On the vast majority of bonds in the world there is a section that describes what you do should the bond go into default. When I say the vast majority, I mean all of them, except one, American Treasury Bonds. The American Treasury Bond is the secure investment of choice in the world. When markets seem untrustworthy, Treasury Bonds are the investment of choice. People say to buy gold when you're unsure of the security of investments, but gold fluctuates, sometimes wildly. The US Treasury Bond, however, is solid. When international treasury markets went into freefall near the end of the George W. Bush Administration, and the T-Bill was offering zero percent interest, that didn't change anything. They were still the most popular secure investment in the world.
The value of the US Treasury Bond has given America a number of advantages in international trade. It's part of the reason why international commodities markets use the dollar as the standard. It's why the US has been able to incur debt and face relatively few consequences for it. It's why the US has never had a crisis preventing it from borrowing money it needs, and it's why our money has suffered relatively little inflation over the last three decades. There are other reasons for all of these things: Our strong economy, our vast wealth, and decisions by policy makers (for example: Alan Greenspan spent over a decade doing everything he could to prevent inflation as chair of the Federal Reserve Bank). But the power of the treasury bond has been a keystone that affected all of those.
And right now, the extreme right wing of the Republican party wants to stop that. We have a good thing and they want to end it because they think it would hurt Barack Obama. For the first time in American history, someone in the federal government is discussing the possibility of not paying all of the country's debts promptly. That's what House Republicans will do if they don't increase the debt ceiling. They've talked about how we could just pay the most important debts, and that it would force us to balance the budget and one of them thinks it would stabilize world markets.
The first two are totally wrong. The Federal government issues two million or more checks a day. Logistically, making sure we pay all the bills we have to is unrealistic. The budget has nothing to do with the debt ceiling. Congress already passed laws spending the money. The debt ceiling is simply the means of paying debts already incurred. The third is somewhat accurate in the same way that dropping a nuclear bomb would stabilize a piece of land. Stability does mean that there is little to no change, I suppose. A glowing chunk of volcanic rock with no life doesn't change much. But, I don't think that's a good thing.
So what would happen if we defaulted. First, our credit rating would drop from AAA+ to something substantially lower than that. Probably a lot lower than that. Secondly, the federal courts would fill almost immediately with millions of lawsuits and class action lawsuits against the federal government seeking payments with interest. That sudden flurry would would glut our already overcrowded federal court system to the point that it would probably shut down. This would basically prevent federal suits to protect civil rights, might affect the prosecution of federal crimes, and would probably make it impossible for people living on military bases or in the District of Columbia to get divorces.
Neither of those matter as much as what happens next. First, international securities markets would go into freefall. Predictions suggest that the drop would be thirty or more times worse than the collapse of Lehman Brothers in 2009. Investment shift to low-risk investments. This would have been Treasury Bonds once, but now will probably be gold, silver, and other precious metals. The price of gold will probably spike to something no one has ever thought about. Since gold and silver are important for making computers, cell phones, and certain car parts, the prices of those goods will probably skyrocket.
The interest rate for the government to borrow money will jump. That will probably cause inflation, weaken the dollar, and stagnate the economy further. The economic harm to the US will probably be worse than the great depression, and last a lot longer, because we can't borrow money to fund infrastructure to get out of it anymore. Likely, the dollar will go into an inflationary collapse that might double the cost of almost everything you buy, but your pay won't increase. People in the bottom 25% of the economy will have trouble getting enough food. There will probably be riots in the streets and crime rates will definitely increase. My guess is that homicide rates would increase from 6 per 100,000 average in America to at least 9, and possibly enter double digits for the first time in over a decade.
Lest you think I'm being histrionic, the only one of those statements I haven't picked up by being conservative in selecting statements by major figures in economics and finance is the statement about homicide rates. So, this isn't exaggeration. It's basic fact.
So, for the people who call me a liberal, because I tend to bash House Republicans, the issue is not that I have some political agenda. The issue is that I just care about reality, and reality seems to have a statistical liberal bias.
No comments:
Post a Comment