Another week of debt-ceiling brinksmanship, and another week of abject terror from the pundit class. Experts claimed ahead of deal that seems to be sealed that a failure to come to terms would besmirch the U.S.’s global reputation, interest rates would surge, and recession would ensue.
The expressed fear implied that higher borrowing costs born of default would bring on economic decline. Except that the biggest driver of global economic prosperity is Silicon Valley, and credit is so expensive there that there's really no “credit” for its moonshot concepts. It's all equity finance. See “moonshot” if you’re confused.
There’s very little to the interest rate story. That’s the case because markets always have their say, no matter what. After which, interest rates are a consequence. Think Illinois. In 2021 Illinois legislators passed the Predatory Loan Prevention Act with an eye on keeping borrowing costs "low" (36%) for the most subprime of borrowers. If expensive access to funds is a barrier to growth, just shrink the barrier, right?
Except that as most know, artificial price controls can’t and don’t alter reality. As J. Brandon Bolen, Gregory Elliehausen, and Tom Miller found in their analysis of the Illinois law, lending decreed cheap didn’t make it so as much as lending dried up for the poorest as a reflection of rates not informed by market realities.
The simple truth is that credit is precious, and it’s precious because compound interest is easily one of the world’s most powerful forces. What it tells us about interest rates is that they’re a consequence of one’s brilliant or trying economic circumstances, not a driver. The poorest borrowers in Illinois aren’t economically destitute because interest rates are high, rather their destitution mandates high rates of interest.
This rates keeping in mind as the matter of the debt ceiling comes to a close. For one, the surest sign that it would be resolved in satisfactory fashion for actual investors with actual skin in the game was the $31 trillion in debt that the U.S. Treasury could already claim. The latter speaks to enormous trust in the marketplace for Treasury’s creditworthy nature, so to presume as the nailbiter class did that “default” of any substantive kind was in the offing pointed to a broad belief within the pundit class that the deepest, most informed market in the world (that for Treasuries) was remarkably stupid.
The same pundits who bruit the horrors of “default” told us that such an outcome would bring on skyrocketing interest rates. See above to develop a sense of just how separated from reality such a view was and is, at which point it’s useful to recognize that interest rates are yet again a consequence. And Treasury is backed by the world’s most productive people. Translated, interest rates weren't about to skyrocket for Treasury. Neither were they going to in the real economy.
Just as politicians can’t decree low rates for subprime borrowers, their fecklessness can't force high rates for the creditworthy. The reality is that investors around the world are lined up to lend to and invest in the U.S.’s best and brightest. To assert otherwise is tantamount to suggesting that a default in California would suddenly render Cupertino-based Apple’s debt “junk.” Try not to laugh.
Expert reverent pundit Catherine Rampell laments a Biden/McCarthy debt-limit agreement that “at best, left America’s long-term fiscal challenges largely unchanged, and tarnished our global reputation.” It’s funny how actual market signals conclude exactly opposite Rampell. Actually, it’s not. So long as the pundit class ignores the truth about rates as a consequence of market trust or lack thereof, they’ll continue to come to precisely the wrong conclusions about a legislative outcome that $31 trillion in debt loudly tells us was never in doubt.
