Debt ceiling debacle is ultimate winner’s curse
NEW YORK, May 23 (Reuters Breakingviews) - How could the United States sail so close to defaulting on its debts? There’s an easy answer: political dysfunction and financial recklessness. With just over a week to go until the world’s biggest economy potentially runs out of money to pay its bills, Republicans and Democrats were still unable read more on Monday to see eye to eye on a solution. But there’s another explanation too. The ongoing debt-ceiling standoff, which has the potential to tip markets into mayhem, is a kind of winner’s curse. Its root causes are the same things that put Uncle Sam on top in the first place.
The $31.4 trillion cap on borrowing that currently transfixes Washington is an example of American exceptionalism. Only Denmark has anything similar, and its cap is far from binding. The bitter, ideological horse-trading read more going on in Congress is also a peculiar feature of modern U.S. politics. There are other kinds of exceptionalism at work too, however. The government has been able to increase its debt from 35% of GDP in 2008 to around 95%, running budget deficits that terrify fiscal conservatives, because more than any other investment, its IOUs enjoy enormous, almost limitless demand. The world wants safe places to park its money, and the United States is the best option.
Put differently, the U.S. government has racked up so much debt because everybody else needed it to. True, buyers come and go: China has been replaced by Japan as the biggest foreign holder. Even so, as Uncle Sam’s indebtedness ballooned, the yields on its bonds – which would rise if buyers were getting antsy – have stayed low. A study by the Global Capital Allocation Project examined corporate bond holdings where issuer and buyer were in different countries, and found that the share denominated in U.S. dollars has grown since the financial crisis, from roughly 40% to over 60%. The euro share has slumped. And the last debt-ceiling standoff in 2011 had no impact.
By getting into ever more debt, Americans have done the rest of the world a favor. Their borrowing and consequent spending has fueled global demand for cellphones, minerals, medication and microchips that kept growth high in markets like China, India and Brazil. Emerging countries have channeled their export profit into reserves of safe dollar assets, giving them stability that helped attract foreign investment. Sure, the U.S. habit of borrowing its way out of crises like the turmoil of 2008, or the 2020 Covid-19 pandemic, verges on recklessness – but getting into debt takes at least two.
Eventually, all this borrowing will almost certainly go too far. It’s a version of what economists call the Triffin dilemma, after economist Robert Triffin: The world demands an ever-greater supply of IOUs issued by the monetary superpower, but that eventually makes its debts unsafe. Nobody knows when that point will come, though, and the debt ceiling doesn’t seem to reflect the market’s view of how much is too much. An auction of 10-year Treasury notes this month received offers of 2.5 times what was being sold. The yield on 10-year bonds, now at around 3.7%, has risen but is still lower than almost any time before 2008.
For now, the dollar is still the only game read more in town. The euro, yen, yuan or bitcoin each have their own major flaws. But the moment when Uncle Sam outstays his welcome as the global hegemon is growing closer. The U.S. share of the global economy is shrinking, the debt is growing, and so is the political theater it generates. It used to be that Treasuries were the kind of asset that the buyer could put in a drawer and never worry about, but that’s no longer true. The real winner’s curse is that nobody remains a winner forever.
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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
The U.S. Treasury Department reiterated on May 22 that it cannot guarantee the government’s ability to pay its debts after June 1 unless Congress agrees to raise the legislative cap on borrowing known as the debt ceiling. Treasury Secretary Janet Yellen told Congress in a letter that it was “highly unlikely” the agency would be able to meet all payment obligations by that date.
President Joe Biden met with Kevin McCarthy, the top-ranking Republican in the House of Representatives, on May 22 but failed to reach an agreement on the terms for raising the debt ceiling above its current level of $31.4 trillion. Any deal must pass both the Republican-controlled House and the Senate, which Democrats hold with a two-seat margin.
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