The debate over raising the debt ceiling, as with healthcare, energy alternatives, and so much else, seems framed by the administration's unwillingness to call the Republicans' real intentions for what they are, or to dwell forcefully on the terrible outcome Republican policies will have for this country. For example, the President throughout 2009 daily passed up opportunities to make clear that those who stood in the way of far-reaching healthcare reform were trying to tie the American people to a ruinously expensive system that will soon collapse of its own weight. The closest he ever came to that was his cautious admonition that "Heathcare reform IS deficit reform." Far better to have said "Republican refusal to change the system while we still can is the fiscal equivalent of locking the American people inside a burning house." Incendiary language, perhaps, but less so than what the other side uses in order to confuse people.
So, what does his have to do with the debt ceiling? Well, the administration is once again letting the other side define the debate by allowing them to tell the American people what to be afraid of. A recent NYT poll indicated that, while 38% of the population are primarily concerned about the consequences of a default should the Ceiling not be raised, all of 47% of the public are more concerned about the consequences of supposed "runaway" spending.
This kind of disconnect is potentially disastrous in a political dispute like this one. A public too distracted by spending issues will not fix blame on Republicans who use the Ceiling issue to force domestic cuts they otherwise wouldn't get, on pain of default. If the public doesn't understand what's going on, they'll stand aside, and this White House especially is likely to do what it is has done too often before - cave.
So, here's my effort, as a non-economist, non-accountant, not financialist, but simply as an educated person, to outline what I perceive as the potentially disastrous consequences of any lengthy default by the US Treasury. I do so to make the point that it should be JOB ONE for the White House to make sure everyone knows that this dreadful outcome is the all-too-likely result of Republican threats ove the Debt Ceiling. And to make clear that the Repub/ConservDem coalition is willing to use the machinery of government to extort funds from ordinary Americans, by threatening their country with what could well be a catastrophe.
I hope that people with more of a background in financial issues than I have will comment on this post. Please set me straight if necessary.
My major concern is that a lengthy default (whatever lengthy means) would end two incalculable economic advantages the US possess over all others in global economic competition. The first is the pricing of oil in dollars. The second is the pricing of our public debt - and private debt, too perhaps -- in our own national currency.
To start, let's recognize that there are Trillions of $$ worth of US Treasury bonds held all over the world, at least a Trillion held by China. If the US were to default on its debt - denominated (at least partly) in Treasuries, then Treasuries would no longer be liquid. One thing we've seen demonstrated since 2007 is that a supposedly liquid investment (be it an auction rate security or whatever) that looses liquidity is not worth much. This threat to the value of Treasury holding would presumably (??) lead to massive dumping of Treasuries, or at least to enough selling to wreck their value.
Wouldn't such sales take the value of the dollar down with it? And what would be the response of nations who price their assets in dollars?
Isn't there a strong likelihood that OPEC, faced with receiving a near-worthless currency for their valuable oil, would stop taking dollars as payment, in favor of some kind of currency basket? The US could wake up as a country forced to import 50%+ of its oil needs using a depreciated currency. Not only would the price of oil trend permanently higher, US would now be like any other country, paying more for oil not just when the base price rise, but every time its currency falls in value. And remember, with our imports of all kinds (not just oil) on the rise, thanks to high imports from China, et al. the dollar is on a downward path already.
Failure to raise the Debt Ceiling, then, could greatly increase the harm done by a falling dollar, making our economy more prone to inflation caused by oil that gets more expensive as the dollar falls. Anyone remembering the 1970s should recoil from institutionalizing stagflation this way.
But it gets worse. This country, on with prices on its massive imports now out of control, could begin experiencing the balance-of-payments crises that have bedeviled the UK ever since WWII. The United Kingdom ended WWII owing massive debts to the US - priced in Dollars, not Pounds sterling. Chronically short of dollars both to make debt payments and to import oil among other things, the UK was caught in a spiral of inflation and recession that has limited its prosperity ever since. The US as an economy already has a trade deficit. Losing our currency advantage would make these excess imports perhaps impossible to sustain.
Britain's example leads me to my third point, which I'll make brief. We are (as Britain was after WW I and II) a debtor nation. Not just the government, but the national economy borrows heavily and chronically from abroad. Again, our salvation at this point is that our debt is priced in dollars. What would happen if default in Treasuries causes the dollar to collapse? Can we not expect the our major creditors the Chinese, purely to protect their investment, to denominate any further loans in the yuan, or, again a currency basket?
Our foreign debt is hard enough to manage now, when it only rise when we take out more loans. Should our debt ever be priced in any currency other than dollars, we will in effect lose control of the amount we owe, since any fall in the dollar will increase our debt, perhaps beyond our ability to pay From then on, our great country would be like a third world nation, edging ever closer to thralldom in the IMF, and vulernable to "austerity measures" imposed by outsiders.
This, then, is the likely result of any default issuing from failure to raise the debt ceiling:
1. Stagflation
2. Recurring currency crises
3. Out-of-control foreign debt, with ever-present fear of national default
4. Forced austerity, with impoverishment of all but the very rich
QED, then, the Republican agenda is to deliver this country into the hands of the very richest among us, impoverish the rest, and to subordinate this country once and for all to those who control global capital.
Will the White House exert enough leadership to keep it from happening? Will we exert enough pressure on the WH to give them no choice?