I'm sorry, but Keynesian theory suggests that things don't work that way. Economics is not something you can empirically test, so we can only work off of theories and past experiences.
In our past experience of the Great Depression, it was not our belt-tightening but our spending that saved us. While Hoover tried to increase tariffs and balance the budget, the US went in a downward spiral (ie- Hoovervilles). Instead it was Franklin Roosevelt's vision of spending (ie- the New Deal) that helped us rough it out.
It seems counterintuitive, I know, but think about it this way: If one person goes broke, then they can tighten their belt and that will work. It will work because no one else has to tighten their belts, and people will be willing to help, or buy their product or service because they can without falling into financial straits. Their livelihoods aren't on the line. However, when everyone's strapped for cash, nobody's willing to help each other out. Furthermore, because everyone (including companies and businesses) are being stingy with their money, people will be fired. Across the board, there will be less jobs. If there are less jobs, there will be less people spending money on the goods and services that companies provide, which further drives down the need for workers. The exchange of money slows down to a trickle.
When the government spends money, particularly on public works (re: the New Deal), they have a two-fold use: 1) pumping money back into the working families' hands, so they can start buying goods and services again, which creates more jobs, and 2) Better infrastructure. And let me tell you, infrastructure is KEY to any great nation. The country that can get goods and information the fastest is the most powerful. Rome was a superpower back in it's day primarily due to it's amazing road system. Part of the reason we've been such a powerful country this last century is due to the fact that we have an amazing road system; visit most other countries and their roads pale in comparison. Today's insfrastucture challenge requires faster movement of goods (bullet trains) and information (internet). Compared to other first world nations, we are significantly lacking in these important facets of infrastructure.
Our current president has been trying to hand out money for improvement of infrastructure, but some senators (notably republicans) have been turning them down. Along with starting public works, this also means that we should 1) cut subsidies for oil companies, 2) get rid of loopholes that allow corporations to not pay taxes, 3) give the average people protections against loan sharks and bankers, and 4) Having the super rich possibly, just possibly pay what they did during the Clinton era. The whole point is to have a robust middle class that can maintain a high flow of money exchange. When that happens, everyone (including the super-rich) wins.
I'm no economist, but I know enough to get the rationale behind our current administration. I could go on a lot longer about this topic, (namely the effect of wars on the economy, and why WWII was good for us but these current wars are bad), but I'm sure I've bored you already.
Wow- I realize I didn't even answer your question yet! The short and skinny of it is, if we lose out AAA rating, our stocks and bonds will decrease in value. If they decrease in value, people (notably other countries) will not buy our stocks and bonds. It's important that people buy our stocks and bonds because, just like anything else in economics, you get more money for a stock or bond that people want. And they want it because we reliably return our investments on stocks and bonds.
If we surpass the debt ceiling and don't pay our debts, we may very well send the globe into another economic meltdown. I kid you not. A lot of China's wealth is tied up in our bonds, to name just one (VERY important) country. So yeah, they don't want to see us fail.
Answered By: Lisa K - 5/1/2011