Heading Toward a Catastrophic Debt Default
A brain-dead party without policies would rather burn down the world than govern
Too many Republicans in Congress are economic illiterates. They don’t understand the basics of global finance, they don’t understand the role that confidence plays in markets, they don’t understand interest rates. Hell, some of these people don’t even understand the difference between the debt and the deficit.
Unfortunately, consumed by the arrogance of ignorance, The Republican Party once again is proclaiming it is prepared to play the role of economic terrorists by refusing to raise the debt ceiling, shrugging about potential default, again sticking a gun to the head of the United States so that they can preen on Fox News. To avoid destruction, they demand the Democrats must agree to draconian budget cuts that the GOP can’t push through on its own - and never tries to do when they have control of Congress and the White House.
When the Democrats refuse to negotiate with terrorists, Fox and the conservative media bubble will once again blame the party of responsibility for failing to give in, and the Republicans will flaunt around some more. The Treasury has some ways to delay default through delaying some intra-governmental payments, but when that runs out, we will be unable to make our interest payments to the buyers of our debt - a default. This game of chicken can only be played out so many times until there is a catastrophe, following what is known as “an accidental default” when both sides hold out just a little bit too long to allow for the necessary mechanisms of interest payments to kick into place in time. It feels like this might be the time that happens - and there is even the chance that the members of the GOP asylum push us into an intentional default.
For most sane Americans who understand the consequences of a debt default, the idea that the GOP would push America over the cliff is dismissed as too ridiculous, too over-the-top to even be considered a possibility. But how many of us could have imagined that they would become a party that spins ever-more-fantastical tales to deny they ever could lose an election? Or who would directly attack democracy? Or who have powerful members that believe in vast conspiracies involving a deep state, child-eating democrats, and Jewish space lasers? Or who would fight to prevent the person who won the presidency from becoming president? Or who would instigate a coup? Or who would blame the coup on imaginary fiends? Or who would refuse to honor or even speak with the police officers who saved their lives? With the party having descended into a freak show of lunatics, nothing is off the table, including default.
Few of us need to understand what it means for the United States to default on its debt, so I will lay out the realities. Remember the 2008 economic collapse? A comparative trifle. The Great Depression? Closer, with the difference that it will take far longer for us to recover. Businesses worldwide will close by the millions, financial institutions will fail, all markets - stock, bond, currency, agricultural futures, everything - will collapse. Billionaires and millionaires will finally learn there are worse things than higher taxes. China will be empowered to further destroy the United States economically. Generation Z, their children, and their grandchildren will grow up in a world that is economically far worse than they can imagine - and because of the greed and irresponsibility of boomers and Gen X, they’ve already got it bad.
This is what the Republicans are risking. And for what? More television time? Our world is in the hand of high school dropouts like Lauren Boebert and professional boobs like Matt Gaetz. The only thing - the only thing - they will care about is assigning the blame for the consequences of their actions. And as always, the Republicans will accept none, blame everyone else, and ignore the damage that their idiocy has wrought.
Now that I have your attention, let’s walk through what’s happening. The reason I am so concerned that this will be the time the Republicans will force a default is because of the clown show we just witnessed in the party’s inability to elect a Speaker until the 15th vote, as political arsonists with no understanding of consequences enjoyed their time of feeling important. These are the people, just like the Joker, who sometimes want nothing more than to see the world burn. And Kevin McCarthy has already proven himself the weakest Speaker of the House in history. I have no doubt that, to keep his gavel, he’ll join the world burners. They have no real agenda - if they did, they would spend some time learning about what they pretend they are demanding. But burning it all down is easier.
The reasons we are in this mess to begin with is because of Republican economic policy dating back decades. No doubt, taxes should be cut sometimes, just like spending should be cut sometimes. But there are other economic circumstances where each must go up. The GOP has ignored that fiscal reality, just cutting, cutting, cutting for 40 years, forcing down tax revenue while continuing to spend with abandon. This is why the difference between tax revenue and expenditures - the deficit - always explodes under Republican presidents, while shrinking under Democrats. And to cover those deficits, the government must borrow by issuing debt, which requires huge sums of interest paid every month.
Let’s back up my last point. Under Reagan, the deficit went from a quite manageable $79 billion (during a recession, when deficits are supposed to grow) to $152 billion (during a strong economy, when deficits are supposed to shrink.) Then George H.W. Bush almost doubled that, pushing the deficit to $255 billion in his in office. Clinton cut the deficit so far that he left office with a $128 billion surplus. George W. Bush saw that money and, rather than paying down our debt, decided to make it worse by throwing around tax cuts again all while spending with abandon: He took a huge surplus and turned it into $1.4 trillion deficit. Responsibility for cutting that back fell to Obama, but because taxes were already cut and spending already underway, it took time - even so, he managed a record cut off the deficit of $600 billion, with much of that taking place during the economic catastrophe Bush had left behind.
