After 10 years of battles over the United States’ debt ceiling, it’s exasperating that federal politicians still think the bedrock of the global economy is fair game for hostage-taking.
A brief primer for those outside the financial world. Banks, corporations of many sizes and numerous countries are the principal buyers in the $24 trillion market for U.S. Treasury debt. Because – until recently – the U.S. government has been a conscientious payer of its bills, these many actors get to park their money in short- and long-term securities, earning a modest return for what’s perceived as nearly zero risk.
If the federal government were to default suddenly the value of all those securities, which have been treated as essentially cash on innumerable balance sheets worldwide, gets called into question. Instantly, any of the roughly $1 trillion in Treasury securities coming due May 31, per TD Securities analysts, become toxic. This alone would cause global economic chaos and potentially throw the world into a financial crisis and a recession.
What makes the current situation all the more galling is that first, the borrowing slated to be paid back May 31 was already agreed to by Congressional Republicans when voting for past federal budgets. Second, Democrats had an opportunity to raise or abolish the debt ceiling after the midterm elections and took a pass.
While it’s doubtful that ratings agencies will slash the United States’ credit rating to “junk” status right away, it’s a slippery slope no one in Washington, D.C. should dare tread. First, it makes every the day-to-day borrowing every American company relies on more expensive, when interest rates are already at a decade high and banks are reluctant to lend for the kinds of projects that will keep the economy going and keep the American people employed.
Looking at this newspaper’s own particular bailiwick, a recent analysis by Zillow estimates monthly payments on new mortgages would jump 22 percent, locking even more people out of the struggling housing market. And the financial stability of more than a few banks and mortgage companies could get called into question as their cost of capital would quickly rise as well.
Second, if Republicans in Washington let the nation default – and, make no mistake, this crisis is entirely of their making since they refuse to negotiate the country’s spending through a normal budget process – that will show the world there’s no guarantee another default won’t happen again. That means more credit downgrades are likely in the future, and that means other currencies, like the Chinese renminbi, will start superseding the U.S. dollar as debt-buyers’ currency of choice. And that starts to put our economy at the mercy of other nations.
It doesn’t matter what your policy preferences are for optimal levels of federal spending, taxation and debt burden. When faced with the kind of cascading chaos and economic body blows a default would cause, everyone should agree that the full faith and credit of this country has to be off-limits.
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