So you think it's just a game of chicken, and the Banana Republicans are certain to kowtow to business interests who don't want the US to default on its debt obligations? Maybe so, but it's not as certain as it looks. For there are many who would like nothing more than for the US to default on its obligations, even if only for a little while. Not because it suits their ideology, but because it would make them even richer.
Eric Cantor, for instance, has about $15,000 invested in ProShares Trust Ultrashort 20+ Year Treasury ETF. That's a fund that bets against the value of US Treasury debt, so if the bonds default, they fall in value and the fund goes up. But to be fair, it's a small position and for all we know, Cantor's total portfolio could go down, since he may own some bonds, and stocks would fall too.
But some folks would make out big time.
The key feature of the recent economy has been really, really low interest rates. It is generally accepted among the people who run the economy that interest rates influence economic growth. High rates mean slower growth. Hence during the inflationary 1970s, interest rates skyrocketed. This was supposed to lower inflation, since the Fed was restricting the supply of money, thus raising its price. (In other words, high interest rates are the visible effect of tight money.) Reagan stimulated the economy with lower interest rates. But they really started falling when Clinton raised taxes. That reduced the deficit, reducing the need for the Fed to borrow, thus lowering demand for debt and (supply and demand being pretty powerful) lowering its price. The lower cost of money helped spur the Clinton recovery.
But remember that what the Fed does -- known as monetary policy -- is only half of the equation. The other half is what Congress does -- fiscal policy. The Fed didn't lower the interest rates under Clinton so much as Congress did by lowering the deficit. The Fed in those days was still heavily influenced by the Nixon-Ford years and thus cared much more about inflation than about unemployment or recession. In fact that's still the case, just less so.
Interest rates in general, across the economy, are based on risk. The least-risky investments get the lowest rates. Hence an "AAA" bond pays a lower interest rate than an "AA" bond, and rates go up as the rating goes down towards the junk range. The Prime Rate is what a bank charges its lowest-risk customers; the rest of us pay prime-plus. And at the very bottom of the interest rate scale, the lowest-risk bond of all, is US Treasury debt. Backed by the full faith and credit of the US government, it has no reason to default, ever. That's conventional wisdom. The debt ceiling is an artificial limit, a kabuki created by Congress in 1917 to make it look responsible. And until now it has been.
Because the US debt is so safe, many other debt instruments are priced relative to it. So your credit card rate or line of credit or car loan might be priced at some markup over the Treasury paper rate, for some period of loan. (There are short and long term federal debt instruments. The market prices them independently.) So even if you don't own Treasury paper, the price you pay or get may depend on it.
And that's where the default becomes profitable. Current short-term interest rates are near zero. Banks are paying less than 1% on CDs. The Fed pays less than 1% for short-term money. This is great if you're a borrower, trying, for instance, to expand your business. This sucks big time if you're living off of investments, as many of the truly wealthy do. You might have socked away $1M for retirement and planned to take out $50k/year for the rest of your life, based on 5% interest. That was very low 20 years ago; it's very high now. More likely you're getting much less, and need to sell off principal in order to make up the difference.
So for the truly wealthy, those who are invested in cash and similar liquid assets, nothing would be better than a US default. Interest rates on everything would skyrocket. Your 1% might become 4% overnight! Your income would thus go way up. It must be nice to have lots of cash.
You could also make money gambling, as Cantor has done, against the Treasury. Default lowers the value of the principal, especially, of short-term notes, since the coupon rate is fixed and thus the principal value is what actually fluctuates. Go short and cover during the default. Or put some cash aside and buy the discounted debt during the default and wait for it to eventually recover. Bond traders will do well with speculators placing lots of orders in what is usually a rather staid market.
What we're seeing, then, is a split in the Banana Republican ranks. Those who care about business, who are invested in operating companies and stock, are aghast at the possibility of default. It will raise the cost of doing business, lower stock values, throw more people out of work, lead to another recession, and, by raising the amount of interest that the Treasury will have to pay for future debt, worsen the deficit. That side of the party is with McConnell, desperate for a deal.
But some members of the financial sector, the pirates who have financialized the US economy to the detriment of the productive sectors, see this as a windfall. As do the truly cash-wealthy, who are slobbering over the possibility of higher interest rates. The cash-wealthy, after all, don't care about recessions. They like recession and depression because it makes servants cheaper and easier to find. They already made or, more likely, inherited their money. Or, like the Kochsuckers, they are in resource extraction businesses that can export to growing economies when the US falls, and see depression here as a source of cheap labor. Cantor is now their leader, and Bachmann their dupe.
So, barring a 14th Amendment remedy (an interesting idea whose viability is however far from certain), default really can happen, if the House falls in line behind Cantor and not enough line up with Democrats to make a deal to raise the debt ceiling. There's a lot of money to be made out of the ashes of the US economy, and the carrion crawlers are already sharpening their teeth.