Before we begin, let it be said that the looming possibility of the U.S.’s default on its own debt is a not-insignificant issue. Let it also be said that the U.S. government may be unwilling to pay interest on its multi-trillion dollar publicly-held debt as of mid-October, and that this carries substantial risks. And, finally, let it be said that this is something we should most definitely avoid.
The potential for a default — however self-inflicted — raises the specter of just about every bad thing economically that you can imagine. And there have been no dearth of voices drawing attention to a variety of doomsday scenarios. The U.S. Treasury Department, which is not normally known for its hyperbole, just issued a report warning of a global economic depression should the U.S. default: interest rates will skyrocket, financial markets will panic, and the global financial system will lose one of its only bastions of predictability and stability.
Five years ago, Lehman Brothers was allowed to fail because of a complacent and erroneous view that its effect would be limited to little more than a market disruption. Today, the prospect of a U.S. default is met with the opposite of complacency. The only voices expressing skepticism that a default would be catastrophic are the very Tea Party ultras whose burn, baby, burn mantra appears to welcome the possibility of an implosion. How else to purify and rebuild a corrupt system?
There’s ample reason to believe that a default will sever once and for all the gossamer threads of trust and stability that sustain not just the U.S. but the global economic system. But it is worth considering that it may not have quite the feared effects, especially because it is such an unprecedented possibility that no one can predict what its outcome might be.
Let’s hypothesize that the next weeks are frittered away as the White House and Congressional Democrats refuse to negotiate on anything until the Republicans allow the government to operate and the Treasury to borrow. Let’s say the drop-dead date of October 17th is reached and the Treasury finds itself unable, logistically, to prioritize the tens of millions of payments it has due. Let’s imagine that it misses an interest payment on the debt, which is the definition of a default. What then?