Everyone is saying it will be Armageddon if the US doesn’t raise the debt ceiling, because then it will be unable to pay its creditors for some time, which will raise the future cost of borrowing, and then have a giant ripple effect throughout the rest of the economy.
But here’s what I don’t understand. Isn’t the fact that we are *approaching* the debt ceiling already an indication to creditors that “Hey, we can’t pay the debt without borrowing more money.” Yet we’re fine.
Doesn’t that distress signal already basically indicate that we can’t really pay the debt? It would be like asserting “It’ll really damage your credit score if you miss a payment” to somebody… who has paid their last 3 years of payments *with other credit cards.* Shouldn’t their credit *already* be shot at that point?
Why do the people lending the government money see the government any differently? Why is our credit considered excellent when we pay off our creditors with other creditors money?
In: Economics
The bad thing about repaying credit card debts with credit cards is twofold:
1) You’ll never pay it off, and
2) It’ll grow exponentially due to interest.
(1) isn’t a problem for the US government. The government doesn’t retire or die (and if it ended, then honestly we all have bigger problems). They don’t ever have to pay it off, and the growing economy will decrease the size of the debt over time relative to its ability to pay.
The US government also isn’t going to abscond or default. It’s just not a worry the way it is with personal debt.
(2) also isn’t a problem because of low interest rates. The US government is really safe to lend money to, so people are happy to lend them money at really low rates. 10 year yields on bonds (people lending the government money for 10 years) is 1.27% per year.
Once you account for inflation, the government is better off borrowing and spending today than not borrowing and spending tomorrow.
That’s all predicated on a low interest rate though, which relies on people being sure that the US government will repay their debts. Not raising the debt ceiling would cause people to doubt that, making servicing new and existing debt vastly more expensive.
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