Rightists Think US Default is Not a Big Deal

There is an ignorant and pig-headed faction on America’s right that is now arguing that a default on America’s debt won’t be that big a deal. These people have no understanding of finance nor economics, and they really don’t deserve hold elective office. This bunch is not typical of Republicans, but they are growing in loudness. With about ten days to go before the US bumps up against the debt ceiling and cannot pay its debts, these people are a clear and present danger to the rest of the nation, and indeed, the world.

Starting with the most ignorant statement on the matter, Florida’s Congressman Ted Yoho said, “I think, personally, [not raising the debt ceiling] would bring stability to the world markets.” He offers no explanation of the counterfactual belief. The consensus on Wall Street, where the financiers will decide just how any default plays out, is that failing to raise the debt ceiling would be worse than the collapse of 2008 in the wake of Lehman’s failure.

Then, there is Utah’s Senator Orrin Hatch, who said, “I think the administration could work on who gets paid and who doesn’t in a way that would pull us through. I don’t think the markets have been spooked so far, and I personally believe that if they realized there was a legitimate attempt to make the government work, they would be less likely [to be spooked].” That can’t happen. Failure to pay all debts in full and on time is the definition of a default. Once one payment is missed, investors panic, and the whole thing collapses.

Senator Richard Burr of North Carolina showed of his lack of knowledge by saying, “The federal government still has about 85 percent of the revenues we spend coming in, and all they have to do is prioritize that they’re gonna pay debt service first. And that leaves some prioritization for federal programs. I’m not as concerned as the president is on the debt ceiling, because the only people buying our bonds right now is the Federal Reserve. So it’s like scaring ourselves.” Prioritization is what Senator Hatch proposed, and it won’t work. Besides, Japan and China hold a lot of US debt, and if they start to sell, US rates will soar.

In truth, a default by the US would remove the safest financial instrument in the world (US Treasury debt) and cause capital flows around the world to become chaotic. Moreover, no one would lend to US institutions; when America’s credit markets lock up, the contagion will spread around the globe. This isn’t based on economic models. This analysis is based on the experience of other nations that have defaulted on their debts.

The example of Argentina is instructive, and American exceptionalism won’t protect a defaulting America from suffering a similar fate. In the last week of 2001, Argentina defaulted on its $132 billion in debt. Unemployment rose, interest rates rose, and it was necessary to freeze bank accounts for a year (only minor sums were allowed to be withdrawn). The nation suffered for years, and Argentina has yet to make good on its debt. It is effectively frozen out of global credit markets.

As bad as things were for Argentina, it was not the foundation of the global economy, so the effects of the collapse were largely confined to Argentina. When America sneezes, though, the rest of the world gets a cold. If America defaults, the world economy is going to suffer.