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'Confusion to the French'
October 9, 2013 - Harry Eagar
During the Napoleonic wars, English sailors used to toast: "Confusion to the French." A fine sentiment for war between nations but not so fine inside a democracy.
At MSNBC, Steve Benen asks:
"Let's say the default deniers are right. They're not, but let's just say they are for the sake of conversation, and the consequences of the United States ignoring its financial obligations would be minor. If that's true, why should President Obama and congressional Democrats pay a steep ransom to let the hostage go?"
That supposes there are default deniers in the Republican Party, which on its face seems unlikely. Isn't the GOP supposed to be the party of businessmen, the ones who have "met a payroll," who worry about balancing income and outgo?
The MSM (mainstream media), however, are reporting that there are GOP default deniers, and that they are distributed pretty widely, too:
"A surprisingly broad section of the Republican Party is convinced that a threat once taken as economic fact may not exist — or at least may not be so serious. Some question the Treasury’s drop-dead deadline of Oct. 17. Some government services might have to be curtailed, they concede. 'But I think the real date, candidly, the date that’s highly problematic for our nation, is Nov. 1,' said Senator Bob Corker, Republican of Tennessee. "Others say there is no deadline at all — that daily tax receipts would be more than enough to pay off Treasury bonds as they come due."
Where is Bob Taft when we need him?
There is a deep confusion in the Republican Party. Obamacare is bad because it will bankrupt the country, which would mean it couldn't pay its bills sometime in the future; but not paying its bills next month is nothing to be concerned about.
It seems obvious that the default of the world's biggest creditor would be a bad thing, just as it used to seem obvious (back in Taft's heyday, around 1950) that a nation could not run deficits (either fiscal or current account) indefinitely.
And the United States has been running both kinds regularly.
Sometimes, it is not possible for this blog to restate the obvious, because no one has ever stated it before. (Well, except in earlier posts at RtO.) It turns out that no matter how obvious it seems that a nation cannot run deficits forever, it isn't true.
We may look to England or Holland, the two countries with the longest histories of modern government finance. Let's take England.
First, current account. England ran a current account deficit with the eastern Baltic for 500 years, because it needed the timber, tar, pitch, hemp and herring of the Baltic for its wooden navy and merchant navy, up until the time that iron ships and steam engines began to reduce the necessity of obtaining "naval stores."
At that time, around 1850, England was the richest country in the world (with Holland right behind), and the Baltic area was very poor -- Sweden was the poorest country in Europe, worse off even than Greece.
Next, fiscal deficits. England has run a steady deficit (papered over with "Consols," the model for our "Treasuries") since 1690. Nevertheless, it is among the world's most prosperous places (despite no longer having colonies to rob) and was strong enough financially even to absorb the failure of all its big private banks in 2008.
So, the bedrock economic assumption of the old, "fiscally responsible" Republican Party is a myth.
What about defaults? Leftists have been pretty insoucient about deficits but never about defaults. They reacted to warnings from the right by saying they could raise taxes. Tax-and-spend liberals. And they were right. Even with the Incurious George tidal wave of deficit spending, there was never any difficulty in "meeting payroll." (To a degree, this was accomplished not by taxation but by inflation. Leftists do not mind moderate inflation; it appears modern economies cannot function without some inflation; it is deflation that cannot be sustained.)
England hasn't defaulted since the time of Richard the Lion Heart. Not even in the grim days after World War II, when war debts burdened the fisc so cruelly that Britons couldn't afford to import eggs (though they were able to start up their magnificent National Health Service and dazzle the world with breakthroughs in government-funded medicine and astronomy).
Today's left and centrist certainty that a government default would be a catastrophe is not so obvious. Argentina has defaulted every few years since 1890, and nobody cares. Argentina has not even had difficulty raising new loans. This demonstrates that there are plenty of people with more money than brains and they work in banks. (Today, trillion-dollar deficits are routine; but in the '70s, when a trillion was real money, banks lent and lost a trillion dollars to what it was then trendy to call "the South," a lot of it in Argentina (and in pre-socialist Chile, I threw that in to irritate all the people who deplore the fiscal policies of Allende but admire those of Pinochet).
Defaults certainly can cause catastrophes. And not only defaults by governments. It was the default of Jay Cooke & Co. that started the very bad Panic of 1873; and the default of the Credit Anstalt (the biggest bank in a very small country) that is conventionally blamed for igniting the Great Depression (unfairly, but that is a story for another day).
But even biggish defaults can be absorbed, in some cases. Russia, for example.
The reason some defaults don't matter is that they are small, or the creditors are not highly leveraged or governments and international institutions step in (thank you, FDR!).
But there's never been a default by the biggest creditor, which is, moreover the creator of the world's reserve currency. So, yeah, the leftists and the centrists are correct, it is obvious that a US default would be a catastrophe.
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