One of the mistakes that many people make is assuming that the battle about raising the debt limit is just another purely domestic political squabble. It’s not.
Even if our country avoids defaulting on its debt for the first time in history, we’ve still probably suffered damage because of the fighting over the debt limit.
Why do I say this? Because if you parse the numbers, as we’ll do in a bit, you see that foreign investors and central banks own about 45 percent of the Treasury securities that are owned by investors, rather than by the Federal Reserve and various federal trust funds.
Here’s why this matters. If you were a foreign owner of U.S. Treasury securities watching the endless debt ceiling posturing, wouldn’t it be rational to wonder whether America’s unblemished record of paying interest and principal on its debt as it comes due is coming to an end?
After all, we’re now hearing talk in Washington about the possibility of the government paying some bills as they come due, but not paying other bills. What we are hearing from the Biden administration is talk about when the country will run out of borrowing power and won’t be able to pay its bills. We aren’t hearing much about how the administration thinks it can deal with the situation, should it occur.
Even if the Fed defers a default by using an innovative, convoluted contingency plan that was revealed recently in the Wall Street Journal, it could cause major problems.
It could make any rational foreign holder of U.S. debt more skeptical about the federal government’s ability and willingness to pay its debts in full and on time. That could well lead to fewer foreign purchases of new issues of Treasury securities and possible sales of existing ones.
Now, let me show you why foreigners’ opinion about the quality of Treasury debt matters.
Our national debt is currently about $28.43 trillion, of which $6.17 trillion is “intragovernmental.” That’s debt owned by various federal entities, the biggest of which is the Social Security Trust Fund.
That leaves $22.26 trillion of “debt held by the public.” About $5.41 trillion of that is owned by the Fed.
This leaves $16.85 trillion of debt held by public investors. Of that, $7.54 trillion – almost 45 percent – is owned by foreign central banks and other foreign holders.
This means that we rely heavily on foreign money to help finance our country’s budget shortfalls. Without foreigners buying substantial portions of our new debt, interest rates are likely to rise, possibly sharply, and domestic U.S. borrowers could be crowded out.
We’re already seeing disturbing signs in financial markets about the impact of a possible default. Federal borrowing rates are creeping up, and the U.S. stock market is starting to suffer what feels like uncertainty-related declines.
The primary blame for this, of course, falls on Mitch McConnell, who happily approved debt ceiling increases and suspensions during Donald Trump’s four years in office that added $7.81 trillion to our national debt. The Senate minority leader now claims to be worried about the federal deficit.
But by not fighting back, the Biden administration is contributing – heavily – to the problem that could end up leading to an inadvertent and unnecessary debt default.
The White House and Congressional Democrats need to come up with something resembling solutions rather than just continuing to react to McConnell and his crew.
It might also help get the public on their side if they repeatedly mentioned that McConnell’s home state of Kentucky gets more money from the federal government than it sends to Washington. And that as a result, Kentucky might be hurt badly by any federal spending slowdowns.
Biden and Treasury Secretary Janet L. Yellen might even consider a version of what I recently proposed: Ignore the debt ceiling by inducing a cash-laden country (can you spell Qatar?) to buy a big private issue of Treasury securities that carry a higher-than-market interest rate.
Look, I still don’t think that the seemingly endless posturing will lead to our country’s first ever debt default, although the odds of a default are growing rapidly.
But even without a default, we’ve damaged ourselves in the eyes of foreign investors by showing how dysfunctional our governance has gotten. As a result, we, our children and our grandchildren are going to find ourselves paying the price for this totally unnecessary piece of political posturing.