The Washington PostDemocracy Dies in Darkness

What default deniers don’t get about the market

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Rep. Ted Yoho (R-Fla.), the man who likened his doomed effort to defund Obamacare to the history-making actions of Rosa Parks and said that breaching the debt ceiling “would bring stability to the world markets,” said something so absurd that if the full faith and credit of the United States didn’t hang in the balance it would be hilarious.

In a New York Times story about the default deniers in Congress, Yoho, a large-animal veterinarian before he was elected in November, displayed heart-stopping ignorance.

“Everybody talks about how destabilizing doing this will be on the markets,” he said. “And you’ll see that initially, but heck, I’ve seen that in my business. When you go through that, and you address the problem and you address your creditors and say, ‘Listen, we’re going to pay you. We’re just not going to pay you today, but we’re going to pay you with interest, and we will pay everybody that’s due money’ — if you did that, the world would say America is finally addressing their problem.”

I suppose I should take comfort in Yoho’s fleeting acknowledgment that failure to raise the debt ceiling would be “destabilizing … on the markets … initially.” But it would be comfort of the cold variety because that initial destabilization could snowball into an avalanche of economic misery.

“This is not some small business. The creditors we owe are banks, pension funds, foreign nations,” Steve Bell of the Bipartisan Policy Center told me. “If we don’t pay on time and in full, the value of what they have will go down. These are binding contracts upon which other binding contracts are founded.”

It’s not just that the value of U.S. treasuries would decline. It’s what investors would do to preserve their investments. Mark Patterson, a senior fellow at the Center for American Progress who was the chief of staff to Treasury secretaries Timothy Geithner and Jack Lew, told me that one of the fears keeping his former colleagues up at night is what’s called “rollover risk.”

“Billions of maturing securities come due on a weekly basis,” Patterson said. “Normally, people plow their money right back” into new bonds during a Treasury auction. That money equates to about $100 billion each week. “If there was a crisis of confidence” because the United States was prioritizing payments and failing to pay billions in government obligations, bondholders “could, instead of reinvesting in Treasuries, simply cash out and take their money somewhere else,” Patterson said.

That crisis of confidence is already upon us. The Associated Press reports that Fidelity, the largest money market mutual fund manager in the United States cashed out of all of its short-term Treasury bonds. Meanwhile, the Treasury on Wednesday sold one-month bonds with their highest yields since November 2008. But I digress.

Remember, Lew’s latest estimate to House Speaker John Boehner is that the United States will have $30 billion cash on hand when the last of the “extraordinary measures” used by Treasury to keep from breaching the debt ceiling are exhausted on Oct. 17. So, the nightmare only gets worse.

“If investors decided not to reinvest in Treasury bonds, which is a real risk, it wouldn’t matter if the government was paying interest,” Patterson said. “Treasury would have to cash those investors out in full.  But the government would have nowhere near enough cash on hand to do that.” The pain would be immediate.

The ripple effects of a debt-ceiling breach wouldn’t just be felt by the investor class, large institutions or governments. The American people would get smacked, too, in the form of hiked borrowing costs. “Our interest rates will immediately rise because of a default premium added to Treasury bills,” Jim Kessler at the centrist think tank Third Way told me. “To put this into perspective, a 0.5 percent increase in Treasury rates would add about $20,000 to the lifetime cost of a 30-year fixed mortgage for a median-priced new home of around $250,000. That’s how it will affect one home buyer in just one aspect of her life if rates only go up a half point because of breaching the debt ceiling.”

Don’t get me started on the hell that would be unleashed if President Obama and Lew were put in the untenable position of picking between paying Social Security benefits and federal salaries with what little cash the government might have on any given day because of Treasury’s inability to borrow money to meet its financial obligations. Contrary to what default deniers and others who don’t understand or refuse to let the truth sink in might believe, raising the debt ceiling does not give the president a blank check. The money borrowed is not new spending. That money is used to pay for what Congress already bought.

For the default deniers, Bell, of the Bipartisan Policy Center, had a simple question. “Are you going to believe what you hear or what the market is showing you?” News that the Republican leadership (such as it is) is considering a short-debt limit hike might mean the former is giving way to the latter. But I’ll believe it when I see it.

Follow Jonathan Capehart on Twitter.