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U.S. Debt Limit Crisis; The Politics Behind the Posturing; What Will Happen to the U.S. Credit Rating?; Exploring the Negative Impact on the Fragile U.S. Economy

Aired July 30, 2011 - 13:00   ET


ALI VELSHI, HOST: We are just over two days away from the date that the United States may not be able to pay all of its bills and minus a deal, we're left with this question -- has Washington lost its mind?

I'm Ali Velshi. Welcome to a special live edition of YOUR MONEY.

We'll head to Capitol Hill and the White House in a moment to get the very latest on what is being done to prevent a potential default. Now we can't say for certain what would happen if the debt ceiling is not raised by August 2nd. We are going to examine that this hour. But crisis and chaos are some of the best guesses that are being offered by some economists.

Now the most recent CNN/ORC Polling says that 51 percent of Americans would hold Republicans responsible if the debt ceiling is not raised. Just 30 percent would find President Obama more responsible.

Peter Morici is an economist and a professor at the University Of Maryland School Of Business.

Peter, I have to ask you this, you are an economist, you're a well-respected economist and we have spoken together for years. Do you have any evidence of what so many conservatives are saying that if we were to increase taxes at all, at all at this point in an economic cycle, that it would actually hurt our economic recovery?

PROF. PETER MORICI, UNIVERSITY OF MARYLAND, SCHOOL OF BUSINESS: Well, increasing taxes wouldn't hurt anymore than, say, cutting spending. Both would decrease the amount of demand in the economy. To say taxes would hurt the economy is kind of code for, cutting spending is OK, but taxes are not. That's simply not true. In fact, raising taxes may be less deleterious than cutting spending. Economic theory says so.

VELSHI: Did anything that happened yesterday, Friday, have any effect on you when you looked at those GDP numbers that came in lower than expected for the second quarter, lower than expected in the first quarter and, in fact, for many, many quarters before that? Does that worry you about this idea that we are looking to cut so much spending out of our federal budget at this particular point in time?

MORICI: I'm not particularly concerned because the spending cuts that both sides are talking about are fairly modest in the first two years. They really bite in 2014 and 2015. But most economists are assuming that somehow or another the economy is going to grow more rapidly, whether it's in the second half or next year or the following year. And I don't see any reason to assume that. Things are broken. And they need a good fix.

VELSHI: Absolutely.

Jeanne Sahadi is a senior writer for CNNMoney; she is an absolute authority on this story. You have to follow her writing on

Jeanne, you've studied one plan after another with respect to this debt increase. And they all look like bridges to nowhere right now. In the meantime, there exists the possibility that depending on what happens in the next few days, some people who are expecting a check from the government may not get it.

You study this, who gets paid? Who doesn't get paid if we don't have enough money on Tuesday or beyond?

JEANNE SAHADI, SENIOR WRITER, CNNMONEY.COM: We're hoping to hear from Treasury perhaps this weekend, maybe by Monday, but hopefully before Tuesday as to what their prioritization plan will be, what their contingency plan is. What everybody knows is that Treasury will not have enough money coming in this month of August or in any particular given day to pay out what it owes. In fact, it might have to cut spending by about 40 percent or you know not pay out about half the bills, something like 80 million bills a month.

VELSHI: Why then do we keep hearing, Jeanne, that we'll be fine -- what I keep hearing is that we'll be able to pay our bondholders, we will be able to pay Social Security, we will be able to pay veterans and active military. That's sort of where - I mean there are probably other things we can pay too. But that seems to be the prioritization that some members of Congress are at least putting on this.

SAHADI: Well I think when people say that they mean in aggregate, the amount of revenue we get in every month could cover bond investors and Social Security payments and maybe a couple of other things. But there's more than a few things on the docket for Treasury to pay. So we're looking at government contractors that may not get paid, those are business owners. We are looking at veterans benefits. They may not get paid. Active military may not get paid. It's a selfish choice is how White House spokesman Jay Carney put it. And nobody knows how it is going to go, we have never had to do it before and it is kind of dumb that we're being put into the situation to having to think about it.

VELSHI: Because this is a channel that children might be watching, I think that is about as far as we can go. But I think we can find better words for this, it is a misinformation campaign, it is wrong for people to be saying that they know how it's going to turn out. It is wrong for people to say that it will not have a detrimental effect. And by the way later on in the show, we're going to be talking to Bill Gross, who is one of the foremost bond investors in the world, to get his take on this.

And Chrystia Freeland joining us now. She is an editor at "Thompson's Reuters Digital."

Chrystia, we are having a conversation about avoiding an economic crisis but between the recent job numbers, the recent GDP numbers and the fact that we are now on the brink of doing something that could cost interest rates to go up, Chrystia, are we in a position where we might actually be causing our economy more harm in the effort to do it good?

