What's The Worst That Could Happen?

June 29th, 2011

Let's say that debt limit deadline arrives and there has been no "agreement."

TPM reports:
"According to one of the most influential economists in federal policy making, the next four weeks will make the difference between a slow glide toward economic recovery, and a severe tumble into a new recession.

Moody's chief economist, and former McCain economic adviser Mark Zandi 
is forecasting GDP growth of 4 percent by the end of the year and into next. But in response to a question from TPM, he told reporters at a breakfast meeting hosted by the Christian Science Monitor that his forecast would be "blown out of the water," if Congress fails to "reasonably gracefully" raise the national borrowing limit."

Sounds pretty bad. But hey, what does he know? Zandi is only one of the most respected conservative economists in America. His analyses don't mean diddly to RNC Chairman Reince Preibus who had some interesting things to say about a default yesterday morning while talking to Joe Scarborough.



"Washington politicians can get on TV all day long and talk about all these awful things that are going to happen if we don't raise the debt ceiling, but I think the problem is that most Americans don't believe what are coming out of their mouths."

A visibly startled Scarborough cut him off and asked him to clarify his position. Preibus continued:

"...the idea that we can’t cover — this is where I have a problem — when you hear people say that we’re going to default on our debts. I mean, we bring in enough revenue in this country to pay our debts, we bring in enough revenue in this country to pay our entitlements, we bring in enough revenue to pay for most non-discretionary spending."

Read that again. Not only is he saying we have revenue commensurate to outlays, he is essentially stating that the structure of our input-output stream is debt neutral. Which explains why there is no debt crisis. Or... something. It simply boggles that he was allowed to continue speaking at all, but speak he did. He next stipulated that, in the event of a catastrophic collapse come August, all of us little folks in the huddled masses will find it super keen. Swell even.

"It is going to put the clamps on a lot of discretionary functions, it’s going to put the clamps on in Washington, but in some ways, I think that a lot of American voters say ‘well good,’ I hope it does make things uncomfortable."

"Uncomfortable?" The folks for whom this will create discomfort are not the millionaires in public office. Nor, for the most part, will this immediately impact the rest of the top 1% that the Republicans so increasingly serve with near exclusivity. But, almost within weeks, ordinary Americans will face exploding interest rates, exponential inflation, and shortages of foreign goods (a great deal of which includes essentials and food). Public works projects may need to be halted. Social Security and Medicare/Medicaid payments may not arrive. American Bonds will be, for all intensive purposes, valueless. And this is all just in the short term.

What it will mean in the long term was put best by Ezra Klein this past January:
"...the damage done by a debt default won't be temporary. Instead, it will permanently introduce a new variable into the market's calculation of America's risk: Right now, the market doesn't believe that our political system would ever allow a debt default. The morning after a default happens, the market will have been proven wrong, and it will have been proven wrong permanently: If it can happen once, it can happen again in 20 years. In that world, the cheap debt that America enjoys and relies on is gone forever, and our economy is likely to be permanently worse off for it."

As Dan Shaviro wrote recently, "to force a U.S. default as (sic) an almost criminally negligent act."

My only disagreement with Mr. Shaviro is in his use of the term "almost."