The Wall Street Journal reports that Treasury Secretary Geithner has asked Congress to increase the nation's debt limit past its current cut-off of $12.1 trillion. Given the massive spending by Congress and the President, paired with what's sure to be unusually low tax revenue for 2009, the request is not surprising. What is kind of amusing, however, is the rationale he cites for why the debt needs to increase.
The WSJ says:
Mr. Geithner, in a letter to U.S. lawmakers, said that the Treasury projects that the current debt limit could be reached as early mid-October. Increasing the limit is important to instilling confidence in global investors, Mr. Geithner said.
So let me get this straight. Global investors will be more comfortable by knowing that the U.S. can incur more debt? This is the kind of logic that only works in Washington. Generally, if a company increases its debt outlay that should be noted by an investor as a sign of greater risk -- particularly if the firm has dramatically increased debt levels over the past few years. Such an action hardly has the effect of "instilling confidence." In fact, this behavior is traditionally a cause for rating agency downgrades.
What, then, is Geithner talking about? A much graver subtlety. He must mean that if the U.S. is unable obtain cash by issuing more debt, then it won't have enough money to cover its scheduled payouts on its current debt. Investors will certainly lose confidence if the U.S. can't pay its obligations. That's what Geithner fears.
While such an outcome would certainly be troubling, there's little doubt that Congress will, in fact, increase the debt limit. However, the reasoning behind why it must might still leave some investors feeling wary.
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