In Wednesday’s Washington Post, Allan Sloan is amused by people who “freak out” over the federal debt getting “downgraded” or defaulted on–the same people who seem oblivious to the problems with the debt itself or even their own role in its growth over the past decade:
You’ve got to love it. Republicans who never saw a George W. Bush national debt-increase request they didn’t support point with alarm at S&P now saying there’s a 1-in-3 chance it will downgrade the U.S. credit rating within two years. Democrats, who rightly fussed about the costs of Bush’s massive tax cuts, two unfunded wars and unfunded Medicare prescription drug benefit, insist that things are going to be okay under the current Democratic administration.
Allan explains that worries about default are really overblown, although who knows, we might just act “stupid” enough for it to happen (emphasis added):
I think S&P has the right idea in treating the U.S. government as just another sovereign credit rather than as some sort of “exceptionalist” borrower that’s not subject to any rules of the financial marketplace.
But even if U.S. Treasury debt is downgraded, there’s no chance of the government defaulting on its debt absent Washington doing something incredibly stupid, such as refusing to increase the national debt ceiling.
The reason there’s no chance of a default (absent exceptional stupidity) is that the U.S. government isn’t a company that has to worry about attracting enough borrowers to roll over its debts, the way even the most mighty corporate borrower had to worry during the 2008-09 financial panic.
Unlike a GE or a giant bank, the U.S. government is borrowing in a currency — the U.S. dollar — that it can print. And there’s the Federal Reserve, which has indirectly funded a significant part of the federal budget deficit through its “quantitative easing” program under which it’s buying $75 billion of Treasury securities a month. If all else fails, the Fed could fund the government directly.
The real problem? It’s not the “grade,” but the “performance” itself. As Allan emphasizes, the debt itself is what we should be fretting over:
[It's t]he same problem I’ve been writing about for years — that even when you’re the U.S. government borrowing in your own currency, there are consequences to excessive debt. Unless the United States defaults on its obligations, interest costs get higher and higher, putting pressure on the budget. Borrowing all this money from all over the world — foreigners own about half our publicly traded Treasury securities — puts downward pressure on our currency’s value.
So in other words, we should spend less time worrying about the possibility of not paying back our debt and start worrying about how (oh no!) we’re actually going to have to keep paying for our debt–for many, many years to come.