A lot has been written about the ‘potentially catastrophic' consequences of a failure to hike the $14.3-trillion debt ceiling which US deficits are expected to bump into on August 2.
But specifics are few and far between.
In the search for answers, the US debt, and the cost of servicing it, is a good place to start.
Take for instance the fact that while the US Federal debt is up 40 per cent since September 2008, the full-year interest payout has actually fallen, by a hefty 20 per cent.
The reason why interest payouts have fallen despite the large increase in debt is that interest rates have been falling.
Why? Well, according to the Federal Reserve Chairman, Mr Ben Bernanke's testimony to Congress last week, the Fed has been increasing its holding of long-term securities because the federal funds rate, already near zero, cannot meaningfully be lowered further.
By acquiring long-term Treasury securities, the Fed “boosted the prices of such securities (and lowered yields).
“In addition, by removing substantial quantities of longer-term Treasury securities from the market, the Fed's purchases induced private investors to acquire other assets that serve as substitutes for Treasury securities, (thereby) reducing the yields and increasing the prices of those other assets as well. The net result of these actions is lower borrowing costs and easier financial conditions throughout the economy.”
This may not have been the primary purpose, but President Obama's government has been the primary beneficiary of the Fed's easy money policy. This curb on interest costs frees up so much more money for other uses.
While Mr Bernanke's statement relates primarily to secondary market transactions, data on auctions over the past three years (available at >treasurydirect.gov ), clearly bring out the synchronous fall in yields in the primary market.
But a US default, and the consequent slip in ratings would push rates upwards, by ousting investors who are statutorily mandated to invest only in triple A securities.
One last thing. To the extent that the ‘economy', too, is going to be a concern for President Obama when he comes up for re-election next year, not the Budget alone, the easy money policy has no hope to offer. The Fed expects that unemployment will still be above 8 per cent one year from now.
He only expected his policy to deliver 30,000 new jobs a month, in the private sector, Mr Bernanke told Congress. And it is already doing that.