Given that the United States debt is denominated in US dollars and our government can technically print as many US dollars as it needs, we should never default on our debt. The only way we could truly default would be if Congress, in an incredible act of stupidity, decided to vote to default and overrode a Presidential veto.
Traditionally that seemed so obviously idiotic that markets had no fear it would happen. But that all changed last year when Republicans decided to hold the vote to raise the debt ceiling hostage to their budget reduction demands.
By threatening they would do something so stupid, the Republicans made Treasury bonds unnecessarily riskier than they should have been. This risk premium increased our borrowing costs, and according to the Government Accountability Office, that cost the government at least $1.3 billion in one year and likely more in the years to come. From the GAO:
A decrease in the yield spread indicates that the market perceives the risk of Treasury securities to be closer to that of private securities, increasing the cost to Treasury. Conversely, an increase in the yield spread indicates that the market perceives the risk of Treasury securities to have decreased relative to that of private securities, making the securities less costly to Treasury. We found that the 2011 debt limit event led to a premium on Treasury securities with maturities of 2 years or more while Treasury securities with shorter maturities either experienced no change or became slightly less costly relative to private securities. Applying the relevant increase or decrease in the yield spread shown in figure 2 to all Treasury bills, notes, bonds, CM bills, and TIPS issued during the 2011 debt limit event period, we estimated that borrowing costs increased by about $1.3 billion in fiscal year 2011. Many of the Treasury securities issued during the 2011 debt limit event period will remain outstanding for years to come. Accordingly, the multiyear increase in borrowing costs arising from the event is greater than the additional borrowing costs during fiscal year 2011 alone
I like to think of this as basically a stupidity tax we are all paying because of how incredibly dysfunctional our government is. Given that top Republicans are now claiming they plan to hold the debt ceiling hostage again in the future, it is likely we will continue to see similar unnecessary borrowing cost increases going forward. Over the long term the mere existence of the totally unnecessary debt ceiling will likely add billions to the deficit.
There is absolutely no reason we shouldn’t simply eliminate the debt ceiling altogether by removing the limit. We are one of the only countries with its own currency to have this idiotic concept, and it serves no useful function. It can only cause harm by allowing a minority to threaten to hurt the whole economy. Now that it has hurt the economy, it is time for it to go before Congress does even more damage.