Yet Another Debt Ceiling Rant: Political Theater Can Be Expensive

June 27th, 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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18 comments in reply to "Yet Another Debt Ceiling Rant: Political Theater Can Be Expensive"

  1. David R says:

    The people taking this position don’t care, as you said. Their only interest is in pushing their political agenda, which is to cut government spending no matter what the consequences.

    The key question is Obama. Will he face them down or will he concede the issue (and probably lose all of his base)

    • Main Street Muse says:

      “The key question is Obama. Will he face them down or will he concede the issue (and probably lose all of his base).”

      Obama has lost his base. His policy of defending Wall Street and ignoring Main Street has lost him a ton of votes.

      The GOP holds the key to victory in 2012. If they nominate a right-wing nut Tea Partier, Obama has a fighting chance to win. If they go moderate (a stretch, yes, but still a possibility), Obama will lose big – the price of propping up a massively corrupt financial sector and ignoring the pain of the worst economic crisis since the Great Depression.

    • James says:

      Oh, please. Obama isn’t going to lose his “base” over this. A party’s “base” are the members of the political party that dependably vote for the party’s candidates, that share the party’s philosophy, that share the party’s policy goals.

      Sure, it’s true that the “base” of the GOP are the looniest, nuttiest, loudest extremists of the right, but the base of the Democratic Party are not the equivalent Firebaggers, Code Pinkers, the Arianna Huffington types and all the other tantrum throwers on the left. Those people are Greens, ex-Naderites, the tree-huggers, the free Mumias, etc., and they have NEVER been the base of the Democratic Party.

      • Dan Furlano says:

        He lost me a while ago.

        I see Obama as spineless.

        BTW: why would anyone think that treasury would have to raise rates to attract buyers?

        That is baseless.

        • Neal Wainscott says:

          The same reason Greece is paying out 6-8%?
          Or because confidence has been lost?
          Choose one.

  2. readerOfTeaLeaves says:

    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 already implicitly voted to increase the ceiling!

    I honestly do not think that many people understand this.

    I still don’t see the media nor the Dems making the House Republicans fully accountable for this point. I’d forgotten about it until I read this post, and I try to follow this stuff daily.

  3. Jim Edwards says:

    After watching Michelle Bachmann the other day I’m beginning to think what Boehner is not saying out load is that he doesn’t have the votes to raise the ceiling without a huge number of Democrats. If taxes go into the mix you get a few Democrats and lose a lot of republicans. If Medicare comes out you get the Democrats and no Republicans. It’s starting to look like there is no deal to be had.

    Of course packaging as a deal was the Republicans’ idea so if I were Obama I’d be telling everyone “I said this should be an up or down, clean vote. The issues we face are to big to try to fix with a ticking time bomb. Beohner and the Republicans insisted this be a package deal and while I will help negotiate a deal the responsibility of delivering a deal rests squarely on those who insisted there be one.”

    The only way to win a game of chicken with a suicidal sociopath is not to play. If I were the Dems I’d be calling for an up or down vote as it’s obvious we are not capable of rational negotiations.

  4. msusanesq says:

    Obama should ignore the debt limit and just continue to fund the goverment as ususal. As TNR noted, it is unenforceable and probably unconstitutuional.
    Bruce Bartlett came to the same conclusion.
    Ignoring the debt limit would effectively strip the Republicans of power to compet draconian cuts outside of the normal legislative process and that would be a good thing. I wish there were more discussion of the option.

    • WASanford says:

      There’s also the possibility of having his treasury dept. create the money needed to keep the government running. JFK got away with that for for several months before he was assassinated. There are even conspiracy theorists who think that was why he was killed.

    • hacimo says:

      “Obama should just ignore the debt ceiling and continue to fund the government as usual”. Unfortunately this scheme is impossible because a bond really is a contract between two parties and the value of a bond thus depends on the existence of willing customers who trust that if they buy it then the principal and interest will be payed as stated.

