As Washington politicians play fast and loose with the debt ceiling, bringing the creditworthiness of the United States into question—not “can we,” but “will we” pay off United States Treasury debt?—the nation is playing a dangerous game.
To risk a credit downgrade for the United States of America for political reasons is poor judgment because putting the “full faith and credit,” of the United States in jeopardy will mean U.S. Treasury securities will have to pay higher interest rates—not only because of market conditions but because this doubt will make them riskier. See Politics, the Treasury and Risk.
In other words, will politics cause the U.S. to senselessly default on the U.S. Treasury debt and neuter the world’s safe harbor security? What irreparable harm will this do to confidence, that elusive element so necessary for the recovery to continue?
The Financial Times reported early Monday that Deputy Treasury Secretary Neal Wolin said, “this is not something we can afford to let happen or to let people think might happen,” adding, “We are talking about a unique and fragile asset of the U.S.: the full faith and credit idea.”
The importance of this risk cannot be overstated. Taxes will go up to pay higher interest costs on U.S. Treasury securities if the U.S. is deemed less creditworthy—the exact opposite of what Congress and taxpayers want to see. And of course there is a difference in using tax dollars to pay for important programs—whatever your cup of tea is—and using tax dollars to pay interest on debt. Every dollar that goes to pay higher interest rates on U.S. Treasury debt will not reduce the deficit or fund programs. Although bond buyers would
probably appreciate a bit more in interest, the risk associated with the stigma of even potential U.S. default won’t do anybody any good. Higher taxes resulting in no reduction in the deficit is something Congress urgently should seek to avoid.