Dateline 14 October 2013:
This morning I unsuspectingly switched on my iPad, went to The New York Times web site and discovered that the world would end in just three days, sometime 17 October.
Leaders at World Bank and International Monetary Fund meetings on Sunday pleaded, warned and cajoled: the United States must raise its debt ceiling and reopen its government or risk “massive disruption the world over,” as Christine Lagarde, the fund’s managing director, put it. (NYT)
In the hope that the NYT assessment of the global future was exaggerated, I went to The Guardian, known as a progressive newspaper in the United Kingdom. To my rising alarm, the view from “across the pond” was, if anything, more alarmist, basing its apocalyptic anxieties on a source no less official than the US Treasury,
A still-fragile global recovery is being put at risk by Washington’s squabbling politicians, finance ministers and governors of central banks have warned as they stepped up the pressure on the US to avoid a catastrophic debt default this week…
Earlier on Thursday, the US Treasury insisted that the shutdown would not affect its estimate of when the government would run out of cash, and warned that the US was heading toward a catastrophic event that could plunge the country into financial crisis…
In the catastrophic event that a debt limit impasse were to lead to a default on Treasury securities, financial markets could be shaken to their core as was seen in late 2008,” the Treasury said. (emphasis mine, The Guardian)
I was, to say the least, unpleasantly surprised by the imminence of the approaching apocalypse (I had assumed it would come twelve days later, 29 October, the 84th anniversary of the Great Crash on Wall Street).
“Catastrophic event”, “catastrophic debt default” and “massive disruption”. Mercy-me (to use the technical term common in the South), this seems serious. The US government refuses to pay its bills because of “Washington’s squabbling politicians”, and the world holds its breath. And the World’s End will come on 17 October when the US government fails to service the federal debt (in the late afternoon, I hope, because I have a lunch meeting at 12:30).
This Shut-Down Apocalypse story makes a serious challenge to lead the league of reactionary nonsense narratives. My suggestion is to follow the advice of Alfred E. Nueman of “what, me worry?” fame. A pinch of rationality helps to dispel the terror that the NYT and Guardian encourage, so-called default.
First, we should ask, what is the unspeakably horrific event that will transpire (or transpired, if you read this in a few days) on 17 October? Officials at the US Department of the Treasury estimate that on that date it, the Treasury, will reach the legal limit on its expenditure. This legal limit results from a statutory maximum to the size of the debt of the federal government.
Setting aside the inherent idiocy of a debt limit, why does this rather embarrassing but common event, not paying bills immediately when they come due, imply catastrophe? Most of the agencies of the federal government have not operated for several days. Terrible hardships for many people have resulted, but these hardships have not, to my knowledge, been described in the media as “catastrophic” (they should be, because of the human suffering involved).
The great cliché in the room (elephant, 500 pound gorilla, add your own) is so-called financial markets. We are told that should the US government fail to service its debt johnny-on-the-spot, those infamously fickle and feckless financial marketeers will bring the known world to its knees. This is a variation on the famous quotation from Benjamin Franklin. Instead of “the second vice is lying, the first is running in debt”, we have, “the second vice is government debt, the first is not paying it back on time”.
And what will be the method by which the financial marketeers will end the world as we know it? It is none other than the dreaded pestilence that brings “the loss of confidence”, known well to all. This evil strikes directly via rising interest rates and more broadly sows discord and dismay across financial markets, which undermines private investment, the driving force of capitalist accumulation.
This disaster narrative is ignorant nonsense (most polite interpretation) and/or conscious anti-government propaganda. As I showed in an earlier 99%, it is beyond the ability of “financial markets”, no matter how voracious, to drive up the interest rate on US government bonds.* Should the interest rate on US 3 month bonds (currently 0.06 %) begin to rise, the Federal Reserve Bank could stop this in its tracks by promising to purchase any and all such bonds at the current interest (note that purchasing bonds reduces the government debt).
But, even if interest rates do not rise, wouldn’t the Great Default cause investors canniption fits (or at least hissy fits), driving down investment drastically for who-knows-how-long? If by “investors” we mean those who lay out funds for a productive purpose, rather than speculation, not to worry. The productive investment rate in the United States is so low that we need suffer little anxiety that it might drop even further (below ten percent of GDP when we subtract depreciation).
What about the rest of the world? Isn’t it true that a US bond default would send the global economy into a proverbial tail spin? Probably not. The European economies find themselves in a depressionary mess largely the result of the German government’s “we grow, the rest can sink or swim” approach to regional cooperation. Private investment in Asia and Latin America is unlikely to so much as sneeze at a delay in US debt service.
In any case, all this default hysteria is a sham, as Richard Finger explained about ten days ago in that impeccable left wing magazine Forbes (of the Forbes 500 fame),
October 2013, which would be the ostensible drop dead date for a debt ceiling increase, is the month our government has the least economic burden in terms of its debt service obligations. Assuming there is no deal, there will be plenty of cash on hand to make what is effectively the October mortgage payment.
To put it ultra-simply, the $16.7 trillion federal debt does not come due this month. On the contrary, the required debt service for October is less than $20 billion, a fraction of the normal federal revenue flow for the month. To service the debt all the Treasury need do is not pay people’s social security, medicare or veterans’ benefits. Anyone out there who thinks the White House and Treasure officials will say, “no way we will pay one cent of debt service by cutting social security”?
Whether or not the debt limit is raised, the US debt service will be paid in October and in every other month. Bet on it. The financial marketeers know this, which is why we find no upward pressure on US public bond rates in the run-up to the End of the World Default. They will get theirs and we get the…you know the rest.
So why all the faux hysteria? Orders from the White House probably motivate the dire warnings from the US Treasury, as part of the bargaining with the Tea Party Troglodytes. The articles that run in foreign newspapers for the most part reflect ignorance, both of economics and US institutions.
But, there is another, deadly serious game being played. The Far Right in the United States, lavishly funded by “financial markets” with the white racist Tea Party as its shock troops, has an agenda, to destroy all social protection as well as most forms of public provision. The demand by the Tea Party Trogs to defund Obamacare is the most obvious manifestation of this agenda. Over the last several years, the President has repeatedly yielded to these demands (“compromised”).
A compromise now would give a tremendous victory to the Far Right. Victory now for them on this issue would make it all down hill for their agenda (and the rest of us).
Write, email, tweet the President to holdout against this reactionary assault. Otherwise, the current severe suffering of many Americans from the Shut-down will become permanent.
[more like this in my new book coming out in January,
Economics of the 1%: How mainstream economics serves the rich, obscures reality and distorts policy, Anthem Press, order it at http://jweeks.org]