If the threats continue, global markets may actually break the U.S.’s leg…
George W. Bush was trigger-happy enough to invade Iraq based on doubtful intelligence reports. Tea Party-influenced house Republicans may be rash enough to let America’s credit standing diminish based on a tough-love libertarian economics.
American financial stability almost never faces a real, possibly-permanent threat, but the Republican debt-ceiling game may be one. Politicians, pundits, and occasionally even economists have all been saying this on TV, but with a subject (yawn) like credit markets, the stern warnings about dire consequences have failed to grab the popular imagination.
The problem is that Tea Party know-nothing’s like William Temple (Mister tri-corner hat) are putting intense pressure on Republican representatives. And those Republicans seem to care more about riding the Tea Party wave than preserving what’s left of American prosperity. What makes it real is that these congressmen have repeatedly failed to demonstrate an understanding of the possible consequences of their threats. One presumes a child-like faith in supply-side economics keeps them sleeping soundly.
Paul Ryan, the supposed economic brain of the group, has a half of an undergraduate degree in economics (the other half was poly-sci of course) and has worked as a “volunteer economist” at Dick Armey’s Freedom Works, a place known for inventing numbers rather than studying them. No one has ever paid him to foresee economic outcomes… the way real economists make their living. He’s never really been in finance, started a business or done anything that might have given him worldly economic insight, rather he’s spent most of his life chasing conservative donors around. It’s disconcerting that he is the best man house Republicans can come up with to formulate economic policy.
He and Paul Ryan are probably calculating that they can demagogue this issue because it is complicated and abstract enough for most independents to believe the simple narrative that Republicans are using leverage to stop wasteful Democratic spending.
But if you’ve ever owed a substantial amount on your credit card, it’s quite easy to understand why this is a lot more dangerous than everyday political arm-twisting. Debtors know that every percentage point counts.
Last year the U.S spent about 4.6% of it’s total budget paying the interest on it’s debt. Not a good thing, but not actually that unreasonable either, kind of like a well managed family’s mortgage. The Family got a home…the Obama administration prevented a global depression. However, unlike a good mortgage, a great deal of this debt is subject to adjustable-rates, meaning that monthly payments could rise dramatically if interest rates rise. The government bankers re-borrow much of the debt every three, six, or twelve months, as older notes come due.
How much could interest payments rise? Well politically inspired government defaults are not everyday occurrences so it’s hard to be sure. But one unnecessary, political default has happened recently and that can provide some comparison.
In 2000, the government of Peru decided to refuse payments on their bonds even though they had the money. They had just ousted dictator-ish leader Alberto Fujimori and decided they shouldn’t have to honor his debts. Unfortunately for everyone in the country, the bold move caused Peru’s borrowing cost’s to skyrocket. They soon discovered that it’s really hard to run a country without credit and agreed to recommence paying the old debt. Their rates came down again, but not all the way. Credit analysts now had to factor political instability into their credit rating. According to a recent report by JP Morgan Chase, the affair permanently raised Peru’s borrowing costs by half of a percentage point…permanently.
What is a mere 50 percentage points to you and me? Currently the Treasury pays about 2.38% to service debt, so raising that by .5% to 2.88% would actually cause about a 21% increase in the treasury’s debt premiums. This would happen over time, as the constant refinancing of older debt continued at the higher rates. So, letting the math stay basic, that means 2012’s debt servicing would likely take up 5.6% of the budget instead of the 4.6% it cost 2010. This would represent a spending increase of about $86 billion, far more than the government currently spends on the nation’s highways or its veterans, or even the State Dept., at least eight times what it spends on Environmental Protection and twice what it spends on Homeland Security.
But these are only the minimum consequences, hoping that the default-caused general panic most money-market dealers foresee does not happen (the way it did when Lehman Brothers did the same thing in 2008)… That would mean a global financial melt-down that would be impossible to quantify. No responsible member of Congress would want this. Right?
Well…May be. Most commentators seem to assume that Wall Street will ultimately control the house Republicans. More importantly most big players in the credit markets have shrugged off the whole thing as mere politics too.
But there are other voices on the wackier side of Wall Street that welcome the possibility of a government default. They think it’s just the sort of short-sharp-shock America needs to wake up to the dangers of the government’s social spending.
Who will a Tea Party harassed John Boehner listen to? And will libertarian congressional freshmen necessarily follow him, if he does betray his own belligerent rhetoric? Come August, conservative donors may find themselves unpleasantly surprised and ultimately impoverished, by the same radical politicians they have no-doubt financed.
Eighty-six billion dollars is still a lot of money for most people, even Republican donors.