Should Republicans block an increase in the debt limit, cutting our borrowing cold-turkey, you can expect to pay more for your mortgage, your credit cards, your car loans, and pretty much any other debt you may take out. How so? Let me amplify.
Say the debt limit is reached with no agreement to increase it. The government then cannot pay its bills and cannot borrow to cover the shortfall. I fully understand why some people think this is just fine. In a perfect world, I could almost agree: You can’t afford your bills, so somehow you work to bring in more money and spend less. Or you default.
But, of course, this is not a perfect world. Among the government’s liabilities are old treasury bills and other debt coming due. Normally, in a time when the government has no cash sitting around to pay off these treasuries, we would just take out new loans to pay off the old ones (no increase in overall debt, so we’re safe with the debt limit). The problem is, in this scenario we’re already having problems paying our bills since our lawmakers refuse to increase our credit line. So why would anyone loan us money if it’s not clear that we can pay it back?
Well, considering the risk, the only way they would loan us more money is if we offer a higher interest rate. That is, the cost of government borrowing goes up. Many if not most consumer interest rates are linked by a short few steps to the cost of government borrowing. So when the Treasury pays more, you pay more. Never mind the fact that then more of your tax money goes to interest than services. But that’s another story.
Can you think of a more effective job-killer than increasing the cost of capital in an economy still in the doldrums?
I’ve also heard predictions that the dollar will fall as investors try to get rid of their dollar-denominated investments in our soon-to-be crashing economy. Since oil is paid for in dollars on the world market, less valuable dollars means more expensive gas. The same goes for pretty much anything that we buy from outside the country. I wondered if higher interest rates would actually bring in more investment, mitigating these effects. But I guess they probably wouldn’t since the whole problem is that, in this doomsday scenario, investors no longer believe in the security of the United States economy.
So, to wrap it all up nice a clean for you: Treasury hits the debt limit -> Treasury can’t pay our debts -> investors charge more for our debts -> we all pay higher interest rates -> we can’t afford to invest -> economy sinks further. Nice.