One of the more baffling aspects of last year's debt-ceiling fight was the collective shrug the bond market seemed to give as the U.S. headed toward default. Investors continued to buy U.S. Treasury securities, and there was little discernible effect on the interest rate the U.S. pays to borrow money.
Investors may have been more spooked than anybody realized.
A new Government Accountability Office report says uncertainty about whether the U.S. would raise its debt limit -- the amount of Treasury debt obligations that can be outstanding at any one time -- increased borrowing costs by $1.3 billion in 2011. The increased cost meant investors were demanding a higher premium to buy U.S. securities, suggesting a concern about U.S. government-backed debt long seen as risk-free.
Granted, $1.3 billion may not seem like a huge amount of money given the U.S. debt load currently stands at $15.8 trillion. But, as GAO notes, much of the debt issued during the 2011 debt fight will remain outstanding for years, meaning the accumulated borrowing costs will ultimately be greater than $1.3 billion.
More important, the report offers a preview of what could happen if the U.S. doesn't get its fiscal house in order and start on a long-term path of deficit reduction. The fear, as the Congressional Budget Office has noted, is that investors will grow so concerned about the ability of the U.S. to make good on its debt that Treasury's borrowing costs will skyrocket or, worse, investors will refuse to buy U.S. securities.
We're a long way from that. Which is not to say that the fiscal trajectory is encouraging. The U.S. currently spends more than it receives -- resulting in a budget deficit that is financed by issuing debt. The 1941 Public Debt Act placed a $65 billion limit on how much debt can be outstanding at any one time, and Congress has had to continually increase that amount as government has grown. Last year, Congress agreed to raise the cap to $16.394 trillion, but paired the increase with more than $900 billion in spending cuts over the next decade and additional slashing if Congress is unable to achieve at least $1.2 trillion in deficit reduction over the same period.
Congress has yet to agree on any spending cuts or long-term deficit reduction. Meanwhile, the debt ceiling is expected to be hit again before year-end, creating a situation that could make last year's uncertainty look clear in comparison.
The political games have already begun, with Republican House Speaker John Boehner and Democratic Whip Steny Hoyer sparring over whether to bring a stand-alone debt-ceiling bill to the House floor for a vote.
The debt ceiling has always, ultimately, been raised, but the GAO report makes clear there are real costs associated with machinations surrounding the cap. Washington needs to end this continual game of chicken by enacting real deficit reduction, including tax increases that allow the U.S. to stop gorging on debt to finance itself.
Read more breaking commentary from Bloomberg View columnists and editors at the Ticker.