NO ONE can specify with certainty the consequences of a congressional failure to raise the U.S. debt ceiling from $16.7 trillion. But it is safe to say that it would not “bring stability to the world markets,” as Rep. Ted Yoho (R-Fla.) incomprehensibly suggested last week. Contrary to that complacent view — apparently shared to varying degrees by some of Mr. Yoho’s ultra-right GOP colleagues — not extending the U.S. government’s legal authority to borrow would produce turmoil around the globe, forcing up interest rates, crunching credit, closing businesses and, possibly, collapsing banks.
The International Monetary Fund calls the prospect “potentially catastrophic”; Goldman Sachs forecasts a “rapid downturn in economic activity.” The notion that the Treasury Department could “prioritize” debt payments and Social Security out of current tax revenues is phony, too. Even if technically feasible, it would force cessation of all other expenditures — which would also be recession-inducing.
For the umpteenth time: Even the slightest scratch in what has heretofore been bulletproof creditworthiness would shake investor confidence. Every financial institution in the world either does or could hold U.S. Treasury debt in its reserves on the assumption that it is ultra-safe. Undermining that assumption would undermine all of those institutions.
It’s worth dwelling on that last point. By now it’s a cliche to refer to U.S. debt as a “highly liquid” or “risk-free” asset. But these are not technical attributes of gilt-edged paper printed in the U.S.A., much less magical qualities. Nor do investors pay a premium for this debt out of deference to our military might, eagerness to trade in our market or even faith in our rule of law.
What gives people confidence in U.S. debt is all of the above, plus our rock-solid governability. Almost alone among the world’s governments, the United States of America — not China, not Brazil, not Canada, not any other nation — has both the need to borrow vast sums of money for long periods and a political system stable enough to convince lenders that their principal will be safe with us until they come to get it back.
The shenanigans in Washington, for which the GOP bears primary responsibility, are not dangerous because they threaten perceived U.S. political stability; they are dangerous because they threaten actual U.S. political stability. Rep. John Fleming (R-La.) has called Obamacare “the most existential threat to our economy” since the Great Depression. Actually, that’s a pretty good description of default.
Yes, the federal debt is a burden that we have managed less than optimally; the GOP has a point about that. Yet it is also a blessing because many people, in this country and abroad, are willing to finance that borrowing at moderate interest rates, enabling us to spend more and tax less than we could otherwise. Americans benefit mightily from the depth and liquidity of our capital market, which rests in turn on the unquestioned status of U.S. repayment.
Much has been said about the embarrassing fact that the United States owes the central bank of China more than $1 trillion. When you really think it through, though, China’s acceptance of our full faith and credit is an enormous compliment. It is a financial endorsement that implicitly contradicts Beijing’s claims that its Communist market system is superior to ours. As of now, it’s still a compliment we deserve. But for how much longer?