Reply #47: "Evidence of a Dark, Self-Destructive Impulse"

[Demeter]

http://economistsview.typepad.com/economistsview/2011/05/evidence-of-a-dark-self-destructive-impulse.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+EconomistsView+%28Economist%27s+View+%28EconomistsView%29%29

It's irresponsible to even consider the idea of defaulting on debt payments:

The Debt Ceiling Fiasco, by Alan Blinder, Commentary, WSJ: The debt ceiling "crisis" started on Monday when the U.S. government reached the legal limit on how much it is allowed to borrow... But don't worry—yet. Treasury Secretary Tim Geithner has a variety of ways to push back the day of reckoning to early August.

What happens then?... Nobody really knows, but ... receipts cover only about 60% of expenditures. So ... the U.S. government's total outlays ... will have to drop by about 40% immediately. ...

Mr. Geithner could wind up brooding over horrible questions like these: Do we stop issuing checks for Social Security benefits, or for soldiers' pay, or for interest payments to the Chinese government? Such agonizing choices are what make default imaginable. ...

Should it occur, the consequences could be severe. ... That said, outright default is not my main concern. Several other things are:

For openers, suppose the federal government actually does reduce its expenditures by 40% overnight. That translates to ... about 10% of GDP. That's an enormous fiscal contraction for any economy to withstand, never mind one in a sluggish recovery with 9% unemployment. Even contemplating such a possibility is evidence of a dark, self-destructive impulse.

Second, markets now assign essentially zero probability to the U.S. losing its fiscal mind. They'd be caught flat-footed if the threat of default suddenly started to look real, possibly triggering a world-wide financial panic. ...

And finally,... should the view take hold that threats to default are now a permissible weapon of political combat in the world's greatest democracy, U.S. government debt will lose its exalted status as the safest asset money can buy—with unpleasant consequences for the dollar and interest rates.

Fights over the budget are normal and proper in a democracy... But threatening to default should not be a partisan issue. In view of all the hazards it entails, one wonders why any responsible person would even flirt with the idea.

http://online.wsj.com/article/SB10001424052748703421204576329374000372118.html

Basically, Republicans are threatening to blow up the economy if they don't get budget cuts big enough to blow up the economy (or at least big enough to threaten the recovery, including the recovery of employment, and reduce social programs that benefit the middle and lower classes).