Hope For China’s Love & Blow A Fiscal Kiss To Germany

Original Article from Fox Business Brian Sullivan

Time to send a collective American hug over to Beijing.   We need their fiscal love.

One of the CBO’s leading economists confirms what many have feared: if buyers of U.S. debt suddenly lose their appetite for it, we’re toast.

From the report:

Although deficits during or shortly after a recession generally hasten
economic recovery, persistent deficits and continually mounting debt
would have several negative economic consequences for the United States.
Some of those consequences would arise gradually—but a high level of
federal debt, combined with an unfavorable long-term budget outlook,
would also increase the probability of a sudden fiscal crisis prompted
by investors’ fears that the government would renege on the terms of its
existing debt or that it would increase the supply of money to finance
its activities or pay creditors and thereby boost inflation. The
resulting abrupt rise in interest rates would create serious challenges
for the U.S. government. For example, a 4-percentage-point
across-the-board increase in interest rates would raise federal interest
payments next year by about $100 billion; if those higher rates
persisted, net interest costs in 2015 would be nearly double the roughly
$460 billion that CBO currently projects for that year. Such an
increase in rates could also precipitate a broader financial crisis because it would reduce the market value of outstanding government
bonds, inflicting losses on mutual funds, pension funds, insurance
companies, banks, and other holders of federal debt.

Scary stuff on a number of levels.  But before you take a sip of Peptol Bismol, let’s acknowledge that a 4% jump in interest rates in the short-term is highly unlikely.   Global desire for our debt has been strong.   Treasury auctions are going well.   Everyone loves our debt as Europe’s problems spook investors to scurry over here.

But it’s the ‘what if’ that should worry us.

If Europe’s problems begin to ease and if global investors lose interest in the U.S. or find better places to put their money then we’ll have to offer higher interest rates to attract their cash.  That could spike debt costs and lead to the CBO’s ‘alternative scenario’ highlighted below.

Again, while unlikely in the near-term, it’s not an impossible scenario to imagine.   Confidence in Germany is back on the rise and some high-level Chinese officials have recently said America’s credit rating should be downgraded.  Even Moody’s is again warning that without a meaningful change America is at risk of losing the vaunted AAA rating we’ve had for nearly a century.   Bluntly, more investors here and abroad are getting worried that our debt levels are simply too high.

The law of large numbers takes on new meaning when one thinks about the cost implications of having to pay even a few higher percentage points on trillions of dollars.   The CBO projects we could pay $100 to $460 billion more per year on interest alone.   Granted, a hundred billion isn’t what it used to be, but consider that Congress just fought over spending another $34 billion to extend unemployment benefits and Democrats are now complaining that extending the Bush tax cuts will cost another $67 billion per year.   Those added interest costs would pay for both the jobless benefits and any cost keeping tax rates low.   More than that you can use your imagination on what we could spent the money on.   Money that goes to pay

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