Did we really need any further proof that our lawmakers are short-sighted and irresponsible? Not really, particularly if it comes with a $100 billion tab. Yet that is the estimated cost of one possible consequence of partisan squabbling and politicians' inability to look further ahead than their next election.
A short-term and a long-term problem
By delaying an agreement to extend the federal debt ceiling and refusing to tackle long-term budget reform, Congress puts the U.S. at risk of rating agencies downgrading its credit rating. Moody's
The debt ceiling is in some sense a sideshow with regard to the elephant in the room: the need for structural budget reform to address unfunded liabilities (Medicare, Medicaid, and Social Security). A research group at McGraw-Hill
That number sounds realistic; there is a precedent for this, after all. In 1979, the U.S. Treasury failed to repay a measly $122 million in Treasury bills on schedule. An academic study later found that this technical default cost the Treasury an extra 60 basis points (one basis point equals one hundredth of a percentage point) on some federal debt. The Economist estimates that would equate to $86 billion a year today, or 0.6% of GDP.
Companies would share taxpayers' misery
But the $100 billion is by no means the extent of the total cost of a downgrade. First, the Treasury's annual interest cost would increase by between $2.3 billion and $3.8 billion. In addition, bond investors price corporate bonds at a spread to the risk-free rate -- the yield on same maturity Treasury bonds. A rise in Treasury yields would almost certainly result in an increase in companies' financing cost, as the risk-free rate and the spread would increase.
Companies have had it good in this low-yield environment. Whirlpool
Playing chicken in taxpayers' cars
Do I expect that Congress will eventually reach an agreement in order to avoid a technical default? Yes, but I can't dismiss the risk that it won't. Lawmakers are playing a dangerous game of chicken, and if they crash, it will be up to U.S. taxpayers to foot the repair bill.
With Congress courting a default, no wonder gold prices are near historic highs. One little-known gold miner is making a fortune; find out which tiny gold stock is digging up massive profits.
Fool contributor Alex Dumortier holds no position in any company mentioned. Click here to see his holdings and a short bio. You can follow him on Twitter. The Motley Fool owns shares of Philip Morris International. Motley Fool newsletter services have recommended buying shares of AT&T, Moody's, and Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.