Failure to raise wrecks the dollar

“Every time the debt ceiling comes up, it's an exercise in political jostling,” said Peter Essele, head of portfolio management for Commonwealth Financial Network. Despite the saber rattling, Essele argued that politicians in both parties have too much to lose to play chicken with the nation’s credit rating. “It's essentially a self-inflicted wound in the middle of a pandemic. During a period when we’re seeing slowing growth and above-average inflation, it would be political suicide for both parties,” he said. “There's certainly a situation where they could put us on the verge, but ultimately, it's in the best interests of politicians to have something worked out.” Some market observers worry, though, that a miscalculation — or even a procedural roadblock if Congress takes the fight down to the wire — could trigger just that kind of a collapse. The U.S. debt was downgraded from AAA to AA+ by Standard & Poor's in 2011. Further black marks on the nation’s credit rating would have greater consequences. “If you go down a couple more notches, that will get people's attention,” Martin said. “If the extraordinary measures are exhausted and something gets missed, I think that gets people's attention.” Beyond the ratings agencies, the U.S. would lose — perhaps permanently — its credibility on the global financial stage, Zandi warned. “It would also further start to undermine the viability of the dollar as a reserve currency, as a foundation of the global financial system,” he said. “Treasuries are the bedrock of the entire financial system. If there's any major disruption to the risk-free rate, the whole house of cards would basically collapse at that point,” Essele said. “The aftermath of that would basically be scorched earth in Washington.”