How Long Will US Debt Remain the Destination of Choice for Global Capital?

Mitch McConnell is apparently promising that last week's histrionics over the debt ceiling were merely a prelude to a lengthy drama in which we re-enact this battle every time the debt ceiling needs to be raised.


"What we have done, Larry, also is set a new template. In the future, any president, this one or another one, when they request us to raise the debt ceiling it will not be clean anymore. This is just the first step. This, we anticipate, will take us into 2013. Whoever the new president is, is probably going to be asking us to raise the debt ceiling again. Then we will go through the process again and see what we can continue to achieve in connection with these debt ceiling requests of presidents to get our financial house in order."

Just how bad you think this is depends on how unlikely (or undesirable) you think it is that we will ever again run a surplus.  But even an optimist would have to admit that it's pretty bad.  As Karl Smith says, "This is the type of thing that should encourage banks and governments around the world to intensify the search for an alternative to the dollar and US Treasuries."


The real question is: why hasn't it already?  And the answer, as Karl suggests, is "Where the hell else are investors going to go?"  The US dominates the market for AAA securities.

AAA-debt.jpg



















There is simply no other market that makes a plausible substitute for US securities.  China is big enough, but its capital markets are primitive, and subject to heavy government intervention.  Japan has lost its AAA, and has a massive debt overhang, to boot.  None of the other AAA countries--or even all of them together--are big enough, and debt-hungry enough, to absorb the amount of capital flowing into the United States.

Ultimately, some of the world's investors are going to have to wean themselves off of the illusory security of AAA debt, because obviously, we cannot keep issuing a trillion worth of AAA debt every year.  Either we'll issue less debt, or we'll lose our AAA.

The good news is that slowing down our issuance will raise the premium paid for the AAA that's left.  So as we start putting our finances back in order, we'll enjoy lower interest rates that will help us do it. There aren't many virtuous cycles left in the world, it seems, so that's something to be happy about.
Presented by

Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

Why Is Google Making Human Skin?

Hidden away on Google’s campus, doctors at a world-class life sciences lab are trying to change the way people think about their health.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register with Disqus.

Please note that The Atlantic's account system is separate from our commenting system. To log in or register with The Atlantic, use the Sign In button at the top of every page.

blog comments powered by Disqus

Videos

Why Is Google Making Human Skin?

Hidden away on Google’s campus, doctors are changing the way people think about health.

Video

How to Build a Tornado

A Canadian inventor believes his tornado machine could solve the world's energy crisis.

Video

A New York City Minute, Frozen in Time

This short film takes you on a whirling tour of the Big Apple

Video

What Happened to the Milky Way?

Light pollution has taken away our ability to see the stars. Can we save the night sky?

Video

The Pentagon's $1.5 Trillion Mistake

The F-35 fighter jet was supposed to do everything. Instead, it can barely do anything.

More in Business

Just In