CHRYSTIA FREELAND, EDITOR, THOMPSON REUTERS DIGITAL: Yes, absolutely. Bob Reuben said to me that if the debt ceiling is not extended in time, this will be the greatest unforced error in economic history. And I think that's absolutely right. The thing to really remember is this is not an imposed crisis. It's not like Lehman where there was an external issue there. This is a manmade, Congress-made crisis. And with the weakness of the economy that you rightly pointed out, it is really irresponsible to be playing with this sort of thing right now.

VELSHI: It is highly irresponsible. I just want to let my control room know that I don't actually have any video of what's on TV. Because I want to show you some charts Chrystia, but I want to be able to see them. I do have to tell you, there's this issue of the newness of what we're doing.

In fact, there's nothing new about raising the debt ceiling. It's been raised 78 times since 1960. It's usually considered a formality. Peter, if anyone that opposes raising the debt ceiling is simply going to be branded a lunatic who wants to send the country into financial Armageddon, why do we have this debt ceiling? The only other country that has this is Denmark and it has it for very different reasons.

MORICI: It's really a political construct. Somewhere or another Congress believes that it's constraining itself by having to raise this debt ceiling. I can remember this being discussed when I was a kid in junior high school. It's an absurd situation. To not raise the debt ceiling is like drilling a hole in the bottom of your own boat.

VELSHI: I want to talk to you about this, Chrystia. What is this talk about how we cannot in this kind of economy -- we cannot raise taxes unless you're an economy that's going gangbusters. Boy we would all love that, right if our economy were growing 3, 3.5, 4 percent a year, we wouldn't have to raise taxes probably. Why do people say something that is not proved to be true at all and yet it's become accepted truth in Washington, both the Democrats and the Republicans putting forward plans right now that do not deal with any increases in taxes whatsoever?

FREELAND: Well, I think Peter had it exactly right. The truth is right now with the economy being so weak -- and it really is profoundly weak, and it has been weak for two years now, three years.

You shouldn't be raising taxes immediately and you shouldn't be cutting spending immediately. What you should be doing is thinking of a medium-term plan to get the deficit under control. And even studies by conservative institutes suggest that the only way you get a deficit under control is by both raising taxes and cutting spending.

VELSHI: Chrystia, let me just interrupt you for a second. I want to go to the floor of the Senate where Harry Reid is speaking right now.

Let's in to what he's got too said.


SEN. HARRY REID (D-NV), MAJORITY LEADER: My friends on the House side to show how they're gaming the system over there, Mr. President. They're going to have a vote on my proposal, on suspension for those that served in the house this is for naming courthouses and little measures that are of little importance.

But yet, this important matter, this matter dealing with the debt limit of this country will take a two-thirds vote to pass over there.

So they have gamed this system from the very beginning. And as I said, Mr. President, earlier from "The New York Times" article, the facts of this crisis over the debt ceiling are not complicated. Republicans have in effect taken America hostage threatening to under mind the economy and disrupt the essential business government unless they get policy confessions. They were never then able to enact through legislation.

So they're going through the -- as I understand on the House side, an effort to vote on our legislation. Setting up a two-thirds standard, get this done, recognizing, of course, Mr. President that I will outline here in a minute, that a filibuster at this late hour here in the Senate and when so much is at risk is really irresponsible.

And to say it puts our economy at risk is an understatement, that's for sure. Majority vote, I repeat was good enough for the speaker's proposal in the House. But Republicans believe it isn't good enough for the Senate today. Rather than filibuster, I ask my Republican colleagues to work with Democrats to make our proposal better. We've offered a reasonable, rational way for Republicans to help us avert default.

But let me tell you about --


VELSHI: All right. We're going to stay with that. We'll be listening to it. I'll bring you back into that when there's something you need to know.

We're going to take a break. I want Peter, and Jeanne and Chrystia to stay there.

Last night, on TV, I made a point, and that is, in the last six days, the stock market, American companies have lost $700 billion in market capitalization. I got a nonsense tweet from someone to say, here you go again worrying about America's companies. So for you who missed the point, let me put it a different way.

In the last six days, we have lost $700 billion in the stock value of companies that you hold in your 401(k) s, your IRAs, your retirement, you lost that money.

This nonsense in Washington cost you $700 billion already, we are talking about trimming a trillion here and adding a trillion there. Seven hundred billion dollars, poof, gone from the economy. We're

going to talk about how much this is really hurting everybody on the ground. And we're giving you a chance to express yourself on twitter. Tweet us, our handle @CNNyourmoney. My handle @Alivelshi. We are running your tweets across the show. We're going to be talking about what you want to talk about so tweet away.

