Jun 27, 2011 at 7:35 pm
I ask myself: is it wise to write yet another post on the sheer craziness of the debt ceiling debate? Does underscoring the sense of urgency simply give strength to dark forces who are trying to leverage the threat of default for their political gains?
Perhaps so, but the other way lies madness. We’ve got to talk truth about the stakes here because they’re so high.
If that’s so, why do interest rates remain low? Why are investors in ten-year US treasury bonds accepting 2.93% interest today instead of insisting on a big rate premium the way bond investors in, oh, I don’t know…GREECE are??
Because they assume we’ll get our act together and raise the debt ceiling well in advance of Aug 2. That’s the date when the Treasury will have exhausted their ability to move money around to cover their obligations while staying under the debt limit.
But what if that assumption should weaken? After all, it doesn’t take a default to spook bond investors. They can see stuff like Sen Jim DeMint the other day saying Sec’y Geithner’s bluffing on the Aug 2 deadline. They can see Rep Cantor and Sen Kyl leaving the building because the D’s insist that negotiation means that they can’t get everything they want and that revenues have to be part of the deal.
Suppose this thing drags on for another month. It’s entirely possible that the Treasury finds they have to offer a premium, maybe 50 basis points (half-a-percent), to sell T-bills. Big deal, right?
Right. That’s about $50 billion in increased annual debt service. That’s some pretty expensive political leverage.
That’s also about another year of extended unemployment benefits to help the millions of long-term unemployed, or half a year of another payroll tax cut for workers.
I know—the folks taking this position don’t really care about deficits and debt. Heck, the same House Republicans stonewalling on the debt ceiling all voted for the Rep Ryan’s budget which requires the debt ceiling to go up by trillions–that’s right: by supporting the Ryan budget, they’ve already implicitly voted to increase the ceiling!
I remain confident that the ceiling will go up before the deadline. It would be such a gross dereliction of duty to force default, that I still believe a majority of elected officials will achieve sanity before this is over.
But the theatrical posturing may not be costless. The longer this goes on, the closer we approach the possibility of wasting serious money on higher borrowing costs.
Update: A number of people have made the important point that the $50 billion in higher debt service should also be viewed as a transfer from taxpayers to bond holders, the rentiers Krugman recently wrote about.
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