Politicians finally began making progress yesterday in their efforts to protect America’s credit rating by borrowing another $2.5 trillion with little prospect and no intention of ever paying it off.
Ridiculous but true. This is the same sort of self-delusion practiced by every gambler who doubles down on his last bet, or by every alcoholic who indulges in a final night on the town before swearing to get on the wagon, but this is self-delusion on a global scale. From Washington to Wall Street, from Beijing to Brussels, people who ought to know better are telling themselves: As long as the United States decides to keep borrowing, someone will always be willing to lend to it – and at dirt-cheap interest rates.
The U.S. Treasury’s debt has climbed from $9 trillion to $14 trillion in just a few years, and we now propose to raise it to nearly $17 trillion – a level we expect to reach around 2013. Surely there is some upper limit to what even Washington can borrow, but what is that limit? Is it $20 trillion, or $25 trillion, or $30 trillion? Nobody knows, but we seem destined to find out.
What happens when we reach the limit? Nobody knows that exactly either, but again, we seem destined to find out. (The most likely outcome is that the Federal Reserve will abandon all its anti-inflation promises and finance the government itself by printing money. Debts will get paid as they come due, but lenders will take a big haircut in the form of dollars that are worth much less than they expected.)
For now, however, nobody is thinking about the future pain, except House Republicans who moved yesterday to pass a “cut, cap and balance” plan that has no chance of making it into law any time soon. Warning of a debt crisis to come, House budget hawks want to sharply cut federal spending, cap future spending as a share of gross domestic product, and enact a constitutional amendment requiring a balanced budget.
Even this plan, the most draconian on the table, would allow federal debt to rise substantially above its present level before the budget could be balanced. It would not require any of the existing debt to be paid down, so a spike in interest rates above today’s ultra-low levels could blow a gaping hole in the best-laid federal spending plans. Most importantly, it says nothing about exactly what spending would be cut to achieve balance, which is sort of a big sticking point for a government that now spends almost twice as much as it generates in taxes.
These shortcomings are academic, however, since the House plan is going nowhere. This brings us to the two other options that were moving ahead yesterday, both originating in the Senate. A bipartisan “gang of six” plan calls for raising the debt ceiling, cutting spending by $500 billion immediately and $4 trillion over 10 years, and raising $1 trillion in new revenue over 10 years. It would not balance any budgets, however, so while it would slow the growth of federal debt, it would not actually arrest it.
Then there is the backup plan that Sen. Mitch McConnell, leader of the chamber’s Republicans, proposed last week. This plan would let President Obama raise the debt ceiling in three installments by a total of $2.5 trillion, without any Republicans having to vote for the increase. Democrats could throw in some spending-cut sweeteners to show they are not all about more borrowing and spending. There would be no new taxes.
The prospect of all this additional debt should scare the credit rating agencies down to their argyle socks, but the big guys, Moody’s and Standard and Poor’s, are more focused on what will happen if the debt limit is not raised by the Treasury’s Aug. 2 deadline. Obama has said he might not be able to make all the Social Security payments that are due the next day, or that military salaries might go unpaid in the middle of two wars.
The ratings agencies want someone to do something about Uncle Sam’s profligacy, but first they want Uncle Sam to go out and borrow more money so next month’s bills can get paid.
The simple truth is that the U.S. Treasury is not a legitimate AAA credit risk and has not been for some time. The problem is that once the ratings agencies acknowledge reality and cut the rating, all sorts of real consequences will ripple through the global economy. Money market funds and other institutions will, in many cases, be forced to dump Treasury debt. Federal borrowing costs will go up and the deficit problem will be even worse. Other interest rates will rise along with Treasury rates, hurting the economy and making the deficit worse still. So the agencies are going along, for now, with the fiction that if the United States agrees to keep borrowing, everything is certain to work out – certain enough to support that AAA rating.
Federal government finances are like a car that has hit a patch of ice while speeding down a highway. The driver can no longer steer. Maybe the car eventually slows down and comes to a safe stop, or maybe it hits a wall. Much of what happens next is a matter of luck.
Perhaps everything will work out, if the economy grows, the government spends less, more people pay more tax, and the Chinese and other global lenders keep feeding our spending habit in the meantime. But if interest rates go up, or the banking system endures another crisis, or a debt or property bubble explodes in China, a lot of things can go very wrong in a short time.
In this situation, I want to own almost anything that isn’t debt. I want real stuff like property or commodities, or intangible stuff like shares of corporations that have a chance to adjust to whatever reality dishes out. I want to lock in today’s low interest rates if I can, because borrowing for nothing without limit just can’t go on forever.
And I don’t think the federal Treasury can be made more solvent, or a lower credit risk, just by borrowing more, even if that is what the rating agencies tell me. I have eyes. I know something ridiculous when I see it.