This story changes every hour. Which is why we have correspondents at the White House, at Capitol Hill. We are tracking it all. We're going to head to them live next on this special live edition of YOUR MONEY.



MARLENE COX, CANTON, OHIO: Let's stop the bickering. Let's stop the show of disrespect between the different parties as well as the parties and the president and get down to business. Let's get out of this mess that we're in, regardless of who got us here and how it happened. We've never defaulted on a loan. Let's not start now. Let's not shipwreck this country.


VELSHI: Marlene Cox, Canton, Ohio, that was beautifully said. This is a live special edition of YOUR MONEY with your voice and your tweets. Joe Johns and Athena Jones are all over the debt ceiling debate. They're tracking the latest developments.

Joe, let's start with you on Capitol Hill.

Speaker Boehner's bill was tabled by the Senate last night. That means it's not going to get voted on. Nothing is going to be done with it. So what is happening now?

JOE JOHNS, CNN SENIOR CORRESPONDENT: It's a tennis match really. As you know, the Senate Democratic leader Harry Reid has a bill that he's trying to push through before Tuesday. But meanwhile, the House of Representatives controlled by Republicans has jumped the gun. They've taken Harry Reid's bill; they're putting it on the floor. They're going to debate in about 40 minutes. And then it's going to be over with and presumably it's going to be down in flames.

And so you ask, well, what's the reason for this? I talked to one Senate House Republican aide who told me, they're doing this to send a message to the Senate that their bill can't pass, won't pass and to stop wasting their time on it. So you've got to ask yourself, what would pass?

There was one Democrat right here just a few hours ago, Barney Frank, the ranking Democrat on the House Financial Services Committee, I asked him to give me an idea of what he thought both Republicans and Democrats could coalesce around and get a bill to the president's desk. Here is what he said.


REP. BARNEY FRANK, (D) MASSACHUSETTS: Significant reductions going forward, not immediate in domestic and military spending, deferring the tax issue for when the Bush tax cuts expire, and not cutting Social Security and Medicare benefits are things we can look at, including in my point, further taxation of the upper income, Social Security and Medicare benefits. I think that's a package that could pass.


JOHNS: The big question though is what's going to happen over here in the United States Senate. Because they also have this bill that they continue to work on. The big question for them is whether all the adults are going to get in a room, talk about this thing and hash out something that looks like a compromise. We have pictures of Republican leader McConnell on the floor --

VELSHI: He's talking right now.

JOHNS: And the point with him is that he has actually told Democrats he doesn't want to sit down with them unless a representative from the White House is in the room. So the question is why is that? It's pretty obvious. He says that Senate Democrats do not have the authority to sign off on anything unless the president agrees to it. So it sounds like he just doesn't want to waste his time.

VELSHI: In the meantime, they're wasting our time. By the way Barney Frank talked about the top earners in the country. The top 1 percent of earners in this country have an effective tax rate on their income of 19 percent.

Think about that as we listen in to Senate minority leader Mitch McConnell right now.


SEN. MITCH MCCONNELL (R-KY), MINORITY LEADER: -- in the hopes that we can come together behind something that can pass both the Senate and the House and be signed into law before Tuesday. Now, I don't blame anybody for being confused about what's been going on here in Congress this week. But I'd like to take a moment to explain what's going on right now.

Last night, the Democrats who control the Senate, proposed a bill that would lead to the largest debt ceiling increase in the history of the United States and which completely ignores the root of this crisis. This bill has one goal -- to get the president through his next election without having to have another national debate about the consequences of his policies.

The president wants to make sure this kind of debate doesn't happen again even as he gives Democrats in Congress the given permission to add trillions more to the debt. That's what the Reid bill does. It isn't going anywhere, as I just described. It will not pass the Senate; it will not pass the House. It is simply a non- starter.

Senate Republicans refuse to go along with this transparently political and deeply irresponsible ploy to give the president cover to make our debt crisis even worse than it already is. And 43 of us, as I indicated earlier, have now signed a letter to the majority leader pledging that we will not vote for your 2.4 trillion dollar --


VELSHI: You can see that's Senate Minority Leader Mitch McConnell speaking. We'll continue to listen in to him and bring it back to you when he has something that we need you to hear.

Look at the bottom of the screen, we're running your tweets, by the way. Tweet @CNNyourmoney. Tweet us about what is going on.

Athena Jones is at the White House.

Athena, what is this that Joe just told us about that Mitch McConnell says he's not going to negotiate with Harry Reid and Senate Democrats unless there is a representative from the White House involved? Why and what's the White House got to say about that?

