19 January 2018

Our Nation's Eroding Credit

For decades, economists used the interest rates on U.S. Treasury bonds as the operational definition of a risk free return for investors in the economy.

No more.

As the U.S. looms less than eleven hours away from a government shutdown as I write this post, Fitch, a government bond rating agency, is threatening to reduce the credit rating of the United States for a second time. The first time, in 2011, Standard & Poors reduced the U.S. credit rating over an unwillingness of Congress to raise the national debt ceiling, despite having appropriated spending in excess of the amount then in place.
Fitch adds that Congressional posturing alone could cause a downgrade – the same reason S&P downgraded the US during the debt ceiling fight in 2011. Fitch:
"Brinkmanship over the debt limit could ultimately have rating consequences, as failure to raise it would jeopardize the Treasury’s ability to meet debt service and other obligations. The next Congressional session begins on 5 September, with only 12 congressional working days before month-end. We believe there is strong political will to ensure that Treasury securities are honored in full and on time…."
So if push comes to shove, debt payments would be prioritized, and the US wouldn’t default on its bonds, Fitch “believes.” But defaulting on other obligations also has consequences:

"In Fitch’s view, the economic impact of stopping other spending to prioritize debt repayment, and potential damage to investor confidence in the full faith and credit of the US, which enables its ‘AAA’ rating to tolerate such high public debt, would be negative for US sovereign creditworthiness."
This has huge practical consequences. A lower credit rating means higher interest payments, and higher interest payments on the national debt shifted billions upon billions of dollars from the American public to bond holders as tax revenues are diverted to pay interest on the national debt.

Interest on the national debt already consumes $266 billion a year (about $2.7 trillion per ten year budget cycle), making it one of the biggest programs in the federal budget each year and consuming 6.5% of the  national budget.

It is also worth noting that indifference to the national debt has, in recent times, been largely a Republican phenomena, with the GOP willing to cut taxes and finance this with debt rather than spending cuts, while Democrats have worked hard to keep deficits lower and to pay for spending increases with tax increases.

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