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
Add to Briefcase
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 »
INCLUDES NY PROBE INTO MANAFORT
Why Yes, Mueller Is Looking into Trump Businesses
2 hours ago
THE LATEST

In addition to ties between Russia and the Trump campaign, Robert Mueller's team is also "examining a broad range of transactions involving Trump’s businesses as well as those of his associates, according to a person familiar with the probe. FBI investigators and others are looking at Russian purchases of apartments in Trump buildings, Trump’s involvement in a controversial SoHo development in New York with Russian associates, the 2013 Miss Universe pageant in Moscow, and Trump’s sale of a Florida mansion to a Russian oligarch in 2008, the person said. The investigation also has absorbed a money-laundering probe begun by federal prosecutors in New York into Trump’s former campaign chairman Paul Manafort."

Source:
FIRST TIME SINCE ITS CREATION
House Reauthorizes DHS
2 hours ago
THE DETAILS

"The House voted Thursday to reauthorize the Department of Homeland Security. The bipartisan measure passed easily by a vote of 386-41, with nine Republicans and 32 Democrats voting in opposition. If the bill makes it through the Senate, it would be the first-ever reauthorization of the Department of Homeland Security (DHS) since it was created in the wake of the Sept. 11, 2001, terrorist attacks." Among the provisions it contains is a mandate that the Senate confirm the Secret Service director. It also boosts funding for the Urban Area Security Initiative by $195 million per year.

Source:
OPPONENTS SAY SHE SHOULD RESIGN
AFT’s Weingarten Likens Voucher Support to Segregation
2 hours ago
THE DETAILS

In remarks scheduled to be delivered today at the American Federation of Teachers' summer conference, President Randi Weingarten "likens U.S. Education Secretary Betsy DeVos to a climate-change denier" and "says the Trump administration's school choice plans are secretly intended to starve funding from public schools. She calls taxpayer-funded private school vouchers, tuition tax credits and the like 'only slightly more polite cousins of segregation.'" The pro-voucher Center for Education Reform said teachers should "consider inviting Weingarten’s resignation."

Source:
DESPITE EARLIER CRITICISM
Trump Has Confidence in Sessions
3 hours ago
THE LATEST

"President Trump has confidence in Attorney General Jeff Sessions, despite his criticism of the Justice Department head's decision to recuse himself from the Russia probe, the White House said Thursday. 'Clearly he has confidence in him or he would not be the attorney general,' spokeswoman Sarah Huckabee Sanders told reporters at an off-camera briefing."

Source:
REPORTEDLY TARGETS LGBT
ACLU Suing Trump Administration for Planned Executive Order
5 hours ago
THE DETAILS

"The American Civil Liberties Union is suing the Trump administration for records on an executive order President Trump reportedly planned to release targeting the rights of lesbian, gay, bisexual and transgender people. In a lawsuit filed in the U.S. District Court for the Southern District of New York on Thursday, ACLU claimed the departments of Health and Human Services, Justice, Labor, and Treasury violated the Freedom of Information Act by failing to release the records it requested on the reported draft order."

Source:
×
×

Welcome to National Journal!

You are currently accessing National Journal from IP access. Please login to access this feature. If you have any questions, please contact your Dedicated Advisor.

Login