Debt-Ceiling Deal Near, but Damage Done

Brinkmanship is damaging the country’s most valuable asset.

Newly redesigned $100 notes lay in stacks at the Bureau of Engraving and Printing on May 20, 2013 in Washington, DC.
National Journal
Patrick Reis
Oct. 16, 2013, 7:58 a.m.

Deal or no deal, the coun­try is already pay­ing a price for Con­gress’s brink­man­ship, and it’s be­ing done to the coun­try’s most valu­able fin­an­cial as­set: the world’s full faith in its cred­it.

In­vestors trust the fed­er­al gov­ern­ment to pay its bills. They trust it so much that they’re will­ing to lend the coun­try money at ab­surdly low in­terest rates — even rates that don’t keep pace with in­fla­tion. So, why are they will­ing to lend money to the gov­ern­ment at what is, in real terms, a loss? Be­cause it’s the safest place to park one’s money.

So long as one can trust the Treas­ury to pay it back.

But be­cause of Con­gress’s — and par­tic­u­larly some Re­pub­lic­ans’ — reti­cence to raise the debt ceil­ing, that trust is be­ing eroded in­to an open ques­tion.

The latest sign of that erosion came Tues­day even­ing, when Fitch Rat­ings threatened to re­voke the coun­try’s per­fect cred­it rat­ing. But those rat­ings ex­ist in the hy­po­thet­ic­al, in that they act as a guide to lenders in how much in­terest they should be de­mand­ing in re­turn.

What ac­tu­ally mat­ters for the coun­try’s budget is how much in­vestors ac­tu­ally do de­mand. And there too, there are signs of trouble.

In 2011, the coun­try saw a spike in the in­terest rates its lenders were de­mand­ing in ex­change for hold­ing its short-term debt. The in­terest rate on the 4-week Treas­ury note shot up 16 basis points — a fin­an­cial unit of meas­ure worth one one-hun­dredth of a per­cent — in the week be­fore the Con­gress reached a deal on Aug. 2.

This time around, it’s even worse. A month ago, the four-week Treas­ury bill was pay­ing out at ba­sic­ally zero, a rate around which it has hovered for most of 2013. But as of Tues­day, that rate had shot up to 35 basis points — by far its highest level of the year.

“The mar­ket is wor­ried about a delayed or skipped in­terest pay­ment,” said Joseph La­Vor­gna, chief U.S. eco­nom­ist at Deutsche Bank.

His­tory sug­gests the dam­age can be un­done: In 2011, the en­tire in­crease in the coun­try’s short-term bor­row­ing costs was erased the day after Pres­id­ent Obama signed Con­gress’s deal to raise the debt ceil­ing.

A de­fault would do per­man­ent dam­age to the coun­try’s bor­row­ing costs, but so long as Con­gress again reaches a deal be­fore de­fault this time around, bor­row­ing costs should go back to nor­mal, La­Vor­gna said.

But every­one, from de­fi­cit hawks to ad­voc­ates of new so­cial pro­grams, bet­ter hope he’s right.

Giv­en that basis points are a hun­dredth of 1 per­cent, it’s tempt­ing to be­lieve that the coun­try could pay a slightly high­er in­terest rate without break­ing the bank. But with debt reach­ing $16.7 tril­lion, even mar­gin­al changes can have massive con­sequences: Ap­plied across the en­tire debt, every ad­di­tion­al basis point of bor­row­ing costs costs the coun­try around $1.6 bil­lion an­nu­ally.

Matt Berman contributed to this article.
What We're Following See More »
DRUG OFFENDERS
Obama Grants 111 More Commutations
7 hours ago
THE DETAILS

In a release Tuesday afternoon, the White House announced that President Obama has commuted and/or reduced the sentences of another 111 convicted criminals, mostly convicted of drug possession or trafficking. About 35 were serving life sentences.

BUT HE’S NOT ADVOCATING FOR IT
Grassley Open to Lame Duck Hearings on Garland
8 hours ago
THE LATEST

Senate Judiciary Committee Chairman Chuck Grassley (R-IA) said Monday he'd now be willing to hold a hearing on Supreme Court nominee Merrick Garland in a lame-duck session of Congress. While he said he wouldn't push for it, he said if "Hillary Clinton wins the White House, and a majority of senators convinced him to do so," he would soften his previous opposition.

Source:
DEFINITELY MAYBE
Rubio Can’t Guarantee He’ll Serve a Full Term
10 hours ago
WHY WE CARE

We can call this the anti-Sherman-esque statement: If reelected, Marco Rubio ... might serve his whole term. Or he might not. The senator, who initially said he wouldn't run for a second term this year, now tells CNN that if reelected, he wouldn't necessarily serve all six years. “No one can make that commitment because you don’t know what the future is gonna hold in your life, personally or politically,” he said, before adding that he's prepared to make his Senate seat the last political office he ever holds.

Source:
DUTERTE BECAME PRESIDENT IN JUNE
Obama to Raise Multiple Issues in Meeting With Philippines Prez
10 hours ago
THE DETAILS

Since Rodrigo Duterte took over as president of the Philippines in June, he has made a serious of controversial statements and launched a war on drugs that has led to nearly 2000 deaths. He called the US ambassador to the Philippines, Philip Goldberg, "a gay son of a bitch." Next week, President Obama will meet with President Duterte at the East Asia Summit in Laos, where he " will raise concerns about some of the recent statements from the president of the Philippines," according to White House Deputy National Security advisor Ben Rhodes.

Source:
LATE SEPTEMBER
Conservatives Preparing ‘Dry Run’ for Constitutional Convention
10 hours ago
WHY WE CARE

The Convention of States Project, which seeks to force a constitutional convention under Article V of the Constitution, will hold a "dry run" in Colonial Williamsburg starting Sept. 21. "Several states have already followed the process in Article V to endorse the convention." Thirty-four are required to call an actual convention. "The dry run in Williamsburg is meant to show how one would work and focus on the changes and potential constitutional amendments that would be proposed."

Source:
×