Along with everyone else, I’ve been watching the US government’s fiscal game of “chicken” with some alarm. What is puzzling is that the opposition in congress doesn’t seem to be all that scared by the risk of default:
The facts, in fact, are plain enough. In the unlikely event that the U.S. government would hit the real ceiling on August 2 as advertised, the federal government would still be on track to collect about $2.2 trillion in the fiscal year. That wouldn’t change. And net interest for the year would still be about $205 billion, or less than a tenth of incoming revenues. And in light of the consequences, there is no doubt that President Obama and his Treasury Secretary would ensure that the interest payments are made on time and in full.
Thus it should not be surprising, as Fox Business News senior correspondent Charlie Gasparino wrote in a New York Post piece some days ago that “just about every private-sector economist I speak to says that Treasury could simply use its ample cash on hand to pay off our creditors first—then begin to prioritize payments for the military and various social programs.”
This view appears to be shared in spades by the credit markets, which so far have reacted to the Obama-media scare tactics with a big yawn. When the markets fear real default, they respond by jacking up interest rates, as we’ve seen in Greece, Italy, Portugal, etc. It’s happening right now in those countries.
In sharp contrast, U.S. long-term rates are actually falling. The 10-year Treasury bond rate, which only a few days ago was around 3.15 percent, has dropped 20 basis points to 2.95 percent. Maybe the markets just aren’t paying attention. Or maybe they know Obama and Company are blowing smoke. Whether the debt ceiling is raised on time or not, markets are confident that the interest will be paid.
