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Things Could Get Ugly as Debt Cloud Grows

Investors, already worried about the struggling economy, will be biting their fingernails as they wait to see whether the U.S. government will default on some of its obligations.

That ugly process is likely to be bad for stocks in what’s already the seasonally worst period of the year. But a timely agreement between Democrats and Republicans — which seems remote now — could spur a rebound. The failure to strike a deal could have the opposite effect, of course.

“The rhetoric will get more confusing over the next few weeks, and markets hate uncertainty,” said Greg Valliere, chief political strategist of Potomac Research Group. He thinks a deal ultimately will get done.

The stakes are high. The debt ceiling is an agreed-upon cap on the amount the U.S. Treasury can borrow. Congress has raised the debt limit 74 times since 1962 so the federal government can meet its obligations.

Usually it’s just a rubber-stamp exercise. But this time a Republican-controlled House of Representatives, which swept into power on the back of the Tea Party movement, is preparing to take a stand against too much federal spending and picked the debt ceiling as the battleground.

Valliere called the 87 freshman Tea Party House Republicans “unlike any group I’ve ever seen in my career. These people don’t give a damn about being re-elected. They feel they are on a mission from God to cut spending,” he told me.

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