      According to the constitution the government cannot legally take on a debt or obligation unless the congress gives its permission. Without such congressional authorization a US treasury bond is worthless because the holder of such a bond cannot enforce his claim to the interest or principal in a court of law. Rather than dealing with each bond separately, the congress typically regulates the issuing of the new debt by passing a law that limits the aggregate value of the bonds that may be outstanding at any given time. If the treasury tries to write a bond that puts the total debt over this ceiling then it is worthless because the market knows it is illegal and no one will touch the dam thing. Would you buy such a bond with your own hard earned money? Would the Chinese?

  5. Robert Thille says:

    Where does that $50B go and where does it come from? Right now, it seems that much of the revenue to the govt. comes from the middle class, and that extra $50B in interest will go to the rich who would be buying those T-Bills, right? Is this not something which would benefit the ‘rentiers’ of which Krugman was writing about recently?

  6. Michael says:

    Astonishingly, “no deal” is still better than all of the deals proposed thus far. Any deal which includes deficit reduction is Actually Worse than no deal, because deficit reduction is sociopathic, and the Democratic Party brand should not be sociopathy.

  7. RN says:

    Obama needs to scream out (in his way), “Do we only do things for RICH people in this country? Can’t we do things for the rest of America?” He needs to make the American people know that Republicans only represent the wealthy, and the rest of us need help too these days.

    And if we default, we default. It won’t be the end of the world. America would still be a great credit risk (where are you going to go, Europe? Japan?). Markets would know that the default was based on theater, not the inability to pay, and the response would be far short of dire.

    Obama needs to make this default happen, and put it squarely on the heads of the Republicans. We may take a short term hit financially, but medium and long term, it’s the only way to demonstrate just how psychotic these Republicans are and get them unelected.

  8. Geoffrey Freedman says:

    I am EXTREMELY disappointed in Obama’s leadership in this crisis. We just get these ridiculous talking points about whether to raise taxes or not and what programs to cut. Not enough is mentioned concerning how we got here. The social security programs and Medicare programs are medium term problems in the sense that they don’t have to be resolved today.

    The largest contributor to our increased deficits is our increase in military expenditures. The military budget per se doesn’t include all the expenditures, for example Dept. of Veterans Affairs, Dept. of Homeland Securities, Intelligence spending, ect. We spend over one TRILLION dollars per year. Bush started 2 wars when he cut income tax by 330 billion per year. That’s really how we got here. WAKE UP AMERICA. The one time TARP plan and economic stimulus plans are relatively trivial when you look at what we spend on our military.

    Do you really think that putting so many resources into the military industrial complex is good for our domestic economy? If we can’t pay bills our choice should be to immediately start cutting defense spending drastically.

    • hacimo says:

      The military spending on Iraq over the whole period of the war comes to about 100 billion a year (this is the increase in annual military budget due to the war). Since the war is winding down this means it lasted about 8 years and cost about 800 billion. This is about equivalent to what Obama’s TARP-2 stimulus program spent in a single year. To put things in more perspective the Obama administration in 2.5 years has increased the national debt by more then the whole amount added by Bush in his 8 years. Things are totally out of control.

  9. kevin says:

    Obama should use coin seigniorage:

  10. hacimo says:

    Why is it so difficult for some people to understand; the bond market only cares about BONDS (duh). Defaults on government salaries or social security or food stamps matter not one iota. In fact the senior bond holders love it when “junior” creditors are told to stuff it while they get payed. It leaves more money for them and validates their absolute power. Besides the US government is not Greece. The US has many assets and generates an enormous cash flow and there are many ways that the debt crises can be solved once we get our act together (e.g. we could raise taxes or cut expenditures). In the case of Greece they simply have no money in their economy and they can never pay there existing debts (or even make the interest payments). This is true no matter how high they raise the tax rates or how much they cut expenditures. Their debt is worthless without a bailout from some external party (i.e. the Germans).

  11. Steve Thompson says:

    Here is an examination of what impact the looming funding gap for the Social Security program might have on the debt talks and what changes might be required to keep this entitlement program functional over the longer term: