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It’s week two of the government shutdown, and with 10 days to go before we hit the debt ceiling, there is one big question as to what would happen if the US defaulted on its debt. Is it merely bad for the US’s image — or would it initiate economic apocalypse?
Yalman Onaran says a US default would be worse than the Lehman bankruptcy, noting that it “will be an economic calamity like none the world has ever seen”. Stephen Gandel identifies four different reasons to freak out over the possibility of default. All four revolve around the fact that a lot of market systems are based on the assumption Treasuries won’t default, and no one is quite sure what happens if they do. The Treasury Department, meanwhile, is set up to make its payments on time and in full, and its payments are not prioritized.
On the other side of the debate, Nick Cawley points out that the markets remain relatively calm. Treasury yields are at the lowest they have been in two months, likely because while payments may be delayed, investors are reasonably certain they will eventually get their money. “Keep calm, carry on and watch out for U.S. Treasurys to push higher”, he writes.
But hitting the debt ceiling is about a lot more than missing a payment to creditors. Where the government shutdown mostly affects discretionary spending (think National Parks and furloughed workers), a default would start to affect mandatory spending programs like Social Security and Medicare. Brad Plumer takes a deep dive into whether the — or exactly how — the Treasury Department can prioritize who to pay in the event that the US breaches the debt ceiling, and still avoid a default. The short answer: it’s incredibly complicated and may not be possible. Furthermore, “to acknowledge that payment prioritisation is possible would enable the Republicans to force the president to use it”, says Cardiff Garcia.
Paul Krugman thinks hitting the debt ceiling will be a disaster, even if the economy manages to avoid a Lehman-like catastrophe:
[The government] would be forced into savage spending cuts, around 4 percent of GDP, that wouldn’t just cause hardship (Surprise! No Social Security for you this month!) but amount to a severely contractionary fiscal policy, sending us into recession if it lasted any length of time.
On to today’s links: