Curious Capitalist

Foroohar: The Debt Ceiling Crisis Is Threatening Your Quality of Life

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The budget and debt ceiling fights in Washington often seem to take place in a hermetically sealed bubble. Or maybe on some faraway planet “Beltway,” where there’s definitely less oxygen in the atmosphere. But it’s important for average Americans to realize that going over the debt ceiling isn’t just a political spectacle—it’s a event that could have major, immediate, real world consequences for your quality of life. The key reason that Americans are able to buy homes at low interest rates, travel abroad for spring break, have flat screen TVs in several rooms, and pay the same amount for groceries every year at Wal-Mart is that the credit of the U.S. is good. That’s what allows us to keep the dollar high and borrowing costs lower than our debt levels, growth prospects, and frankly, political competency, would otherwise allow. Once that trust is gone, it’s often gone for good—just ask Argentina, which is still paying through the nose to borrow money thanks to a default that happened twelve years ago.

Unfortunately, the markets are already starting to price in the loss of trust in the full faith and credit of the US government. As politicians continue to wrangle over the shutdown, U.S. sovereign credit markets are increasingly worried about default. You can see it in the anxiety provoking little bump that reflects the interest rates paid out on U.S. Treasury bills. The lower the rate, the safer the bet is considered by the markets, and vice versa. Our bill bump is flat until about October 17th, when the government is expected to run out of money. It then starts to swell, and continues swelling into November—meaning the markets think that we’re more likely to default. The bump goes back down on Treasury Bills that mature in December. But nobody knows yet whether a pre-holiday delivery of a new debt ceiling increase will be successful. That’s why you can also see a rally in U.S. sovereign credit default swaps, complex securities that would theoretically pay out to investors if we did actually default. (Though if I were a buyer, I’d take a good look at Greece and notice that things don’t always go as expected during a default. Borrowers and lenders on all sorts of Greek assets are still duking it out for who gets paid and who doesn’t).

Uncertainty is the key reason that the sales of T-bills to overseas creditors are also very likely slowing. As a new Goldman Sachs report looking at the potential economic impact of the crisis noted today, purchases of Treasury Bills by foreign investors during past debt ceiling showdowns have declined markedly, and while figures are only currently available through July, the August/September numbers due out soon will almost certainly show the same trend. If the Chinese, Japanese, Europeans and others don’t buy as many of our T-bills, we won’t be able to keep rates as low as we have in the past. And it’s worth noting that one of the key reasons that T-bills sales went up so quickly after the 2011 debt debacle is because Europe was in the middle of its own, more serious debt crisis. We were the prettiest house on an ugly block then. But Europe is in recovery now, and the emerging markets are more stable. Who’s to say this won’t be the moment that the long predicted shift in the position of the dollar as the preeminent global reserve currency starts to happen in earnest? If I had to place a bet now, I’d say it’s very possible we could look back on the fall of 2013 as the beginning of the end of the dollar as the world’s sole currency superpower.

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Certainly, confidence amongst the nation’s business leaders is down. CEO confidence has been trending lower for the last several months, which means that “companies capital spending plans for the rest of the year are likely to be limited,” notes Michael Purves, chief global strategist for institutional broker/dealer Weeden and Co. That will further depress the growth that’s already being trimmed by around 0.2 percentage points a week as the shutdown lags on. Combine that with lower consumer confidence, along with lower growth in the service sector and housing as people tighten up their wallets, and you’ve turned what was a more robust recovery in the first half of the year into an economy that’s once again struggling to hit 2% growth.

