Fox Business anchor Lou Dobbs downplayed the looming default crisis, calling the August 2 deadline for raising the debt limit a "false date" and "pure fiction," and thereby minimized the consequences of the U.S. Treasury Department not paying its legal obligations.
Dobbs made his comments in response to J. Dennis Hastert, former Republican speaker of the House, who said that "the federal government can decide what it's going to pay, when, and where."
This line of thinking has become a preferred talking point within the right-wing media. But this completely dismisses the ripple effects of choosing to ignore payment obligations.
Jeffrey Frankel, a Harvard economist who serves on the National Bureau of Economic Research and who was a member of the Clinton administration's Council of Economic Advisers, explained that choosing not to pay certain bills "would mean failing to honor legal obligations that have already been incurred (paying suppliers for paper clips that have already been bought, paying soldiers their wages for last month's service, sending social security recipients their checks, etc.)." Frankel added:
The government's credit would still be downgraded and global investors would still demand higher interest rates to hold US treasuries, probably on a long-term basis.
Jerome H. Powell, a Treasury Department undersecretary during the George H.W. Bush administration, wrote in a Politico op-ed that efforts to "prioritize" the nation's legal obligations would be disastrous:
If Treasury is forced to prioritize, the rating agencies will immediately put our sovereign debt on watch for a downgrade, at a minimum.
If investors avoid the Treasury market, we could be unable to pay off maturing securities, which would mean an immediate default. Market participants generally agree that even a brief default would create potentially catastrophic risks to the financial system, like the meltdown of 2008. A tiny but well-amplified minority disagrees.
At the Washington Post, Ezra Klein further outlined the broader economic consequences:
So as we get closer to doomsday, companies that contract with the federal government will start hoarding cash to tide them through a period in which they might stop being paid. Seniors and other Americans who rely on federal transfers would be wise to do the same. And then if we do pass the borrowing limit, the economy is going to have to absorb a sudden and sharp drop in federal spending, which will reverberate among businesses that don't directly work with the government but sell to those who do.
It won't just be the federal government that pays. It'll be the economy.