ATHENA JONES, CNN CORRESPONDENT: Well, certainly the White House would say that there have been discussions, there are ongoing discussions at every level from people at the White House, from the president on down with members of Congress and their staffs. Those conversations continue. And while there's no meeting on the public schedule today, certainly that could change at any moment.

The White House is standing ready to respond, and if congressional leaders believe that having a meeting here at the White House would help steal the deal, would help have them get them to a breakthrough in this compromise, then certainly they're going to be willing to meet.

But as you can see most of the action certainly in front of the cameras is taking place there on the Hill. But it doesn't mean that folks here at the White House are sitting idly by or sitting on their hands.

The president has used several ways to try to keep the pressure on Congress. We saw him come out on Monday and give a speech. Yesterday, he gave a speech. And early this morning, in the weekly address, he tried to explain what the consequences would be if Congress fails to reach a deal by Tuesday.

He says he made the point of saying that this money, this vote to raise the debt ceiling is not so that Congress can spend more money. It's so that the country can continue to pay the bills it already owes, bills that Congress has already racked up. So things like Social Security checks, veteran's benefits, checks to pay the military and, of course, payments to debt holders.

One more thing that's important to note, is that of course the country won't be in default until it actually misses a payment to debt holders. And, of course, Treasury --

VELSHI: Well that's a Republican talking point that is wrong. Ben Bernanke and Standard & Poor's have both said if you miss a payment on anything, you're in default. Moody's has said that you won't do it. It's one of those talking points that those Republicans continue to like to use that we are going to put an end to on this show. Athena, thanks very much. Joe Johns, thank you very much.

America may be on the brink of another financial disaster but some members of the Tea Party insist that now is the time to give in. Others have been entirely unreasonable. So we found one of those Tea Party members who we always find to be informed and reasonable about the economy. He's here to explain to us why they will not talk about tax increases after this.


VELSHI: The stand-off over how to raise the debt ceiling continues at this hour. But one group of Republicans, those influenced by the Tea Party, do not necessarily see this as a bad thing. Mark Skoda is the founder and the chairman of the Memphis Tea Party.

Mark, let's just talk about this for a second.

According to a CNN/ORC Poll, two thirds of Americans do not believe Republicans have behaved responsibly in the debt ceiling talks. A lot of that criticism is being leveled in the direction of the Tea Party even from some more moderate Republicans.

Now most Americans want a compromise that involves cuts and increases and a small minority -- or I guess a big minority of Republicans almost half think that we need a compromise solution and yet they are being held back by the Tea Party and they are being held back by their promises to Grover Norquist and the Americans for tax reform that say they can't increase taxes.

Now I know you want to answer Mark. But I am going to give you some more facts. We've lost $700 billion in the stock market in the last six trading days. We've started to see interest rates move up already. Why is this better? Why is everything we're going through now better and the risk of a default than compromising on taxes?

MARK SKODA, FOUNDER & CHAIRMAN, MEMPHIS TEA PARTY: Well, first, let me say, we're not going to risk a default. Moody's late Friday put out a note that suggested that as long as we arrange to pay our bondholders' interest and principal --

VELSHI: They are one of three rating agencies. Ben Bernanke said that if you default on anything, you're -

SKODA: Fitch has already downgraded us. You know that.

VELSHI: I love having you on Mark. But then we have to tell the whole story. Because if we are saying that's not going to happen, we have to tell the rest of the story. And this is why it gets dangerous. Because these things become things that everybody says. I know you're informed about it but a lot of people aren't.

SKODA: Well that is right. First of all let's talk about taxes, as you point out. We're going to have $530 billion of new taxes beginning in 2013. So the tax increases for Obama are already there. Their plan in the Obama Health Care Act which has now law that is first point. We've got half a billion dollars more in new taxes being created. We need to have this fight right now about whether or not we're going to pay our bills and how we're going to pay the bills.

Now as you know have said as of last weekend suggested that we need the Boehner plan as it was initially proposed. I was supportive of it because it put the onus back on the Democrats. It was a two- step process. But as you know, for the past roughly I think 72 times on average, we have raised the debt ceiling about seven months.

Now, it is unique in the situation that when we looked at 2010 when this debt ceiling question became about that the president did not wish to have a raise occur on his watch during 2010. As you know, the Democrats who held a super majority could have raised it to $20 trillion or they could have had a $5 trillion budget and they've done neither.

And that's what I think is problematic here. To be sure, the Democrats are very good at demagogue. The president has had the bully pulpit. I give him kudos for his ability to sway public opinion. But look at the end of the day we need to get a proper deal done. I would agree, is it good enough to raise it until July of next year, that's almost 12 months, is that enough?

