Belmont Club

Is the debt clock ticking already?

Megan McArdle wonders whether there is really no such thing as “too big to fail” or too stable to default.

For a while now, I’ve been asking people at conferences, on and off the record, what America’s sovereign debt risk is? That is, how long until people stop treating treasuries as the “risk free” securities, and start demanding a premium for the risk that we might default.

The answer from the right has been a nervous (perhaps hopeful) 2-3 years. The answer from the left, and professional Democratic wonks, is some unspecified time in the future. Probably, there will be a Republican in charge. Markets hate Republicans.

But last Thursday, the Treasury auction was . . . well, descriptions vary from “weak” to “horrible”. … Obama can assure voters that he inherited these deficits. But bond markets pay closer attention to the fact that Obama has already increased the projected deficit he inherited by 50%

Hubris often has its roots in pride. Richard Posner claims that conservatism has been dumbing itself down, but argues this is partly good news. “I sense intellectual deterioration of the once-vital conservative movement in the United States. As I shall explain, this may be a testament to its success.” It’s good news he claims, because the economic meltdown destroyed a great many shibboleths. But it may be argued that the real benefit was that it destroyed the tendencies to dogmatism.

By the fall of 2008, the face of the Republican Party had become Sarah Palin and Joe the Plumber. Conservative intellectuals had no party.

And then came the financial crash last September and the ensuing depression. These unanticipated and shocking events have exposed significant analytical weaknesses in core beliefs of conservative economists concerning the business cycle and the macroeconomy generally. Friedmanite monetarism and the efficient-market theory of finance have taken some sharp hits, and there is renewed respect for the macroeconomic thought of John Maynard Kenyes, a conservatives’ bête noire.

That’s as may be, but if the decline of intellectual conservativism has had an upside, it has been to destroy the faith in the proposition that we know — exactly — how the world works, and try to fix it. The decline of intellectual conservatism reduced the confidence it required to outsmart itself.


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