Occasional reflections on Life, the World, and Mathematics


Some things that genuinely confuse me about the looming (again) threat that the US will default on its debts:

1) Why is it the Democrats’ problem? Why is it President Obama’s problem? Who is taking whom hostage? A debt default doesn’t particularly affect Democratic constituencies. I’d expect that Republican business interests would be more directly concerned. Why can’t President Obama threaten to veto a bill raising the debt ceiling unless the Republicans agree to attach an infrastructure stimulus bill and raise the minimum wage? Is it just that the president has the direct responsibility for coping with the financial shitstorm that would follow breeching the debt ceiling?

2) Why doesn’t the looming government shutdown obviate the default threat? I see political commentators making arguments that a government shutdown will purge some of the Republican bile, and so make a debt default less likely. And Matt Yglesias points out that some people seem to think (erroneously) that not raising the debt ceiling will save the government money. But a government shutdown clearly does save a lot of money. So, as long as that’s going on, presumably government outlays will not exceed its income. Maybe it’s a technical problem, preventing debt from being rolled over at all. [Update below]

3) Why is it such a big deal? I don’t mean, why is it a big deal? I mean, why is it such a big deal. The standard belief, as summarised here, is that the US breaching its debt ceiling will have long-term repercussions for financial markets, only the least important of which would be permanently raising the cost of US government borrowing. I have commented earlier about the peculiar faith the bankers have that past defaults are uniquely significant for predicting future defaults. Surely if I’m thinking of lending money to the US Treasury, the fact that two hundred Republican firebrands blatantly take no responsibility for US debt repayments and think that playing chicken with debt repayments is a great way to score ideological points should make me uneasy. The fact that they have already pushed it over the brink would marginally increase my unease, but the total effect would depend on how that exercise came out. Did they get a good warm feeling out of it, or was the outcome shocking and unpleasant, so that they would be very unlikely to choose this tactic again in the near future. If the latter, then I’d be more inclined to focus on the fundamental solvency of the US government, which is obviously very good.

Obviously, I’m not a banker, but I wonder if they’re being rational, in at least the house-of-mirrors sort of “the value of a bond is what people think people think people think people think … people think it’s worth” way. Of course, once you’ve iterated ad infinitum pretty much any answer can come out.

[Update 30-9-2013: By way of Andrew Sullivan comes a link to this explanation (from Zeke Miller at Time):

Steve Bell, the senior director of economic policy for the Bipartisan Policy Center, told TIME that a shutdown — of any length — wouldn’t alter the pressure on Congress to raise the nation’s borrowing limit.

“A shutdown would not affect the ‘X day’ by more than one day either way,” Bell said, using his office’s term for the deadline. “For the purposes of the debt limit, it’s going to be so negligible.”

Unlike the last government shutdowns, which came in December 1995 and January 1996, the current showdown comes at the start of a new fiscal year. October and November are important months for federal spending, with large mandatory expenditures.

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