No, because the president doesn't want to talk about this issue. In my view this becomes the fundamental question about America. Do we wish to deal with our long-term liabilities and the deficit spending or are we going to continue to allow this kick the can down the road. The truth of the matter is -- go ahead.

VELSHI: That's a good question, Mark. And that is what we're going to address. Stick around. Stay right there because I'm going to have you talk about this and our panel. Plus, the man that Washington leaders turn to to break down the bond market is here to speak directly to you to tell you what you need to do to protect your money. Send us a tweet @CNNyourmoney; give us your opinion and your questions. We will be right back after this break.














UNIDENTIFIED MALE: I think it sucks.


VELSHI: Couldn't have said it better myself.

Mark Skoda, founder of the Memphis Tea Party, Chrystia Freeland, of Reuters, Peter Morici of the University of Maryland School of Business, and Jeanne Sahadi of CNNMoney, are back with us.

Jeanne, how many times -- when this debt ceiling discussion started I had hair. How many times have you heard me say this thing is being run by bumper stickers. One of them that we hear a lot of- there are three, really, that trouble me the most. One is that that tax increases will hurt our economy. Number two: It is not a revenue problem, it's a spending problem. And number three: It's only a default if you miss interest payments or principal payments. Not if you miss any of your other problems.

I want to start with the last one. Let's get clarity on this one. Because we just don't seem to have clarity on this. Ben Bernanke has said, and others have said, that just like if you miss a credit card payment, but you still pay your mortgage, the credit rating agency knows you missed your credit card payment, but did pay your mortgage. Your credit rating can still go down. It's not all that different when it comes to S&P.

SAHADI: Forgive me, because I forget specifically what S&P said, but I do think the chances for a downgrade are much greater if you do miss the interest and principal payments. I do think all the rating agencies are on board with that. And I think it is interpretational going forward. Fitch, for instance it said, if there are extensive arrears in payments to contractor, and so on, then that's going to be a question of sovereign creditworthiness. And we are going to have to look askance, you know, negatively at that.

But it's sort of immaterial to me. It's terrible for the largest economy in the world to miss payments, period. We shouldn't be ticking off half the economy because-gosh, we can't make a decision in Washington. While I appreciate Mr. Skoda's position that maybe the president is saying, let's extend the debt ceiling past the election for political reasons.

It's equally political to want use the debt ceiling as the political bludgeon to get a get a debt reduction plan. It perverts the argument. It perverts the argument that the country needs to have-the debate, rather-about how to reduce the debt. It's a very important discussion we have. I credit the Tea Party and the Republicans with bringing it to the fore, but it is getting perverse at this point.

VELSHI: Peter, let me ask you this. Is it fair to characterize you as conservative, economically, Peter ?

MORICI: That would be correct.

VELSHI: Sit fair to say that fiscal conservatives are getting a little bit hurt by the inflexibility of some of those people, not Mark Skoda, our beloved Mark, but by some people in the Tea Party and some of those freshmen congressmen who came in on their wave. And some of those fiscal conservatives who signed Grover Norquist's pledge? It's just handcuffing them from actually being able to make a deal that could be good economically for the country, or could get them something down the road.

MORICI: Fiscal conservatives would like the government to spend less money, though many of us recognize the need for taxes. And the Tea Party has to recognize that they have won working control of one half of the two political branches of government that set policy. They cannot change the fiscal policy of the United States by simply dictating it, or holding it hostage. What they can do is cause calamity. And we are facing that, simply because we haven't made adequate plans to deal with Tuesday. And because we have all this terrible inflexibility. I'm becoming very impatient with these people.

VELSHI: Chrystia, what's your sense of what's going to happen and what's the best road to get there -- we all agree it's dumb that we're having to have this discussion. I like my Saturday afternoons not in a tie and a vest. What's the best way to get to where we have to go? FREELAND: You're asking me to have a crystal ball, Ali. And it's so hard when the players are quite unpredictable. What I am actually astonished by is carrying on from Peter's remarks. It seems to me that the conservative Republicans have won a really major victory.

If you go back to that interview with Barney Frank, he was talking about a deal that would be accept to him. And he is considered to be a liberal Democrat. He's not someone on the middle or on the right. An acceptable deal with him would not include any tax increases. So he is saying he would be willing to sign up for a deal that cuts spending significantly and pushes the question of tax increases down the road. That is a huge victory for the Republicans.

So what's kind of amazing to me is that the Republicans aren't willing to pocket that and say, wow, we've really won. What I think has really come into play is the politics of the 2012 election. And if you think about what's going on, really, it's not a debate right now so much about the contours of a deal. It's a debate about timing. And that, to me, is the real irresponsibility. This is really a debate about trying to make 2012 really difficult for the president to run again in an election. It's not really a debate about ideology anymore.

