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Lewis Morris / October 7, 2021

Would the U.S. Really Default?

Debate over the debt ceiling inevitably contains dire warnings about consequences.

When it comes to economics, there is rarely such a thing as a definitive answer, no matter how pointed and direct the question being asked. It’s the inspiration for the oft-repeated joke attributed to Harry Truman, “All my economists say ‘on one hand…’, then ‘but on the other hand….’ Give me a one-handed economist!‘”

Here’s a prime example: Will the United States default on its nearly $29 trillion debt? Numerous economists, investors, and finance experts have weighed in on the issue, and the cumulative answer is a definite maybe.

It would be great to slice through all the politics and hyperbole like Alexander slicing the Gordian Knot, but there’s a larger picture that should be considered in looking at the current manufactured debt crisis. And leftists are blowing a lot of smoke to obscure the situation and create for themselves a ticket to use all our taxpayer money and then some to remake America as a worker’s paradise.

Treasury Secretary Janet Yellen stated unequivocally to the House Financial Services Committee last week that not raising the debt ceiling would mean a default on the U.S. debt, which then would cause “irreparable” damage to the economy, including a financial crisis and deep recession. Yellen warned that the obligation for paying out Social Security, as well as interest on government bonds and notes, would have to be met by the current money in the Treasury. “We won’t be able to pay all the government’s bills.”

All these items, plus the interest on the debt itself — which accumulates rather rapidly when you’re in the TRILLIONS — are normally paid by borrowing more money and incurring more debt. In the real world, when this happens to families, they lose their cars or their home. Over-leveraged businesses go bust. But not the government.

It’s nothing short of a farce that Congress can merely raise the debt ceiling whenever it’s reached, resetting it at an arbitrary number with no consequences. During the Trump administration, the debt was suspended altogether, then raised to a new limit reflecting what was spent during the suspension. That suspension lasted two years and ended in August. Barely three months later, Yellen started crying apocalypse to Congress and the country, looking for another debt hike.

Some economists suggest that the government can’t default if it issues debt in its own currency. Billionaire investor Warren Buffet boldly proclaimed at last year’s Berkshire Hathaway annual shareholders meeting that the U.S. could never default. All the Treasury needs to do is print more money. Of course, Buffet adds a hook: “If you print bonds in your own currency, what happens to the currency will be the question.” This sounds a lot like runaway inflation, which would require its own series of measures to be mitigated.

Economic analysts at Moody’s Analytics and Barclays predict uncertainty in the financial markets if the U.S. defaults on its debt, but many are unsure as to the extent. If the Treasury knows when it will run out of money — Yellen predicts October 18 — then there may be ways to mitigate disaster such as moving maturity dates on Treasury bonds. The government could also liquidate assets it holds in the private sector or sell some of its gold reserves and foreign currency holdings. But default? Not likely. A lot of entitlement programs will be cut, but Uncle Sam will be open for business.

What if we did away with the debt ceiling altogether? Yellen suggested as much. At that point, there would be no end to how much the government would spend. At least with the debt limit, the public gets to see that our elected officials are spendthrifts with our money and there is an opportunity to check the insanity. Voters also have the (rarely taken) option to get serious about electing representatives who pledge to be conservative on spending and hold them to it. Congress must be made to spend less, or this perpetual crisis cycle will continue until it no longer can.

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