Big Government Downplays Consequences Of Failing To Raise Debt Ceiling

Big Government: Debt Ceiling " 'Crisis' Is As Phony As A $3 Federal Reserve Note." From a July 17 post on Andrew Breitbart's Big Government website:

For weeks, we have been treated to comic opera in D.C.'s theater of the politically and economically absurd. On the stage, the actors -- President Obama, the Secretary of the Treasury, congressional leaders -- hop about, shouting moronic lines about the national “default” that will occur unless the government's statutory debt limit is raised, reciting Chicken Little lines about how such a default will trigger worldwide economic catastrophe.

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Have governments defaulted in the past? Of course, they have, on hundreds of occasions over the centuries. Have these defaults triggered “catastrophic economic and market consequences”? No. When a government defaults, there are consequences, of course, including heightened reluctance of lenders to lend to the deadbeat government in the future or at least to lend at such favorable interest rates. Often partial payments of principal and interest are arranged or debts are restructured. The world keeps spinning.

Has the U.S. government ever defaulted before? Yes, in 1933, by refusing to honor the gold clauses in its bonds, the Treasury engaged in a massive default. Ironically, for mainstream economists and economic historians, the government's abandonment of the gold standard, along with its associated default on its gold obligations, is seen as the decisive government action that stopped the Great Contraction and set in motion a recovery from the Depression. (Don't laugh: for some time, this interpretation has been the reigning view in academia.)

If we attend to the lines being mouthed by the actors in this absurd play, however, we see quite plainly that the whole “crisis” is as phony as a $3 Federal Reserve note.

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In short, the whole show is a farce, nothing more than a convenient occasion to seize a public-relation lever to move a mass of money out of the taxpayers' bank accounts into the Treasury's account at the Fed -- but only for an instant, because the Treasury has plans to spend every cent it snatches and, of course, to spend even more, financing its profligacy by going even more deeply into debt (again, not the government officials' personal debt, but yours and mine, to be serviced under threat of fines and imprisonment).

If you had maxed out your credit cards and nobody would lend you a dime, you would have to bring your expenditures into line with your income. Going ever more deeply into debt is universally recognized as ruinous for any individual or family. Yet people seem to believe that this simple economic fact of life does not apply to an organization that styles itself “the government.” Of course, this gang does have an option that you and I do not have: the ability to threaten violence against the peons it rules in order to make them hand over loot. But this option has obvious limits, and when those limits are reached, increased borrowing by the government portends the same ruinous outcome that excessive indebtedness brings to an individual or a family that consistently lives beyond its means. [Big Government, 7/17/11]

But Experts Agree That Failing To Raise The Debt Ceiling Could Have Disastrous Consequences

Zandi: “In A Post-Default World, Financial Markets Would Unravel And The U.S. And Global Economy Would Enter Another Severe Recession.” In a July 15 Washington Post op-ed, Moody's economist Mark Zandi stated: “The Obama administration and Congress must raise the federal debt ceiling by Aug. 2. That's all there is to it.” Zandi warned that failure to do so could create “another severe recession” in “U.S. and global econom[ies].” From The Washington Post:

The Obama administration and Congress must raise the federal debt ceiling by Aug 2. That is all there is to it. In a post-default world, financial markets would unravel and the U.S. and global economy would enter another severe recession. The nation's already daunting fiscal problems would spiral out of control as tax revenue plunged and demand surged for unemployment insurance, food stamps, Medicaid and other programs supporting vulnerable Americans.

Yes, it would be wonderful if politicians could agree to rein in future budget deficits as part of a debt-limit deal. But that isn't necessary right now. Simply raising the debt ceiling enough to last through next year's elections would appease global investors and sustain the economic recovery. The 2012 vote will be a referendum on how to address our fiscal problems: The winner sets the agenda, and tough decisions can be made after the next president and Congress take office.