VELSHI: Mark Skoda, founder of the Memphis Tea Party, you've heard the criticisms. Last word to you.

MARK SKODA, FOUNDER, TEA PARTY OF MEMPHIS: Look, the issue of compromise is necessary. We've done yeoman's work. And I think the Republicans and John Boehner and his leadership with one House, the House of Representatives, have gotten this dialogue around no taxes and a reduction in spending. I think the question is, how far the politics are going to play out for the 2012 election.

That's always what this has been about. The president understood that. It's what it was about in 2010 as well. Why the House of Representatives and the Senate, owned by the Democrats, didn't raise the debt ceiling. So, look, the compromise needs to happen, unquestionably. We've won the argument. I think this dialogue has to take place throughout 2012. Let's pocket the wins, let's go home, get this thing fixed and let's look at real cuts going forward.

VELSHI: Why are those freshman Democrats (ph) who is came in on the wind of the Tea Party not accepting that? They continue to give interviews on CNN saying, I am not budging on this. You sound like you're compromising. Others, Peter Morici is a conservative. He thinks it's time to take the win and go on to the next one.

Why are these-are you telling these members of Congress, guys, stop it?

SKODA: Well, look, I'm going to be excoriated for saying what I am saying to you right now.

VELSHI: Yes. SKODA: But at the end of the day we've got the House of Representatives. That is it. The president vetoes anything he wants to veto, and we're losing the argument. So let's get as much cut as we can. I'm against, frankly, passing this by 2012. But if we could get a big cut, as Barney Frank said, and we can get verifiable cuts, let's stop playing the game of war reduction, let's get real verifiable cuts going forward. I think Boehner's done a great job at that point. It's a tough, tough situation. We're not in the House. We're out here commenting.

VELSHI: Thank you, Mark. I appreciate that, Mark Skoda is the founder of the Memphis Tea Party. Jeanne Sahadi of CNNMoney, Peter Morici, stay where you are as well as Chrystia Freeland. We are going to come back to you guys. >

What happens if the U.S. does lose that prized AAA credit rating? We'll talk about that next with Bill Gross of PIMCO.


VELSHI: I just want to give you some news. All 43 Republicans in the Senate, all 43 Republican Senators have signed a letter, that's just been released, saying they will not vote for a Democratic plan to raise the debt limit. That is a sign that the measure, the Reid measure, does not have the support that it needs to advance in Congress. Your tweets are at the bottom of the page. Send them in to @CNNYourMoney.

Bill Gross is the founder and co-chief investment officer at Pacific Investment Management Company, you'll know it as PIMCO. He is quite possibly the most important bond man in the world. He joins us now from Newport Beach, California.

Bill, good to see you. We haven't chatted for a while, but we have certainly been reading and listening to everything you have to say.

Let me ask you this, Bill. Economics 101, probably in the first week of classes says that if an entity, a government, an individual, a business is at more risk of not paying its bills in a timely fashion, the cost for that entity to borrow increases. Tell me how that lesson from Economics 101 plays out into this discussion. Is it still valid?

BILL GROSS, FOUNDER, PIMCO: Well, certainly it's still valid, Ali.

Thank you for having me. I enjoy your program every Saturday morning out here in California.

Yes, I think risk spreads widen, interest rates go up if a creditor is at risk of not paying its debts. We saw that in California. California in 2009, for instance, April of 2009, began to issue IOUs. And the cost of that debt, the debt that later came, to pay them off was IOUs, was 100 basis points or 1 percent higher than it was before issuance of the IOUs. So, whenever an issuer or creditor basically stiffs, either vendors, or certainly debt holders, the cost to the issuer goes up by increments of 25, 50, 100 basis points. It becomes very expensive.

VELSHI: Now, 100 basis points, 1 percentage point, my viewers may know it as-Bill, let me ask you this, because this is a fines point of debate. But you're one of these guys who trades in bonds. So you mentioned if they stiff their creditors or vendors. Now, some are saying Moody's is saying they're only considering stiffing creditors, on principle or interest as a default. Others are less clear. And Ben Bernanke said it could be anybody. As a guy who buys and sells bonds, would you see it differently if the U.S. defaults on interest or principal, versus not paying bills to vendors, or other expense that is it has?

GROSS: Well, certainly there's a distinction. I think the Treasury has laid out the distinction and worked with the Fed over the past few days to make sure that debt holders are paid first; and those in lesser priority in terms of Social Security and the like. So it does make a difference. But to the extent that anyone does not receive their payments on time, it basically lessens the reputation of the United States. This debt crisis has numerous implications for the economy and the investment markets. We're speaking to lower growth. We're speaking to higher interest rates that I just talked about. We're speaking to a lower dollar.

