by Mitch Kokai
Senior Political Analyst, John Locke Foundation
While the fractious House Republicans try to come up with a successor to outgoing Speaker John Boehner, deadlines loom for major fiscal measures. First and most pressing, the Treasury says it will have exhausted all of its borrowing authority by Nov. 5, which yet again raises the specter of the first-ever default by the United States of America. Then, on Dec. 11, the government’s stop-gap spending authority runs out, which could lead to another shutdown of the federal government. …
… A default would be a decapitation of sorts of the U.S. Treasury’s obligations, which stand at the head of the worldwide capital markets. The impact of America’s failing to pay its debts in full and on time is literally inestimable, given Treasury securities’ role of linchpin of the global financial system.
Politics, not finances, are the main risk to the unrivaled status of the credit of the U.S. In an affirmation of its triple-A rating on U.S. government obligations, Moody’s Investors Service dryly said last week that “uncertainty can arise from the contentiousness of the political process.”
The dysfunction in D.C. was a major reason for Standard & Poor’s shocking move to remove its triple-A imprimatur from the U.S. government’s obligations in 2011. Despite all of the ill-informed hysteria at the time that interest rates would shoot up on Main Street, nothing of the sort happened. But stocks slid in the aftermath of the S&P move. The Standard & Poor’s 500 plunged 6.7% right after the debt downgrade and ultimately suffered a 19% correction (although concerns about Federal Reserve policy and Europe added to the worries at the time).
The ability of the U.S. to issue IOUs that are the favored asset of the rest of the globe, and that are denominated in the world’s main reserve currency and used as a store of value, as well as for trade and financial transactions, is an astounding advantage. Imagine if we were on a gold standard, and we had a mine with infinite reserves that could be extracted for zero cost. That is what the U.S. has with its ability to print dollars and issue Treasury securities.
To be sure, that’s an invitation to abuse what has been called an “exorbitant privilege.” That privilege can be maintained only to the extent that it is restrained. Indeed, Moody’s points out in its report, political wrangling has “introduced an element of spending restraint which has contributed to deficit reduction ahead of our expectations in recent years.”
But the debt-ceiling charade, in which Congress decides whether to borrow to pay for the spending it previously approved, is the height of hypocrisy. And it runs on both sides of the aisle. As Chris Krueger of Guggenheim Partners points out in a research note, “Recall that then-Senators Biden, Clinton, Kerry, and Obama voted against [raising] the debt ceiling when George W. Bush was president.”