To get a sense of how absurd a sudden default of U.S. debt would be, turn back the clock two-and-a-half years.
On January 14, 2009, six days before the inauguration of President Barack Obama, Greece took its first step toward the precipice of default. On that day, citing worries that Athens was fudging its books, the credit rating agency S&P cut Greece's debt grade to A-. Furthermore, the agency warned that trouble lurked for Spain, Portugal and Italy, if those countries didn't clean up their acts.
S&P was right to worry. Some 30 months later, Athens' debt is junk and the interest rate on Greek bonds has stunningly tripled, from 5.3% in early 2009 to 17% today, indicating widespread doubts that the county will ever pay back its promises. The United States, meanwhile, is sitting comfortably with 3% interest on our 10-year bonds, meager decimals higher than the cold afternoon President Obama was inaugurated.
Predictably, Greece is on the edge of default. Unpredictably, so are we.
Our circumstances couldn't be more different. Consider the sovereign credit default swap spread, which is probably the best indicator of how risky investors perceive a country's debt. Greece has the world's worst CDS spread, at nearly 2,000. The United States has the world's seventh lowest sovereign CDS spread, near 50. Thanks to the Federal Reserve's appetite for debt and foreign investors' so-called "flight to safety," it is easier for the United States to borrow today than it was in 2006 or 2007. For Greece, it's four times harder.
And yet we might actually default first. How? It all comes down to gruesome politics and a 94-year old law.
Let's all blame Gavrilo Princip.
Without Archduke Ferdinand's assassin, there might have been no World War I. Without World War I, the United States wouldn't have needed to pass the Second Bond Liberty Act in 1917 to issue long-term debt. Without the Second Bond Liberty Act, Congress might never had enshrined the debt ceiling, which politicians have now turned into missile aimed squarely at the heart of the country's financial credibility.
The debt ceiling, which establishes a legal limit on U.S. borrowing, should not exist. (It may well be unconstitutional.) For most countries, it does not. After all, it doesn't make sense to give politicians a veto to fund laws that they've already voted to fund. That's like polling your family or roommates to ask if you should pay your credit card bill. If you can afford it, you should pay it!
Debt ceiling votes should be just as simple. We can afford this deficit. We should just pay it.*
But it's never been that easy. The debt ceiling has always been used as a political tool. (President Obama voted against raising the debt limit in 2006.) Raising the ceiling has been called a "tax on the majority." In the last four House debt ceiling votes tracked by Donald Marron at the Tax Policy Center, the majority party outvoted the minority 871-3.
But this year, Congress is in a mood to really make history. Republicans and Democrats, unable to come to a deal, are on the brink of becoming, to my knowledge, the first government in world history to purposefully default on its otherwise affordable debt to make a political point about spending.
Newsreaders glancing at the debt crises overseas have asked: Are we Greece? The correct answer is no. Our problems are not nearly as serious as Athens, but they are somehow more immediate. Without a deal by August 2, we would beat the Hellenic Republic to become the first sovereign debtor in the last few years to outright default.
In January this year, the GOP, having won on a platform of spending cuts, immediately set out to cut spending. Democrats, having lost on a record of deficit-spending, tried to play catch up. Both parties saw the debt ceiling vote as a useful tactic to force the changes they wanted in the budget. Both parties elevated that tactic to the level of strategy.
That I blame Republicans more than Democrats for our current crisis is a secondary point. We're on the cusp of default because both parties chose to play a game of pointless brinksmanship, a kind of mutually assured financial destruction, that could cost the country unfathomable standing among investors we depend on to fund our health care, retirement security, and military.
The debt ceiling is a 1917 relic that, after years of rust and political wear, has finally become a lethal weapon. At this point, it's quite clear that, like a rogue country with an atom bomb or an infant handling a full glass of Merlot, Congress cannot be trusted to keep the debt ceiling without making a mess. I beg Washington to pass a law to raise the debt ceiling with one simple rider provision.
Kill the debt limit, forever.
*I don't want to walk too far down the government-is-just-like-a-family road. That way, confusion lies. Families cannot run small deficits forever. The United States government can. Foreign governments and investors are willing to lend us hundreds of billions of dollars every year. That's because we've always paid them back on time and in full, no matter what our deficit or surplus looked like.