VELSHI: Right.

GROSS: And reduced confidence in financial markets and the ability of Washington policymakers to stabilize them going forward. Congress has basically proven itself to be dysfunctional, and this will carry on for months, even if the crisis is basically resolved over the next few days.

VELSHI: Bill, let me ask you this. I'm going to put up a map here. Moody's and Standard & Poor's, if you take both of their ratings of AAA countries around the world, you come out to about 15 countries that are rated as AAA. Each of them, by the way, each of those rating agencies have a couple of more that are AAA.

Legendary hedge fund manager Jim Rogers says the U.S. doesn't belong in this club and should have been downgraded years ago. Do you agree? And do you think there's a downgrade coming regardless of what happens between now and Tuesday?

GROSS: Well, eventually there's a downgrade coming. It depends on Moody's, Standard & Poor's and Fitch. And they're very slow moving. This country has $10 to $12 trillion worth of outstanding debt. In addition, however, we've got about $60 trillion worth of liabilities. I call this, Ali, a debt man walking, D-E-B-T, as opposed to D-E-A-D. You're a debt man walking. I'm a debt man walking. We all are.

Basically, what that means is that instead of a piece of paper at $10 trillion to $12 trillion and counting, we have liabilities going forward for Medicare, for Medicaid, for Social Security that total about $60 trillion. So in combination, we have a $70 trillion debt that's five to six times GDP. It puts us in the category basically of the worst countries in the world in terms of total debt. VELSHI: That is incredible, debt man walking. That's good. Bill, right stay where you are. We're going to take a break to pay some of our bills. We'll be back in a second with Bill Gross, co- chief of PIMCO.


VELSHI: Bill Gross, founder and co-chief investment officer of PIMCO is back, along with Chrystia Freeland, Peter Morici and Jeanne Sahadi.

America is risking a default if the debt ceiling is not raised by August 2nd. Credit ratings agencies may go ahead downgrade Americas AAA credit rating, even if a default is avoided. And according to many Republicans unless we default on an actual debt payment, an interest or principle payment, we don't have to get our debt downgraded. But according to S&P, and according to the Federal Reserve Chairman Ben Bernanke, some people see it as a default on if you default on any payment you're supposed to make, even if it's not to a bondholder. We may still get a downgrade anyway.

Bill, let me ask you this, you have said in the past, U.S. Treasuries weren't a great investment anyway because there are 15, 16, 17 other countries, depending on how you want to look at it, with really good credit ratings that pay more interest than America does anyway.

If we do get a downgrade, and if as some people think, interest rates might go up a little bit, are American bonds a good buy? Are they good deal? Are they a worthwhile investment, or are there substantially better investments in the world?

GROSS: Yes, I think there are better investments. We call them clean or dirty shirts. Most countries have a lot of debt, but some have a half of what we have in the United States. And their interest rates, as you imply, are in some cases 1, 2, 3 percent higher than what we see in the Treasury market, an average yield of which is about 1.5 percent. So you know, an investor needs to look outside the United States.

Let me give you an example of what has happened to the Chinese in terms of their Treasuries over the past year. They basically have been investing in Treasury bills at 10 basis points, or 15 basis points, all the while the value of their dollar holdings, in terms of the dollar's depreciation relative to a basket of currencies, has gone down by about 15 percent. So the Chinese, and let's put ourselves in the place of the Chinese, the Chinese have not only earned a paltry 10 basis points on their Treasury bulls but they have lost 15 percent in terms of global purchasing power. Americans have to look at it from that perspective.

VELSHI: I want to take that point over to Peter for a second. Peter, you're a professor you explain this well, and I know this is close to your heart. The idea that this will have an impact, a downward negative impact on the U.S. dollar. What does that do to our economy? MORICI: Well, it will make everything we buy more expensive. We certainly want currency adjustments to be competitive, but we don't want them for this reason. People are pointing out that Australia, Canada, Japan have had downgrades without much effect on their interest rates. I would suggest their circumstances were significantly different than ours.

They never had an August 2nd where they pay the bond holders but miss the vendors and so forth. If you take a lower dollar, but you couple that with higher interest rates, you lose the benefit of a lower dollar. It strangles you in another way. This is not a good outcome.

VELSHI: All right. Peter , thanks very much. Bill Gross, good to talk to you. Thank you very much. You guys are -

GROSS: Thanks, Ali.

