Failing to increase the debt ceiling in a timely manner does not, as such, require the United States to default on the interest it owes on existing debt. The Treasury Secretary has the authority to “prioritize” payments and could, therefore, reneg on monies owed to defense contractors, Social Security recipients, doctors who treat Medicare patients, or anyone else who’s legally entitled to funds Congress has appropriated. In terms of America’s standing in international financial markets, this decision to pay bondholders rather than other legitimate claimants would probably be preferable, but as Treasury Secretary Timothy Geithner explained today in a letter to Senator Jim DeMint, that’s not to say it would have no consequences.
For example, “There is no guarantee that investors would continue to re-invest in new Treasury securities” once it became clear that the US political process was prepared to stiff people who are owed money. Ratings agencies have already made it clear that they would regard any prioritization scheme with suspicion.” And as Geithner says, “We should not and must not gamble with the full faith and credit of the United States,” which is “too precious an asset to risk.”
In response, DeMint essentially stuck his fingers in his ears:
Sen. Jim DeMint (R-S.C.) maintained Wednesday that the government has “numerous tools” available to avoid a default, and that one would only occur if Geithner was unwilling to use them.
“Secretary Geithner’s approach to dealing with the looming debt crisis is to take his hands off the wheel and let the car careen over the cliff,” he said.
This completely fails to grasp the force of Secretary Geithner’s point. But to try to restate it, markets charge different interest rates to different sovereign states. Generally speaking, large high-income, politically stable sovereigns get the best rates. That’s because large rich countries have the greatest ability to raise the funds needed to pay off debts, and politically stable countries are the most reliable in terms of actually living up to their commitments. And the United States, as the largest, richest, and longest-running political democracy in the world, pays the lowest rates. German rates are higher than ours, and Britain and France pay higher rates than Germany’s. What Geithner is saying is that even if he avoids technical default by stiffing someone other than bondholders, this will still naturally lead some people to re-evaluate the theory that we’re the most creditworthy country on earth. People who don’t pay what they owe start looking like bad credit risks no matter who it is exactly who doesn’t get paid.