The fight around maximum indebtedness carries a high financial cost – even if there is no default – El Tiempo Latino

Senate Minority Leader Mitch McConnell, R-KY approved borrowing increases of more than $ 7tn (trillion dollars) during the Trump era but is now refusing to negotiate with Democrats. PHOTO: Jabin Botsford / The Washington Post.

(c) 2021, The Washington PostAllan Sloan

One of the mistakes many people make is assuming that the struggle over maximum indebtedness is just another entirely domestic political dispute. It is not.

Even if our country avoids defaulting on a debt payment for the first time in its history, we have likely suffered damage from the fight over the debt ceiling.

Why do I say this? Because if we analyze the numbers, as we will shortly, we will see that foreign investors and central banks of other countries own almost 45% of the Treasury securities in the hands of investors, instead of being the Federal Reserve or other funds. federal trustees.

Here’s why this matters. If you were a foreign investor in US Treasury securities and you observed the positions around the infinite increase of the maximum indebtedness, would it not be rational to ask yourself if the impeccable record of the United States as a debtor is about to be tarnished?

After all, there is talk in Washington about the possibility that the government will pay some of the debts that are due, but not others. What the Biden administration says speaks of the moment in which our country will exhaust its ability to borrow by not being able to pay. You don’t hear much about how the administration thinks it can deal with the situation, should it occur.

Even if the Federal Reserve (also known as the “Fed”) deferral of the “default”, by using an innovative and convoluted contingency plan that was recently revealed in the Wall Street Journal, still there could be big problems.

Any reasonable foreign owner of US debt could be more skeptical of the federal government’s ability and willingness to pay its debts in full on time. That could logically lead to a decrease in foreign purchases of future Treasury securities issues and cause the sale of those already issued on the secondary market.

Let me show you why the opinion of foreigners is important regarding the quality of US Treasury debt securities.

Our national debt is currently close to $ 28.43tn (millions of millions of dollars), of which $ 6.17 trillion is “intergovernmental” debt. That is debt owned by various federal entities, the largest of all being the Social Security Trust Fund.

That leaves around $ 22.26tb of “debt in the hands of the public.” About $ 5.41tn of that amount is owned by the Fed.

That leaves $ 16.85tn of debt in public investor portfolios. Of those, $ 7.54tn – almost 45% – are in the hands of foreign central banks and other foreign investors. That means we are deeply dependent on foreign money to help finance our country’s budget deficits. If foreigners weren’t buying substantial portions of our new debt issues, interest rates would likely rise – perhaps dramatically – American domestic lenders could be displaced.

We are already seeing worrying signs in the financial markets about the impact of a possible “default”. Federal loan rates are on the rise and the US stock market is beginning to see what appears to be declines related to uncertainty.

The main blame for this, of course, falls on Mitch McConnell, who gleefully approved increases and suspensions to maximum borrowing during Donald Trump’s four years in office, adding $ 7.81tn to our national debt. McConnell now says he is concerned about the federal deficit.

But by not fighting this, the Biden administration is contributing – heavily – to a problem that could result in inadvertent and unnecessary default.

The White House and Congressional Democrats must agree to something that looks like a solution rather than constantly reacting to McConnell and his associates.

It would also help put the public on their side if they repeatedly mentioned that McConnell State, Kentucky, receives more money from the federal government than it sends to Washington. And as a result, Kentucky could suffer heavily from any late payment from the federal government.

Biden and Treasury Secretary Janet Yellen might even consider a version of what I recently proposed: ignoring peak borrowing and inducing a cash-rich country (read Qatar) to buy a private issue of Treasury securities with a interest rate higher than the market rate.

Look, I still don’t think that the seemingly endless stance on our debt is going to lead to the country defaulting, but the chances of a “default” are increasing rapidly.

Furthermore, even without defaulting we have already damaged our image in the eyes of foreign investors by showing how disorganized our government has become. As a result, we, our children and our grandchildren, will be paying the price for this totally unnecessary political stance.

Author Information:

Allan Sloan is a columnist for the Washington Post. He is a seven-time winner of the Loeb Award, the highest honor in business journalism.

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