And if we go over the debt ceiling and default on our bills, hold on to your hat, your house, and your job. Failing to pay creditors would immediately downgrade the U.S. credit score. Markets would —the debt ceiling debacle in 2011, which wasn’t as real as possibility, resulted in a 13% drop in the value of U.S. stocks, and hundreds of billions worth of outflows from money market funds, as investors tried to redeem cash as the sky seemed to be falling. Our borrowing costs would rise significantly. By how much, nobody knows. But it’s worth remembering that back in 1979, we had a tiny, technical default on a few T-bills (thanks to a word processing glitch, if you can believe it). There was never any doubt that people would get paid, but rates on T-bills still jumped more than half a percentage point, costing taxpayers an additional $12 billion worth of interest payments. Because the incident was so isolated, it didn’t have much of an impact on consumer markets. A default caused knowingly, and for reasons of political gridlock, would be a very different story. Failing software, of course, can be fixed. Sadly, there’s no virus program we can run on Congress.

27 comments
axexeda
axexeda

Ms Foroohar,

I buy the "curious" part. "Capitalist" you are not. 

There is only one leader, in theory at least, who has to make things happen. That would be Mr. Obama. First was Bush now is Congress. The country elected Mr Obama to make changes within a democracy where compromise has always prevail. Mr Obama has not idea what that is, unfortunately.

Regards 


gayGOP
gayGOP

 This article is pure leftist speculation.  The US brings in enough tax revenue every month to cover our debt and then some.  If we default it is squarely on Obama's head.   What it actually does, is force this obese government through gastric bypass.  When a few hundred pounds is lost, we'll feel a hell of a lot better.  Boehner is doing his job, per the constitution of The United States of America.  The executive branch does not get to say how and when the US spends money. That job lies solely with the House. 

btt1943
btt1943

China, US largest creditor, has just sounded a warning that bickering partisans in Washington ought to take note seriously. Imagine even if the debt ceiling is raised, there is no guarantee that Beijing would want to buy more bonds for fear of eventual default (unlikely yet possible).

tiktin
tiktin

It would be nice if the government could be forced to live within it's means if congress does not raise the debt ceiling.  After all, with an income of over two trillion dollars a year, the government just might be able to scrape by. Unfortunately, it probably wouldn't work. You see, there is really nothing to keep the treasury from printing checks, regardless of what the congress does, or does not do.  The banks would honor those checks and the fed would clear them by crediting the amount to the bank's balance sheet. There is really no need for the Treasury to sell any more paper or for the fed to buy it. All it takes is the click of a computer mouse.  You see the beauty of it. The national debt does not rise, no more nasty Treasury auctions wondering if anybody is going to show up,  no more paper added to the fed's already bloated balance sheet, but the gravy train keeps right on rolling.  You think this is fiction? Think again!

Dull_Roar
Dull_Roar

 @richardjpapp Actually the deficit has much more of an impact than the debt. As long as a country is growing economically (which deficits suppress), the debt will be taken care of by inflation in the long-term. It's important to understand the distinction if you are going to make informed decisions.

RobertParent
RobertParent

Maybe it's time to get parties out of the gov't.

Parties should function outside of our gov't institutions. they can support or oppose any candidate or elected official they choose.... but a candidate or elected official should not be able to claim an affiliation with a party nor be labeled as a party affiliate.....The media might label them "democrat supported" or "republican leaning".... but they cant claim an affiliation.... they would be free to vote for the "greater cause", but can vote strictly along a party platform if they choose.
This idea would open up avenues for other parties to form, ... so if an elected official displeases one party... other parties may want to back them.
We would have to change all the election rules....but that is long over due anyway.
We would also need to convince the people in charge.... thats the big problem...

I am thinking that it would have to incubate on a state level...

Anyone have an idea???

richardjpapp
richardjpapp

Baloney. It's the National Debt that's crushing my grandchildren now.

firmsoil
firmsoil

Never mind the debt and deadbeat culture, "The Debt Ceiling Will Crush Us"!

Relax, most americans do not own much anyways, all this "sky is falling" scaremongering is phony.

