Squandering America’s Debt Advantage; Even if the Debt-Ceiling Crisis Is Resolved, Washington Could Have Tarnished One of Its Most Valuable Assets

Updated October 10, 2013, 8:14 p.m. ET

Squandering America’s Debt Advantage

Even if the Debt-Ceiling Crisis Is Resolved, Washington Could Have Tarnished One of Its Most Valuable Assets

SPENCER JAKAB

Testifying to Congress on Thursday about the debt ceiling, Treasury Secretary Jack Lew stressed that American politicians throughout history “have universally understood the importance of protecting one of our most precious assets, the full faith and credit of the United States.” Despite recent theatrics, it is a safe bet that most of today’s political leaders understand it, too. On Thursday, Washington appeared closer to a resolution, although that remained uncertain, to the political crisis that threatened to force the U.S. to default on its debt.But the latest bout of political dysfunction, and the doubts that it sowed about U.S. government debt, show that most in Washington take for granted another important U.S. asset. Back in the 1960s, France’s peeved finance minister dubbed it America’s “exorbitant privilege.” More recently, some have referred to it even less kindly as an “extortionate privilege.”

The basic idea is that, by having the world’s reserve currency and being able to borrow in it, Americans are subsidized by the rest of the world.

One form of this is an age-old concept known as seigniorage—the money made from issuing currency, which is essentially a form of government borrowing that bears no interest. While any country that issues currency benefits from this, the U.S. gains more than others because of the dollar’s prevalence: About 85% of international transactions are done in greenbacks.

The more important advantage is the ability to borrow cheaply even, and especially, in a crisis. The U.S. Treasury market is the largest, most liquid pool of securities in the world and the benchmark for what is considered “risk free.”

A good example of how this works came in August 2011 when Standard & Poor’s removed its top rating from America’s debt, shocking the financial world and sending stock markets world-wide plunging. Ironically, one asset that thrived at the time was Treasury debt—the very thing that had been downgraded.

Depending on which study one believes, America’s privilege is worth hundreds of billions of dollars a year or just tens of billions. Whatever the number, it is a free pass for behaving badly.

So how would the U.S. be viewed if it were just a normal country that didn’t enjoy such an advantage? One measure is the Sovereign Risk Index maintained by asset manager BlackRock. It ranks countries on their fiscal health and “willingness to pay.” Last month, just before the shutdown, the U.S. ranked 15th on a list of 48 countries overall.

And the safe-harbor status of U.S. Treasurys isn’t a given. The notion that political rancor could lead, even temporarily, to a technical default on U.S. debt sent credit-default swaps that insure against it soaring. Unlike other such contracts, and for obvious reasons, the one on the U.S. settles in euros.

Times like this bring to mind Stein’s Law, coined by the late economist Herb Stein: “If something cannot go on forever, it will stop.”

For now, American politicians can write checks more freely and cheaply than those in any other country. Acting in a way that could hasten the end of that era runs the risk of cooking that golden goose.