issue, it is a side show to the real issue. Kevin Williamson describes matters correctly:
The United States is not on a downgrade watch because the markets fear we won’t raise the debt ceiling in time to avoid a default; the United States is on a downgrade watch because the markets believe the debt-ceiling debate presents the last real opportunity for the government to enact a meaningful fiscal-reform program before it is well and truly too late to avoid a national crisis. The credit agencies, wisely or not, aren’t worried about the short-term political fight leading to an immediate default, but about the near- to medium-term fiscal situation, which is plainly unsustainable.
The debt ceiling resolution is likely irrelevant to the downgrades coming for US debt. Indeed, the ratings agencies themselves might be irrelevant. Markets will eventually “downgrade” US debt regardless of whether the ratings agencies do or not. Markets anticipate and generally move ahead of ratings agencies.
The deterioration is US debt means rising interest rates and lower bond values. Rising interest rates will make an economic recovery that much harder. Decreasing bond values will further jeopardize holders such as banks, insurance companies, municipalities and all other holders. Many of the first three are already insolvent, meaning their conditions will worsen. That might be enough to trigger the collapse of our financial system.