The latest out of the extreme conservative wing of the Republican party is that a failure of the U.S. government to take the steps necessary to pay all its bills on time would be no biggie. They say we could juggle things around and avoid missing any payments on the debt, which they figure is the only thing our creditors really care about. Some, such as Sen. Rand Paul, go a step further and say failure to raise the government's borrowing limit might be a blessing: "If you don't raise the debt limit," he told the New York Times, "all you're saying is, 'We're going to be balancing the budget.'"
What you're saying is that the federal government is going to start picking and choosing which bills to pay. Depending on the vagaries of cash flow, maybe today the military doesn't get paid, maybe tomorrow Social Security checks don't go out, or maybe Medicare can't cover its bills. It's not a good sign of creditworthiness when a house hold starts deciding to pay the electric bill a few days late to avoid missing a mortgage payment. It's much worse when the government whose bonds form the basis of the entire global financial system starts doing that.
Nobody ever decided that United States treasuries would be the standard by which the value of all other financial assets are based. It simply developed that way because the full faith and credit of the United States government is universally considered to be beyond question. Or at least it has been. If the U.S. government starts defaulting on its obligations — any obligations — that confidence will be permanently shaken. And that has some very real, practical consequences.
The largest holders of U.S. treasuries are the Social Security system and the Federal Reserve. If government bonds are suddenly devalued, Social Security could find itself unable to pay retirees, and the assets that back the value of the dollar would evaporate. The third and fourth largest bond holders are the Chinese and Japanese governments. If their assets suddenly contract in value, the contagion would spread from the world's largest economy to the second- and third-largest. Many institutions are barred from trading in bonds issued by an entity in default, which means that pension funds, money market funds, bond funds and other investment funds would be required to dump their U.S. debt, causing its value to spiral downward even more.
For average Americans, that means the purchasing power of their dollars will collapse, and interest rates on everything from mortgages to credit cards would skyrocket — if any lending was going on at all. After Lehman Brothers defaulted on its obligations five years ago, the stock market lost half its value, lending froze and unemployment jumped above 10 percent. We still have not recovered. The treasury's outstanding debt is more than 20 times as great as Lehman's was. We avoided another Great Depression after Lehman only because the Federal Reserve and the U.S. Treasury were able to take extraordinary action to shore up the financial markets. If the U.S. government is the one to default, there will be no one to save us.
The precise chain of events that would occur after a U.S. default is unknowable, both because it has never happened and because it would be the single largest disruption of the financial markets imaginable. But there is near universal consensus among economists, global finance officials and the financial industry that it would foster world-wide catastrophe.
Yet a sizable portion of the Republican caucus in Washington chooses simply not to believe any of it. They think the White House is bluffing or that the predictions of dire consequences are overblown. Sequestration wasn't the end of the world, they say, and neither so far has been the federal government shutdown — at least not for members of Congress, who continue to show up to work and get paid.
The blind willingness to reject the opinion of anyone who might actually know what he's talking about should not come as a surprise. After all, this is the same group of people who are willing to ignore all manner of evidence that the globe is warming and that human activity is driving it.
President Barack Obama cannot allow the reality-deniers in Washington to determine this nation's course. He must stand firm in his insistence that raising the debt limit cannot be a perennial occasion for extortion. Meanwhile, Senate Majority Leader Harry Reid is right to begin moving a bill that would suspend the debt limit until the end of 2014. The Democrats in the Senate need to stick together and do the responsible thing — and hope that enough Republicans come to their senses before it's too late.
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