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How a Default Would Send the Deficit Sky High

David Callahan

One of the most alarming aspects of a possible default is also one that gets the least attention: A default would raise the cost of federal borrowing, perhaps for years to come, and send the deficit soaring. 

If Treasury securities become, well, less secure, the United States will have to pay investors more to buy them. Hence higher interest rates on new debt that is issued. 

A recent report by the Committee for Responsible Budget found that interest on the national debt was the most volatile element of federal spending. A mere one percent increase in projected interest rates could increase federal borrowing costs by $1.2 trillion over the next decade and $4 trillion in the following decade. 

Given that risk, you'd think that anyone who really worries about the deficit would steer far, far away from any action that could jack interest rates for Treasuries. Of course, you'd be wrong, and the way conservatives are playing with fire here is yet more evidence that they aren't so worried about the deficit—but rather just use this issue mainly as an ideological weapon when it's convenient. 

Of course, real deficit hawks wouldn't be trying to sink Obamacare to begin with, since the law represents the biggest effort yet by Congress to tackle rising healthcare costs—a key driver of rising national debt. More immediately, analysis has found that repealing Obamacare would increase the deficit by $109 billion over the next decade. 

Bizarrely, even the nonpartisan deficit hawks groups aren't sounding the alarm about what higher interest rates would mean for future deficits. The Committee for a Responsible Budget only addressed this point in passing in a recent Q&A about the debt ceiling—even as their own research suggests that it should be front and center. 

The Peterson Foundation has been silent about the interest rate menace. 

Weird? Or maybe just business as usual for Washington's defict alarm industry.