The PJ Tatler

So, Is Default A Paper Tiger?

Well, the news of a deal to avoid default was killed today when Harry Reid decided to reject a six-week debt ceiling extension proposed by the House.  Additionally, Senate Republicans are skeptical of the House plan as well.  So, for now, we’re heading for the cliff, which I’m told would be cataclysmic.  Right now, I’m indifferent. It could be that I’m experiencing what George Will aptly noted as “apocalypse fatigue” when the debt ceiling battle was raging on Capitol Hill in 2011. So, is this a countdown to doomsday?


Well, according to one liberal economist, default could lead to economic growth.

Dean Baker of the Center for Economic and Policy Research said,

We have been repeatedly warned that the dollar could lose its status as the world’s reserve currency in the event of default. While this is a dubious claim (will countries rush to the euro?), it would actually be good news if it were true. … If the dollar is no longer the pre-eminent reserve currency, then countries will dump much of their dollar holdings, pushing down its value in currency markets. A lower-valued dollar will cause exports to soar and imports to plummet, creating millions of new manufacturing jobs. Millions more jobs would be created in other sectors due to the multiplier effect. This could well bring us back to full employment — a goal we may not otherwise achieve until the next decade.

Well, what would come if we do default? In 2011, Reason’s Veronique de Rugy wrote:

“Technically, if the debt nears its statutory limit, the Treasury Department cannot issue new debt to manage short-term cash flows or manage the annual deficit—the government may therefore be unable to pay its bills. But in the real world things are different.”

“First, if the debt ceiling is not increased it doesn’t mean the federal government will have to repay the entire debt at once. The government just won’t be able to increase its borrowing. Americans understand the difference between not being able to borrow more money and defaulting on one’s mortgage…”

“More importantly, the Treasury Department has other options. For instance, if the debt ceiling is not increased, the Treasury can prioritize interest and debt payment to avoid a default.”


Additionally, Jeff Dorfman of Forbes wrote on October 3 that defaulting on the debt is “forbidden.”

 “Reaching the debt ceiling does not mean that the government will default on the outstanding government debt. In fact, the U.S. Constitution forbids defaulting on the debt (14th Amendment, Section 4), so the government is not allowed to default even if it wanted to.

“In reality, if the debt ceiling is not raised in the next two weeks, the government will actually have to prioritize its expenses and keep its monthly, weekly, and daily spending under the revenue the government collects. In simple terms, the government would have to spend an amount less than or equal to what it earns. Just like ordinary Americans have to do in their everyday lives.”

So, Congress would have to act like a typical American family when it comes to its finances.  How revolutionary!  Yet, it’s unlikely we’ll ever get to the point of going over this cliff, which very much looks like small hill.

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