July 15, 2011

THIS EDITORIAL should not be necessary. By now, every elected official involved in the impasse over the federal debt limit should at least understand that not raising it risks major damage to the U.S. and global economies. Reasonable people can, and do, disagree over how to resolve the impasse. We favor tying the increase in the debt limit to a substantial deficit-reduction package; we recognize that there are strong arguments against that position. But reasonable people do not disagree that the limit must be raised.

And yet, as David A. Fahrenthold reported in The Post on Friday, a key obstacle to a deal is that many House Republican backbenchers insist otherwise. Some of these self-styled conservatives argue that President Obama and, indeed, House Speaker John A. Boehner and Senate Minority Leader Mitch McConnell, are merely exaggerating the downside. Others actually believe that refusing to raise the debt ceiling would be beneficial, by forcing a big, fat government to go on a diet. So let us take a moment to spell out why this is pernicious nonsense.

To be sure, the United States need not default on its existing debt as long as the Treasury has enough cash flow to cover interest payments — which could be awhile. And, yes, the bond markets have so far taken the political uproar in stride, as investors continue to snap up U.S. debt carrying modest yields.

Yet the evidence is clear that Treasury Secretary Timothy F. Geithner has postponed the day of reckoning as long as the law allows. Within the first half of August, if Congress does not authorize new borrowing, a lack of cash will force Treasury to start choosing which of its many obligations to meet and which to pay with an I.O.U. “Handling all payments for important . . . and popular programs will quickly become impossible,” according to an analysis by the Bipartisan Policy Center.

Even if the United States gives bondholders first dibs on its available cash, avoiding default in that sense, the fact that it must stiff other payees would cast doubt on its broader creditworthiness. And that is the crucial point. U.S. credit could come to be perceived as something it has never been seen as before: risky.

That alone could cost the U.S. government billions in extra interest payments. And the effects might not end there. For decades, Treasury debt has served the world as the risk-free standard against which nearly all other investments are valued. This is why they are taken as collateral in literally countless transactions across the world every day. If that financial bedrock shakes, thousands of interest rates that hinge on Treasury rates would have to be recalculated — upward. Large holders of U.S. debt such as money market funds, insurance companies and pension funds might dump all sorts of assets in an effort to “rebalance” the overall risk level of their portfolios. The resulting sell-off could turn chaotic. All of this would threaten business investment, consumer spending and, by extension, job creation. We haven’t even mentioned the impact on confidence if no one knows from one day to the next whether, say, the national parks will be open or federal contractors paid.

Markets have probably been complacent so far because investors simply cannot believe that Washington would risk one of this country’s most precious assets, earned through generations of hard work and lawful conduct: the privilege of borrowing money at low interest based on the “full faith and credit” of our government and the people it represents. There are many words to describe politicians who would trifle with that national legacy. “Conservative” is not one of them.