One Solution to the Deficit Problem: Default

NYT decided to look at the numbers that make up a "Republican budget plan," whatever you'd like to think that is, in its opinion section:
Here are two numbers to keep in mind when thinking about the House Republicans’ budget plan: They want to cut spending on government programs over the next decade by $4.3 trillion. And they want to cut tax revenues over the same period by $4.2 trillion.

Government spending needs to be brought under control. But slashing vital services just to pay for more tax cuts is bad public policy and bad economics.

It won’t fix the deficit, no matter what the Republicans claim.

We’ve seen this play before. President Ronald Reagan promised that tax cuts would spur more economic growth and pay for themselves. During his tenure, the deficit hit what was then a peacetime high of 6 percent of gross domestic product, and he eventually decided that he had no other alternative but to raise taxes to try to close the gap.
Or there is Budget fights are a lose-lose proposition from Steven Pearlstein in the Washington Post if that's more your flavor:
It all began in December with the bipartisan deal on extending the George W. Bush tax cuts, followed by a series of continuing resolutions setting spending for the fiscal year that is already half over. The latest came Friday night, just minutes before a looming government shutdown. But even before the details of that compromise were released, the the brinkmanship began over the next crisis, a threatened default by the U.S. government sometime in early July. Republicans now threaten that they won’t authorize an increase in the debt ceiling unless it includes promises of even deeper spending cuts next year and beyond.

However disruptive a government shutdown might have been, it would be a mild tremor compared with the global financial tsunami that would ensue if the world’s biggest and most trusted borrower were unable to repay its debts when they come due. Among the many disastrous consequences would be a big spike in U.S. government borrowing costs, which when you’re carrying $14 trillion in debt has pretty dire implications for the deficit that Republicans say they are trying to reduce. Every one percentage point increase in interest rates would add $140 billion to interest payments every year, more than offsetting the beneficial effect of all those spending cuts that the Republicans have worked so hard to achieve.
And what would be so bad about defaulting? Who is the largest creditor of the United States? Here's a big fucking hint, I hope some of my favorite sleazy Congressmen are reading this as we speak so they get this: we pay a fuckload of interest on the "money" we have to borrow from the Fed, including our very own "money" (if you can call pieces of paper with their name on it money) which they don't even print and yet somehow we pay them to be able to use their branded cash. And they're fucking us on the deal. Actively. As in this very second. And repeatedly.

All under the guise of helping.

So why not just default on their asses? We could fuck them back since a lot of what they are holding is Treasurys - everyone knows those are worthless if we can't sell more to the Fed so we can keep paying our interest on them. It's almost too simple, really, no need to make this complicated. It would immediately eliminate all unnecessary government programs, no need to keep bitching back and forth about what we should cut and how until Congress gets another debt ceiling increase. Why not just make it permanently infinity + a bazillion? There's no getting out of payday loans if you keep taking out new ones to pay the old ones.

Here's the extra-genius part: the Fed is fucked anyway, regardless of whether we keep making timely interest payments or not.

News flash: unemployed people don't demand very much money. Employed people do. Employed people also cost employers money, which causes additional money demand. What do you think happens to this very simple formula when employees cost even more money and more taxes are demanded of those employees? The Fed knows it can't give the government a two-handed hand job through buying up Treasurys and feeding in all this money to employed people so the government can swoop in and take large amounts of it. The Fed can't afford to manufacture and distribute that much street money without unleashing rampant inflation. They're stupid but they're not that stupid.

Meanwhile, let's keep thinking the decisions in Washington are actually made on the Hill and not nearby in a more secluded part of town.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


T said...

I think the fact that the Fed is the largest holder is irrelevant in this context. Default is a concern since the US dollar acts as the world's reserve currency. a default would cause trillions in wealth destruction, devaluation of the dollar, loss of confidence in the US, loss of investment in the US, etc.

There's talk and opinions that the US would survive a default, but at what cost? Enormous loss of social programs (e.g. Social Security and Medicare) that people depend on would only mitigate the income disparity in this country. One of the reasons we've done so well is the health of the middle class. With a default, millions would see their retirements disappear and safety nets evaporate.

I'm all for making cuts, etc., but I enjoy the global influence the US has, and don't want to see that be stripped away just because our lawmakers can't stop playing chicken.

W.C. Varones said...


Devaluation isn't the result of default. It's the alternative to default.

And you really enjoy the global influence the U.S. has? Running three simultaneous wars and having the populace so afraid of terrorism that they'll submit their children to groping by government goons?

I'd rather be like Canada. Nobody gives a shit about them and they go about their lives peacefully.

T said...

Okay, I think it's fair to say we might be facing inflation in the near future with or without default. I won't deny that. Also, with competition from the Eurozone I wouldn't expect the USD to be the end all and be all forever.

Still, a default would still be much harder on the value of the USD than any of the quantitative easing will do. Especially if the recovery is a slow and painful one (which seem to be seeing that housing foreclosures are still rampant and toxic assets are still on the books of many institutions).

P.S. I might not agree with what you say in the posts I've read, but at least I know where to go for "alternative" opinions. Keep it up.

OMG. That awful NYT article reminds me of P.J. O'Rourke's take on the end of the world as reported by major newspapers:

NY Times: World to End; Leaders Meet

NY Post: World to End; World Series Cancelled

Washington Post: World to End; Women and Minorities Hardest Hit.