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Defaulting on the nation's debt would be cataclysmic. The U.S. Treasury's Aaa rating is the one constant in the world's financial system. When times are bad anywhere on the planet, global investors flock to Treasury bonds because they know they will get their money back. This “flight to quality” has pushed U.S. interest rates to near-record lows and has been vital to keeping our economy afloat. Yet this benefit was earned over more than two centuries by adhering to the bedrock principle that the United States always pays its bills on time. One misstep, and the government would have to pay higher interest rates for years, perhaps for generations. [The Washington Post, 7/15/11]

Gross: “The Debt Ceiling Must Be Raised And Not Be Held Hostage By Budget Negotiations.” In a Washington Post op-ed, Bill Gross, founder of the investment firm Pimco, warned that "[t]he debt ceiling must be raised and not be held hostage by budget negotiations." From The Washington Post:

To raise or not to raise the debt ceiling; that is the question: Whether 'tis nobler to suffer the slump and arrows of default today or in some distant future. Oh, bards of Washington, give us your answer.

This Shakespearean financial dilemma hangs in the balance between now and a somewhat theoretical Aug, 2, but I can tell you what an unbiased investment manager thinks: Don't mess with the debt ceiling. Raise it unencumbered if necessary. I say unbiased because my credentials have become very public over the past several months. Pimco owns very few Treasury securities, and its clients would theoretically benefit if yields rose on an under-owned asset class that was technically in default. But default would still be a huge negative for the U.S. and global financial markets, introducing fear and unnecessary volatility into the economy and global trade. The market situation might resemble what happened after Lehman Brothers collapsed in 2008.

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The answer to our modern-day Hamlet's question then, is that there should be no question at all. The debt ceiling must be raised and not be held hostage by budget negotiations. Don't mess with the debt ceiling, Washington. Bond and currency vigilantes will make you pay. [The Washington Post, 7/13/11]

Politico: U.S. Going Into Default Is “An Unthinkable Idea To Many Economists And Market Participants.” From Politico:

Republicans are growing increasingly concerned about the impact a bruising fight over raising the nation's $14.29 trillion debt ceiling could have on U.S. financial markets.

House Speaker John Boehner (R-Ohio) has had conversations with top Wall Street executives, asking how close Congress could push to the debt limit deadline without sending interests rates soaring and causing stock prices to go lower, people familiar with the matter said. Boehner spokesman Michael Steel said Tuesday night that he was not aware of any such conversations.

Treasury Secretary Timothy Geithner has warned Congress that without new borrowing authority, the federal government could hit the statutory debt limit by May 16.

Treasury could then implement emergency measures to continuing making interest payments on existing debut until around July 8. After that, the U.S. risks going into default, an unthinkable idea to many economists and market participants who say such an event could drive scores of large banks into failure, send interest rates skyrocketing as foreign investors abandon U.S. securities and crush the already slow-going economic recovery. [Politico, 4/13/11]

MSNBC: If Default Causes Interest Rates To “Rise Too Far, Too Fast, The U.S. Economy Could Face The Risk Of Another Recession.” From an April 11 article on MSNBC's website:

Washington is gearing up for a battle over how many trillions the federal government can borrow to pay its bills, and it's shaping up to be an even bigger brawl than the one just resolved over funding the government for the next six months.

While investors viewed last week's budget brinksmanship as a minor event, they are beginning to grow concerned that many lawmakers and ordinary Americans, [sic] fail to grasp the implications of even suggesting the United States would default on its debt obligations.

What is a political football to Congress could end up flattening the economy and hurting consumers by lowering the nation's pristine credit rating and sending interest rates sharply higher.

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So far, bond market investors apparently are not very worried; the United States has never defaulted on its debt and many have long thought a default unimaginable. On Monday, amid the rancorous aftermath of the budget battle that nearly shut down the government, bond prices were flat.

But some investors are betting that bond prices are headed lower. As the Federal Reserve wraps up a $600 billion round of bond buying designed to keep interest rates low, many investors are wondering what will replace that program when it expires in June. On Monday, the giant investment fund PIMCO, which recently dumped its holdings of U.S. Treasury securities, disclosed that it has gone even further and is now selling U.S. debt short -- a bet that bond prices have further to fall.

Falling bond prices hurt more than the investors who hold them. As prices fall, interest rates rise. If they rise too far, too fast, the U.S. economy could face the risk of another recession. Without borrowing authority, the government would be powerless to pay all its bills, much less assemble another stimulus package to revive the economy. [MSNBC.com, 4/11/11]

Ex-Treasury Official: “This Would Make the Lehman Brothers Bankruptcy Look Like A Walk In A Park ... They're Really Playing With Fire.” From The Huffington Post:

If Congress doesn't raise the $14.3 trillion debt limit by mid-May, the U.S. government will have to resort to emergency measures to avoid default. One missed payment, which could happen as soon as July if the ceiling is not raised, would likely set off a widespread global panic, causing borrowing costs to skyrocket and severely crippling the nation's economy.

But Republican lawmakers have said they will use the debt limit as a means of enforcing fiscal austerity, insisting they won't raise it without winning concessions from Democrats.

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Meanwhile, Jim Millstein, the former restructuring officer at Treasury, who helped reorganize AIG, outlined how disastrous the consequences of default would likely be. Speaking on CNBC on Tuesday, he said that a Treasury default would affect investors of all sorts, and he criticized those who downplay the consequences.

“This would make the Lehman Brothers bankruptcy look like a walk in a park on a sunny day,” he told CNBC's David Faber. “They're really playing with fire.” [The Huffington Post, 4/13/11]

Media Conservatives Have Routinely Downplayed Debt Ceiling Fears Or Outright Called For Government Default

Napolitano: “If I Were In The Congress, I Would Encourage Everybody To Vote Against Raising The Debt Ceiling.” On the April 11 edition of his Fox Business show, Freedom Watch, host Andrew Napolitano interviewed Rep. David Schweikert (R-AZ). During the interview, Napolitano spoke repeatedly about the debt limit and at one point said, “If I were in the Congress, I would encourage everybody to vote against raising the debt ceiling.” [Fox Business, Freedom Watch, 4/11/11, via Media Matters]

• Napolitano Has Repeatedly Spoken Against Raising The Debt Limit. Napolitano has frequently used his Fox Business show as well as guest host positions on Fox News to speak against raising the debt limit. As a guest host on the March 10 edition of Fox News' Glenn Beck, Napolitano urged Rep. Jason Chaffetz (R-UT) and Sen. Jeff Sessions (R-AL) to vote against the debt limit. During the January 4 edition of Freedom Watch, Napolitano said, “It's an easy one for me -- the debt ceiling should not be raised.” [Fox News, Glenn Beck, 3/10/11, via Media Matters; Fox Business, Freedom Watch, 1/4/11, via Media Matters]

Hannity: “I Would Not Vote To Raise The Debt Ceiling.” During a panel discussion on his April 12 show, Sean Hannity said, “If I was in Congress, I would not vote to raise the debt ceiling.” [Fox News, Hannity, 4/12/11, via Nexis]

Bolling: “I Say Let Them Default.” On the April 13 edition of Fox News' Fox & Friends, guest host Eric Bolling told Fox Business host Stuart Varney, “I say let them default. ... What's going to happen?” [Fox News, Fox & Friends, 4/13/11, via Media Matters]

Limbaugh: “We Do Not Need To Raise The Debt Ceiling. There Is No Crisis.” During the June 29 edition of his radio show, Rush Limbaugh stated:

LIMBAUGH: Truth is we would only default if we don't service our debt. The cost of servicing the debt is 6 percent of the budget, and we have revenue coming in to do that. We do not need to raise the debt ceiling. There is no crisis. There is no Armageddon. This is stimulus all over again. This is TARP all over again. This is the same lie repeated over and over again. The same attempt to make you think your country is coming to a screeching halt and is ending unless the debt ceiling is raised. [Premiere Radio Networks, The Rush Limbaugh Show, 6/29/11, via Media Matters]

