海角大神

I ask myself: is it wise to write yet another post on the sheer craziness of the debt ceiling debate? Does underscoring the sense of urgency simply give strength to dark forces who are trying to leverage the threat of default for their political gains?

Perhaps so, but the other way lies madness. We鈥檝e got to talk truth about the stakes here because they鈥檙e so high.

If that鈥檚 so, why do interest rates remain low? Why are investors in ten-year US treasury bonds accepting 2.93% interest today instead of insisting on a big rate premium the way bond investors in, oh, I don鈥檛 know鈥�GREECE are??

Because they assume we鈥檒l get our act together and raise the debt ceiling well in advance of Aug 2. That鈥檚 the date when the Treasury will have exhausted their ability to move money around to cover their obligations while staying under the debt limit.

But what if that assumption should weaken? After all, it doesn鈥檛 take a default to spook bond investors. They can see stuff like Sen Jim DeMint the other saying Sec鈥檡 Geithner鈥檚 bluffing on the Aug 2 deadline. They can see Rep Cantor and Sen Kyl leaving the building because the D鈥檚 insist that negotiation means that they can鈥檛 get everything they want and that have to be part of the deal.

Suppose this thing drags on for another month. It鈥檚 entirely possible that the Treasury finds they have to offer a premium, maybe 50 basis points (half-a-percent), to sell T-bills. Big deal, right?

Right. That鈥檚 about $50 billion in increased annual debt service. That鈥檚 some pretty expensive political leverage.

That鈥檚 also about another year of extended unemployment benefits to help the millions of long-term unemployed, or half a year of another payroll tax cut for workers.

I know鈥攖he folks taking this position don鈥檛 really care about deficits and debt. Heck, the same House Republicans stonewalling on the debt ceiling all voted for the Rep Ryan鈥檚 budget which requires the debt ceiling to go up by 鈥搕hat鈥檚 right: by supporting the Ryan budget, they鈥檝e already implicitly voted to increase the ceiling!

I remain confident that the ceiling will go up before the deadline. It would be such a gross dereliction of duty to force default, that I still believe a majority of elected officials will achieve sanity before this is over.

But the theatrical posturing may not be costless. The longer this goes on, the closer we approach the possibility of wasting serious money on higher borrowing costs.

Update: A number of people have made the important point that the $50 billion in higher debt service should also be viewed as a transfer from taxpayers to bond holders, the Krugman recently wrote about.

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