A debt ceiling deal appears to be in the works, and the consensus is clear that no one actually expects a default. As Warren Buffett put it a few weeks ago, politicians may go “to the point of extreme idiocy,” but most people think it’s just brinkmanship. Even if the immediate crisis is averted, the damage may already be done. “The dominant belief in the financial markets is that a political tornado has hit Washington. It will cause some destruction but it will pass leaving all basic structures untouched… I do not agree,” writes Richard X Bove, VP of equity research at Rafferty Capital Markets LLC. Bove thinks the current crisis is the symbolic turning point in our nation’s economy, as we finally come to terms with the idea that we have become a debtor nation.

Government shutdown debt ceiling

Contribution to national debt

Political platforms aside, both parties have contributed to the national debt. President Obama has presided over the largest expansion in the nation’s debt, but George W. Bush oversaw the second largest. Dick Cheney once claimed that “Ronald Reagan proved that deficits don’t matter.” The parties have diverged on priorities, but neither was able to rein in the debt.

But the world economy is no longer as interested in owning U.S. debt as it used to be. China and Japan, which together own 20 percent of U.S. debt, are both trying to reduce their exposure. “There are very few issues that unite China and Japan, other than this one,” writes Bove. “Both nations have made statements that support the view that a de-Americanized world may be a desirable goal. The BRIC nations are in total support of this concept.”

Federal Reserve might intervene

Bove thinks there is a strong chance that China and Japan will simply refuse to roll over some or all of their holdings when they come due, forcing the Federal Reserve to intervene. “The whole QE3 program, which the markets are so addicted to, would then shift to a program to replace foreign holdings of U.S. debt with Federal Reserve holdings of the same,” he writes.

If Bove is correct, the U.S. will finally have to contend with its debt simply because other countries will become unwilling to finance it, something he describes as a “major impediment to economic growth,” and the rest of us would probably call a depression.