The Buck Stops Somewhere

                                             The Buck Stops Somewhere
   The current roiling among the politicians in our nation’s capitol seems to reinforce Lilly Tomlin’s dictum that “No matter how cynical you get, it is impossible to keep up”. We now have government by puerility. How else can one explain the current possibility of Federal default? Even if an agreement is reached to actually pay our authorized expenditures, it is unlikely the solution will be more than a finger in the dike and the issue will be revisited in the near future. Real consensus seems unachievable as of this date.
   It would be easy to blame the current impasse on the venality and ignorance of politicians. If this is so, we are to blame. Representative democracy doesn’t guarantee good government just representative government. A congressional seat is a virtual sinecure. Since 1990, 90% of congressional incumbents have won their elections .Clearly district voters are satisfied with their representative’s performance (There is an argument that gerrymandering has led to non-representative districts, but that is a topic for another day and another person). Ignorance may play a role: The potential outcomes from the debt ceiling deadlock and potential government default are as poorly understood by our elected representatives as by the public at large.
   The public has an excuse, our representatives do not. We hire them under the assumption that they actually understand the issues they have campaigned on. This assumption is clearly incorrect. For example, on the 13th of October Rand Paul stated (on CNN) that the Republican Party “is not giving the President a blank check to borrow more.” That statement about the debt ceiling is false. I assume he doesn’t understand the issue. Raising the debt limit only authorizes the Treasury to sell bonds to cover expenditures already authorized by Congress and does not represent new expenditures. . These expenditures are part of the current deficit not additional deficit. Government default or the risk of default has no beneficial outcomes, either in the short run or the long run.
   Those who argue otherwise must believe that credit ratings are unrelated to risk and that interest rates are unrelated to risk. This is not true. Default will lead to a fall in government bond prices, hence a rise in interest rates. Even if we narrowly escape institutional idiocy, the penumbra of default risk on Federal securities is no longer zero. Along with issuing new debt to cover expenditures authorized by Congress, the Treasury also rolls over (refinances existing debt by swapping new bonds for old bonds) about $7 to $8 trillion in debt a year. This debt will also have to be offered at higher interest rates.
   Up until now US debt (particularly short-term notes and bills) have been regarded as virtually riskless assets by purchasers. Financial institution and foreign governments have large holding of US Debt (The Social Security Administration is the largest single purchaser). This debt is viewed by the purchasers as a highly liquid asset or as good as money. Introducing uncertainty into the value of this asset affects balance sheets and spending plans of the owners, and has the additional effect of increasing interest rates in general We emerged from WW2 as the world’s major economic power and became the world’s central bank. The world became tied to the dollar standard. We were politically stable and the major force in the world’s economic recovery and the growth in international trade. In this process, our debt became the financial reserve for the rest of the world. We are the largest contributor to both the International Monetary Fund and the World Bank’s Reserves. Many countries, not only Japan and China, hold large reserves of US Debt. This role has been of great benefit to us and the world. It has helped finance the growth in world trade and given us low interest rates, substantial foreign investment and enhanced our political leverage. It’s been a win-win.
   A diminution of this role may benefit the Chinese but not the world. The Chinese are in the position of becoming the world’s default banker if our credit becomes suspect. I see no advantage to a Chinese reserve currency. It will not facilitate world economic growth but will enhance Chinese political power. Many of our politicians have been unwilling to inform voters about the significant issues at play. Instead they have misrepresented the issues, either through ignorance or ideological bias. As voters we should be angry.