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Allan Sloan: The Debt Is the Problem Even If We Don’t Default On It

April 27th, 2011 . by economistmom

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.

5 Responses to “Allan Sloan: The Debt Is the Problem Even If We Don’t Default On It”

  1. comment number 1 by: Ralph Musgrave

    For the U.S. to borrow dollars from other countries when the U.S. can print dollars itself is pure genius. It’s like a dairy farmer buying milk in a shop when there’s a thousand gallon tank of milk right outside the farmer’s own front door.

  2. comment number 2 by: Gipper

    Allan Sloan just proved that he’s very ignorant about default. Failure to raise the debt ceiling will have ZERO effect on the probability of default on publicly held debt.

    ZERO.

    Only Obama’s administration can default. They have the discretion over how income tax revenues shall be spent. Now that nearly 70% of the federal budget is financed by tax revenues, interest expenses and principal payments can be easily covered.

    I am completely shocked at the media bias and misinformation that is circulated about this issue. What is shameful is that Economistmom would even give credence to morons who spout this garbage.

    You should know better.

  3. comment number 3 by: Gipper

    Anyone who says that failure to raise the debt ceiling threatens default is an ignoramus or an partisan Democrat trying to sway public opinion to intimidate Republicans from using the debt ceiling vote as a bargaining chip for extracting spending cut concessions from Democrats.

    I hope that the Republicans refuse to raise the debt ceiling and use it as an opportunity to educate the public about the fact that only Obama and Tim Geithner can cause a default.

    Then we can watch Democrats squirm as Obama has to decide which is the most important 70% of the federal budget that should be funded during an extended period of time when no borrowing is permitted and he has to rely on tax revenue to fund operations.

    Can’t wait to see him defend funding NPR and high speed rail over the defense budget. That will be fun to watch!

  4. comment number 4 by: Vivian Darkbloom

    Gipper,

    You are correct that the following language is silly:

    “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.”

    But, it is only the clause after the comma (the part Economist Mom put in bold print) that is wrong. The “doing something stupid” would be refusing to put creditors first in line, not in refusing to increase the debt limit.

    That said, the gist of the Sloan message is correct: there is no (current) chance of default and therefore the risks of default are (currently) overblown. He is also right that the consequences of the increasing debt (devalued currency, higher costs to service it, etc) are problems nevertheless. He and Economist Mom got the rationale wrong, or articulated it incorrectly, and that may betray some political bias, but the overall conclusion seems to be valid.

  5. comment number 5 by: Gipper

    Vivian,

    I was focused on the clause “such as refusing to raise the debt limit” because Economist mom put it in bold italicized print. Sloan clearly suggested that failure to raise the debt limit could trigger a default.

    It’s important that nonsense be refuted early and often.

    I’m not disputing the overall conclusion.