Rice Prof Says Deal Will Be Struck in Debt Crisis

August 2nd…that's the deadline Congress and the President have set to reach an agreement on how to pay the nation's bills.  Some are warning of world economic disaster if an agreement isn't reached and the U.S. defaults on its bonds.  But a Rice University Professor says the doom and gloom predictions may be a bit exaggerated.

Republicans say the U.S needs to cut spending.  Democrats would like to borrow more money.  They have less than a week to reach an agreement or else…well, that’s the question.  What will happen if they don’t?

John Diamond is a professor at the Baker Institute at Rice.

“You could have a big hit to the economy.  Interest rates would go up, which will reduce business investment.  Government expenditures will fall, which will have a negative impact immediately on the economy.”

Most of the “armageddon” talk centers around the U.S. not paying bondholders.  But, Diamond says even without an agreement, there’s no way the U.S would stop paying those.  He says there would still be money coming in, just not enough to pay for everything.

“We still have tax revenues coming in, and those revenues could be used to first pay off your bond holders.”

So while bondholder would get paid, Diamond says social security checks, veterans benefits and government contracts would all be in jeopardy.

“By any measure, at some point or another, we’re not going to pay someone a benefit that was promised.  The real question is ‘are we going to default?’ for someone holding a U.S. Bond, and the answer there is ‘no’.”

As for the city of Houston and residents here…

“I think we’re in the same pot as everybody else.  ‘No agreement’ does carry a risk to it.  ‘Is it financial armageddon or not’ is a question I don’t think anyone can really answer.”

And we won’t know for at least another week. However, Diamond does predict the two sides will reach a last minute deal that doesn’t fix the problem, but buys them more time.

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