The last time gubmit scared americans in 2008, it succeeded in giving the banksters trillions, and what did people get... foreclosure notices.

mary.waterton
mary.waterton

TRILLION dollar annual deficits 5 years in a row with no signs of slowing. Federal Reserve is printing money and buying Federal Government debt with no signs of slowing. No one can stop the democrats from borrowing and spending TRILLIONS to buy their constituents' votes with your money because (according to the democrats) failure to raise the debt ceiling will cause the world to end.

So, Government accounting has become a Ponzi scheme ... borrowing from Bill to pay off Sam. Sooner rather than later Treasury rates will rise and we will suddenly discover that we can no longer even pay the interest on national debt. What then? That's the debt ceiling the democrats won't be able to avoid.

j45ashton
j45ashton

It's not Obama who is breaking the GOP.  It's the tea party.  Aided & abetted by Fox News.  GOP take heed.  Even Rupert & Roger are starting to pull in their horns.

tsvskibum
tsvskibum

Congress should grow up, the those tea party wing nuts to pound sand and PASS a budget!

mak4374
mak4374

@gayGOP Well, let me give you my speculation: It is people like you that are the problem.  Simpleton ideologues that confuse opinion with knowledge.  People that think cliques based on simplistic attempts to put everything in a small brain, are solutions to problems so complicated that even those whose job is to know, cannot predict what is going to happen.  Go ahead, ignoramus, predict the future based on your nihilist views.  But when we loose our jobs and our houses, guess who is going to be blamed and punished.  Because by then many will have nothing else to loose.

mak4374
mak4374

@Azrimgiab No, just certain consequences.  Last time the world run out of credit, a world war broke out.  Was it the direct reason? Let's find out.

tom.litton
tom.litton

@RobertParent I think that would just produce parties in everything but name.

Some other suggestions though:

Signficantly reduce the barrier for other parties to be no more then what it would take for any candidate for the current parties, and require that they be allowed in any presidential debates.

 Reverse gerrymandering and prevent it from happening in the future.

Either complete public funding of elections or use blind campaign contributions system.

mak4374
mak4374

@richardjpapp It is like saying, it is your mortgage for the house your grandchildren will inherit, or the load for their college, or the bills for their doctor,  that is crushing them, so, let's not pay it.  Oh, and the little consequence would be that credit for your own business would be eliminated, so you would loose it and go bankrupt.  For ever.  Yeah, THAT would really help your grandchildren.


Is that how you go through life?  Packaging everything in a little neat box of simplistic cliques? Because, if so, your grandchildren have a lot worse things to worry about.

mak4374
mak4374

@firmsoil Wow, another genius with an opinion.  And a job.  Last time, moron, that the world lost their credit, there was this little thing called the Great Depression.  Yeah, 3/4 of the people didn't lose their job, but for some weird reason they still called it that.  I wonder why.

jim.satterfield
jim.satterfield

@firmsoil The debt ceiling has nothing to do with what any members of the private sector owe or own, whichever you really meant.

mak4374
mak4374

@mary.waterton No sign of slowing, except that...it slowed? Actually cut by half? And projecting surpluses? Oh, right I am liberal-biased because I live in reality.  Never mind then.

tom.litton
tom.litton

@mary.waterton This is the fastest decline in deficit since just after WWII.

The CBO estimates the debt to GDP ratio to remain stable for the next 10+ years (and then rise, but only because of entitlements). 

Not to mention a default would make the debt significantly worse. It after all, doesn't actually reduce the spending already authorized by congress.

jim.satterfield
jim.satterfield

@mary.waterton Facts are such a horrible thing to have to face. In fact the annual deficit is decreasing, slowly but surely. Who's been telling you otherwise? BTW, the debt ceiling is just an agreement to pay the amount of spending that has been authorized.

mary.waterton
mary.waterton

@swagger @mary.waterton 

I agree. The Nasdaq (or dot Com) Bubble in 2000 marked the beginning of our ongoing slide into poverty and the Housing Bubble of 2008 a dramatic acceleration. It will ultimately end in a sovereign debt crisis and/or currency crisis with lots of smaller bursting bubbles between now and then.