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.
What We're Following See More »
"Even if House Republicans manage to get enough members of their party on board with the latest version of their health care bill, they will face another battle in the Senate: whether the bill complies with the chamber’s arcane ... Byrd rule, which stipulates all provisions in a reconciliation bill must affect federal spending and revenues in a way that is not merely incidental." Democrats should have the advantage in that fight, "unless the Senate pulls another 'nuclear option.'”
The House has passed a one-week spending bill that will avert a government shutdown which was set to begin at midnight. Lawmakers now have an extra week to come to a longer agreement which is expected to fund the government through the end of the fiscal year in September. The legislation now goes to the Senate, where it is expected to pass before President Trump signs it.
President Trump’s portrayal of an effort to funnel more Medicaid dollars to Puerto Rico as a "bailout" is complicating negotiations over a continuing resolution on the budget. "House Democrats are now requiring such assistance as a condition for supporting the continuing resolution," a position that the GOP leadership is amenable to. "But Mr. Trump’s apparent skepticism aligns him with conservative House Republicans inclined to view its request as a bailout, leaving the deal a narrow path to passage in Congress."
Democrats in the House are threatening to shut down the government if Republicans expedite a vote on a bill to repeal and replace Obamacare, said Democratic House Whip Steny Hoyer Thursday. Lawmakers have introduced a one-week spending bill to give themselves an extra week to reach a long-term funding deal, which seemed poised to pass easily. However, the White House is pressuring House Republicans to take a vote on their Obamacare replacement Friday to give Trump a legislative victory, though it is still not clear that they have the necessary votes to pass the health care bill. This could go down to the wire.