The Associated Press distributed a story implying that default is no big deal. “You hear the same proud claim every time Washington wrestles with the debt limit: The United States has never defaulted. But the record’s not that clean. America has stiffed creditors on at least two occasions.” One was during the war of 1812. Another, it claims was in 1979, when “lawmakers determined to attach a strong balanced-budget amendment to the (budget) bill. They finally relented, the day before Social Security checks were expected to start bouncing.”
It’s a nice story, comforting, wrong. In 1814, the United States was a developing nation heavily dependent on trade with the country we were fighting, Great Britain. Even so, the economic consequences of the War of 1812 were catastrophic and took years from which to recover.
By the way, Andrew Jackson, a pre-tea partier, was obsessed about the national debt when he wasn’t stealing land that had been promised to native tribes in solemn treaties. As president he paid it off. This did not prevent the financial panic that ruined the administration of his chosen successor, Martin Van Buren. It arguably made it worse, choking off foreign investment.
The 1979 analogy is even more flawed. It was a momentary blip, largely caused by a problem in the Treasury Department’s back office. Back then, money didn’t move with the speed of a keyboard stroke. America was a manufacturing powerhouse not a financialized land of “fulfillment centers” and low-wage jobs. The middle class was strong. With the Cold War alive and dangerous, investors had no choice but to wait, and they didn’t have to wait long. The government repaid the debt in full.
Today, the United States remains the world’s largest economy. The dollar is the world’s reserve currency. Treasury bonds are the safest investment on the planet. Both underpin a complex, interconnected system of finance. It is also highly brittle, as we learned five years ago.
The tea party House of Representatives is ready to kick both into the trash can. Indeed, many extreme Republicans, in their alternative fact-free universe, subscribe to a theory that default wouldn’t be bad and might even be good.
The Dirty Harry of fallen empires says, “Go ahead. Make my day.”
Here’s how a default would likely play out, thanks to New York magazine’s Kevin Roose. This is only the first few hours and it’s not pretty. As it goes on, it will be an object lesson to Americans of just how large and essential a role government plays in the economy.
The biggest damage is not financial but to our democracy. We are in a constitutional crisis where majority rule is being blocked. We are more divided than any time since 1861. But the economy, already suffering from high joblessness and slow growth, already held back by the sequester and failure to invest in our future, will feel the damage even if an 11th-hour deal is reached.
Nations will start looking for another reserve currency, or several. Treasuries will no longer be deemed safe and our borrowing costs will rise. All this might happen very slowly. The world looks at us as if we are insane — and unreliable.
Let’s not fall for the false “both sides are to blame” equivalency. The blocking minority stands for nothing but nihilism and hatred of That (Black) Man in the White House. The big business interests that bankrolled them have lost control. They have worked around the shutdown, but they will be hard pressed to avoid the shock wave of default that lasts more than a day or two. Whistle past the graveyard at your own peril when even the oligarchs are nervous.
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Today’s Econ Haiku:
Fasten your seat belts
Portfolios upright, locked
We can’t wing it now