For starters, not raising the borrowing limit doesn’t mean default. America’s annual debt service costs are only about 10 percent of federal revenues, which means that the country can easily pay investors, meet its obligations to its retirees (for now) and still have money left. It would certainly mean cutting spending somewhere, but that’s a prospect to be cheered, not lamented.
Furthermore, America has experienced an epic financial meltdown, sluggish growth and is up to its eyeballs in debt and credit markets are still offering it loans at effectively zero percent interest rates. It makes no sense that a little budget fight to put America on sounder fiscal footing would cause them to significantly jack up these rates.
But one reason credit markets have ignored America’s spending addiction is that, with Europe on the verge of meltdown, they have nowhere else to go. More importantly, the dollar’s status as a reserve currency makes it much easier for America to issue debt without fearing commensurate interest hikes. In other words, America’s superpower status has created an incentive for fiscal irresponsibility.