VELSHI: Hold on. I'm not at the end of the hour. See, I'm ahead of myself. I'm the opposite of Congress, I'm wrapping up too quickly. Stay right there. We're taking the bills. He'll be right back with all four of you.


VELSHI: All right, let's go back to our panel now. Chrystia Freeland, from Reuters, watching this very, very closely. You've got a global view at Reuters, one of the reasons we enjoy talking to you. What is the scar going to look like after Tuesday one way or the other?

FREELAND: OK, I have one thing that really keeps me up at night that hasn't been mentioned in this great conversation. And that is in August, $50 billion of U.S. debt matures and has to be rolled over. That means the U.S. has to go out there in the midst of this chaos and persuade people to invest $500 billion in U.S. Treasuries.

Now, half of the buyers of Treasuries tend to be from outside the United States. So that, for me, is going to be the really, real tough moment of truth. And the moment when issues like an increase in interest rates, and therefore the cost of all of this to U.S. taxpayers, really comes to the fore. That's what I'm scared of.

VELSHI: You put that very well. We don't have to translate that for our viewers, because all of them remember 2008 in the financial crisis having to go back and refinance your mortgage, or somehow convince somebody to give you more money. Sometimes it works, sometimes it didn't. Many times even if you were a good bet and you had good reasons for it, your cost of borrowing that money got higher.

Your thoughts right now. I'm not going to call them last thoughts, Jeanne Sahadi, because you're not going anywhere. You and I will be working all weekend.

SAHADI: You are asking me for my thoughts?

VELSHI: Yes, your interim thoughts, let's put it that way.

SAHADI: Here are my interim thoughts. We worry about a downgrade if we don't raise the debt ceiling, but we also need to worry about a downgrade if we don't come up with a long-term debt reduction plan that is bipartisan. And that is credible. Credible, means everyone is going to be able to stick to it. That's why you can't just do it on a spending cut side. It is going to be too Draconian and it has to have bipartisan buy in, otherwise the ratings agencies will be like, that's not going to work.

We do risk a downgrade anyway, even if lawmakers at this point miraculously figure out how to raise the debt ceiling by Tuesday.

VELSHI: For a sophisticated bond buyer, like PIMCO's Bill Gross, does the downgrade that you think is inevitable, and a lot of us think is inevitable, does that actually matter at this point? In other words, has that damage been done, and we're going to trade the way we trade?

GROSS: No, I think it matters. Not only in downgrade to AA plus, but perhaps to lower than that. The Chinese have a rating agency and they rate U.S. debt A plus. So turnabout, I suppose, is fair play.

The one thing -- I want to comment on, Ali, in terms of the entire situation in terms of the debt ceiling, is that the Republicans and the Tea Party candidates basically are operating under the wrong premise. They think by cutting the deficit and balancing the budget that that will be growth positive. I suspect it is not. I call that the new "Laugher Curve", not L-A-F-F-E-R, but L-A-U-G-H-E-R.


GROSS: And to the extent that you reduce a deficit by 5 percent, the private sector has to come right back in with a 5 percent positive. We know the private sector companies are not investing in investment, nor in people. So reducing 5 percent in the deficit is really a growth negative proposition.

VELSHI: You have closed the show with the very point at which I opened it. I think everybody in this country is welcome to their views about it. There is nothing wrong with views from people who want more-less spending and those who think we need to make it up with taxes. But to suggest that we can do it one way or the other, that is a math I have never studied.

Bill Gross, thank you very much for being with us. Bill Gross, founder and co-chief investment officer at Pacific Investment Management Company, or PIMCO. And Peter Morici is a professor at the University of Maryland School of Business. Jeanne Sahadi, is a senior writer at CNNMoney. And Chrystia Freeland, our friend from Reuters, editor at Reuters Digital.

That will do it for us for this special live edition of YOUR MONEY. But that doesn't mean we're going anywhere. We are fully staffed 24/7 here at CNN. We're watching what is going on, on Capitol Hill, in the Senate right now interpreting that, figuring out what the options are.

Jeanne and her team at are crunching the numbers and try to explain what this means to you. You have already lost a lot of money. This has cost you money in your 401(k), in your IRA. It could cost you more as your interest rates rise if there is a default.

More than that, it could cost you a lot if the government has to stop spending 40 percent of what it does because we don't get an increase in the debt ceiling. That is going to cost us jobs. We're in a crisis. Don't let anyone tell you otherwise.

We're here on YOUR MONEY every Saturday at 1:00 p.m. Eastern and Sunday at 3:00 p.m. You can catch Christine Romans on "YOUR BOTTOM LINE, Saturday mornings at 9:30 a.m. Eastern.

Stay connected to us 24/7 on Facebook and Twitter. My handle is @AliVelshi.