The government has now brought our credit worthiness into question twice in the last year. Many are screaming for it to stop, many are confused as to why, and even more seem to be ready to ‘fire’ government all together. Although not feasible, nor do I accept the movement, it is becoming more rational. The continual risk of ruining the United States credibility is horrifying; there is no reason we should ever be in such a situation.
I have heard, read, and seen many individuals attempt to quantify the United States not making good on their debt payments. For starters, it is nearly impossible to predict exactly what would happen, although complete devastation, many agree, would surely ensue.
The United States’ notes, or T-bills, are looked upon not only in the United States, but in the world, as an asset with no risk. This is not exactly unwarranted either; The United States boasts the strongest economy in the world, the most used currency, as well as an assortment of other economic advantages. The idea of a complete default of government debt, in the United States, because of actual failure to pay, is nothing short of a doomsday scenario. Although the United States offers a variety of other bonds, which are also great economic indicators, for all intents and purposes, a focus on the T-bills is all that needs discussed.
The T-bill, because of its privileged status of “risk-free”, is seen as the base interest rate for any shorter term financial security. Any loan imaginable, including private college loans, would see its interest rate skyrocket. Furthermore, the low-cost of investing right now, which is essential to the recovery from the great-recession, could be compromised. Comparing the economy post-default, to the Great Recession, would most likely make the great recession seem trivial. The economy would most likely slip to levels equal, or possibly worse, than those seen by the Great Depression.
The debt ceiling has now been raised, thankfully, and yet another doomsday has been avoided. Many rejoice at this move, but it is hard to forget that the ceiling was only raised to a level that will most likely require another authorization around February of next year. The uncertainty that our government conveys, by only raising the debt ceiling for short periods of time, is nothing short of unacceptable. The world is watching, and knows the government will be at risk, once more, of not making good on debt payments, less than four months from now.
Standard and Poor’s has already downgraded our debt, with Fitch now placing us on ‘watch’ for a downgrade, which tells the international community that the United States may not be the “risk-free” debtor they once were. The downgrade by Standard and Poor’s last year sent most markets into a tailspin, although quite ironically the interest rate on T-bills fell, with investors fleeing to more liquid short-term investments. If Fitch now downgrades our debt many of our bonds, from the 1-month all the way to the 30-year, could see a tremendous decrease in value.
This would cost the US more to borrow, and a loss of affectability when using monetary policy. Obviously the doomsday scenario will most likely never happen, even with hot-heads like Senator Cruz, most government officials understand what is at risk and know to raise the ceiling.
This does not mean however that the raise is automatic, and we will see a drag on our economy until the raise is more automated. This issue will most likely be kicked down the road for a couple months, unfortunately, and our valuable privilege of issuing a virtually “risk-free” asset could begin to fade.