Dobbs Calls Debt Ceiling Deadline A “False Date” And “Pure Fiction.” On his July 11 Fox Business show, host Lou Dobbs called the August 2 deadline for raising the debt limit a “false date” and “pure fiction.” 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.” [Fox Business, Lou Dobbs Tonight, 7/11/11, via Media Matters]

Hannity: Democrats' “Doomsday Rhetoric Would Have You Believe” That If The Ceiling Deadline Passes, The “Economy Would Crumble.” On the July 11 edition of his Fox News show, Hannity said: “As the deficit reduction talks continue in Washington, Democrats have been ramping up their efforts to scare the American people into supporting this deal. Now, the left's doomsday rhetoric would have you believe that if Congress does not vote to raise the debt limit by August the 2nd, the American economy would crumble.” [Fox News, Hannity, 7/11/11, via Media Matters]

Carlson: “Some Republicans” Are Asking Whether Debt Ceiling Deadline Is A “Democratic Ploy.” On the July 12 edition of Fox News' Fox & Friends, co-host Gretchen Carlson claimed that “some Republicans are saying that August 2 deadline, as I alluded to at the top of the show -- is that a Democratic ploy, or is that a hard and fast date now? Remember, back in April that was the first deadline date, and everyone kind of pooh-poohed it, and before you knew it, in the middle of that horrible earthquake tsunami in Japan, the Treasury secretary moved it.” [Fox News, Fox & Friends, 7/12/11 via Media Matters]

Kuhner: “The Sky Will Not Fall If An Agreement Is Not Reached By Aug. 2.” In his July 14 Washington Times column, Jeffrey Kuhner claimed "[t]he sky will not fall if an agreement is not reached by Aug. 2" and accused Obama of engaging in “shameless demagoguery.” From Kuhner's column:

For weeks, the administration has argued that unless the government's borrowing authority is lifted, Uncle Sam will default after Aug. 2, leading to economic turmoil -- and maybe fiscal collapse. Mr. Obama even has played the Grandma card, threatening seniors with not receiving their Social Security benefits.

“I cannot guarantee that those checks go out on Aug. 3 if we haven't resolved this issue,” he told CBS News. “Because there may simply not be the money in the coffers to do it.”

This is shameless demagoguery. The president knows full well that Washington will continue to take in more than enough to pay easily for Social Security as well as other basic government services -- including the financing of our debt. The sky will not fall if an agreement is not reached by Aug. 2. At worst, there may be a partial government shutdown, but that would take several weeks. Hence, the GOP - and the nation - should not be bull-rushed into accepting any deal. [The Washington Times, 7/14/11]

Beck: “There Is No Default. Default Is A Red Herring.” During the July 15 edition of his radio show, Glenn Beck stated:

BECK: From what I understand, there is no such thing as a default. We're not going to say -- again, and this is something that I am not for. I am not for, you know, not raising the debt ceiling, but I'm also not for raising it. Both scenarios -- we're in lose-lose territory now. However, I would consider raising it a smidge if, and only if, there were rock solid, in writing, no loopholes, massive cuts. Massive cuts. Then I'd be for it.

If we default it's like you. You can't make your payment. At the end of the month you haven't brought in enough income, and so you can't make all of your payments. Do you default on everything? No, of course not. You default on the things, or you don't pay the things, that are the least impactful to your credit rating, your life. You still make your mortgage payment or you make your car payment, but you're -- maybe you're not doing a credit card payment. Or you're not going to the movies and everything else. You're not doing some things that you really want to do.

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There is no default. Default is a red herring. You do not want to default and I believe this White House will push us into default. They will do -- they'll do whatever they have to do to default. They want a default. I really believe it. They want a default. [Premiere Radio Networks, The Glenn Beck Program, 7/15/11, via Media Matters]