Then there was Trump. He inherited a booming economy, with deficits on the downswing. That was the time to raise taxes - when the economy is chugging along well. But in what was a first in the history of the world, a country with a strong economy and massive debt adopted a huge tax cut. The chance of bringing down the deficit was gone - all of Obama’s success was thrown aside and the deficit exploded by 50% before COVID came along. In 2019, in a strong economy, Trump and his Republican dancing mice drove up the deficit to $1 trillion. But again, that was when things were good - the Republicans basically sprayed a fire extinguisher around a house that was not burning, assuming there would never be flames. But then COVID, and the deficit tripled to $3.1 trillion.
This is what is so frustrating about the economic larceny of the Republican Party - they drive up the deficits to incomprehensible amounts, requiring the government to issue tons of debt. Then Democrats are required to fix everything, and the GOP pretends their political opponents are responsible for the mess. So, the Republicans advance this “the need to increase the debt ceiling is caused by the Democrats” lie every time a Democrat is in the White House, make extortionist demands, threatening to destroy the world by setting off the debt bomb that they planted themselves.
The consequence of the GOP’s threatened default would be beyond catastrophic. The United States has a stellar credit history because it has never missed or even delayed an interest payment to investors in our debt. Vanguard, the multi-trillion-dollar mutual fund, is already desperately trying to educate its clients of the incalculable harm. Global faith in the United States as a reliable borrower would disappear overnight. Vanguard, the multi-trillion-dollar mutual fund, is already desperately trying to educate its clients that this will not be an event we can reverse. “The damage to U.S. credibility would be irreversible,” it wrote in a recent report to investors. “Even if a default were only technical—if payments other than interest on debt were delayed—the United States could no longer fully reap the benefits bestowed on the most reliable debtors.”
It wouldn’t take months of delays to destroy what America has built. Or weeks. Or even a day. If interest payments are not made at the exact hour as expected, our debt will be trashed. And it will never recover.
As investors flee the now-unreliable American debt, shifting their investments into safe assets like gold, interest rates will explode. The only way for an institution - whether a company or a country - to attract investors when its creditworthiness is in question is by offering to pay far more in interest, giving the buyers of the debt a bigger return for assuming the increased risk. The higher interest rates - which would be matched by other countries now in competition to find buyer for their debt - would hit businesses and individuals around the world, many of whom would find their ability to qualify for loans to be gone.
Trading models from investment institutions around the world are built on an assumption of stability in our federal Treasury bonds and currency, as well as the expectation that there will be no sudden, unexpected interest rate increase. All of that is out the window with a one-hour - or maybe even 5 minute - default. Markets worldwide will collapse, one that grows into an escalating cycle as terrified investors dump more of their holdings, setting off more automatic sales by investment firms using their trading models, and on and on. Margin calls will go out, and investors unable to meet those demands to pay off credit will see their holdings sold involuntarily.
Banks were - stupidly - allowed to get into the investment business in the 1990s, a nonsensical decision that escalated the impact of the 2008 collapse, so as markets worldwide fall, so will those institutions. Runs on banks will be likely. Gen Z - already saddled with immense student loans - will be the first to be fired from struggling businesses, making it impossible for them to pay the interest on their school debt. And of course, since wealthy investors own that debt, too, they will start getting out. At least, amid the wreckage, there won’t be many people worrying about defaults on student loans.
None of this even begins to touch the impact on essentially wiping out government functioning. Remember, we already have a trillion-dollar deficit, which must be financed with debt. Suddenly, our budget will have to be cut by an annual amount of one trillion dollars. In an economic disaster, raising taxes will be impossible unless we want to speed up the death spiral. The real consequences: We will still owe the interest on the debt, which will be growing exponentially as our interest rates climb and climb. So, unless we decide to become a third world country, that financial obligation will continue to be paid, even though it was paid late.
That means, even assuming nothing changed in our interest obligations - a ridiculous assumption - we would still be forced to spend $513 billion. If we got rid of everything categorized as welfare - cash payments, food stamps, unemployment benefits, housing - we would only save $493 billion. If we got rid of all law enforcement and shut down all the prisons, that would save another $364 billion. But in truth, our deficit will be growing and growing with no way to borrow without taxpayers picking up the tab for much higher government interest payments, which means the cutting would have to continue with abandon. The military, healthcare, education, transportation would all be on the chopping block. Even the National Weather Service would be shut down.
Now, the Republicans real targets for their recklessness are Social Security and Medicare because, well, wealthy people have privately paid retirements through 401ks and without Medicare, private insurance companies can rush in to make up the difference. Although, not under this scenario: Health insurance companies don’t leave premiums lying around to pay off medical bills for policyholders. No, they are invested in the markets, including federal debt. And with their capital reserves cratering, they won’t have the wherewithal to expand.
What I’ve written, though, is a fantasy. There are plenty of laws and Supreme Court rulings already in place that designate huge portions of the budget as non-discretionary, meaning they must be paid no matter what. Or do they? Under law, yes. Under default, who knows? The litigation will be endless. So, Congress will have to rush through and engage in some of the most complex lawmaking in history, as they figure out ways to end the non-discretionary requirements. About 63% of the budget is mandatory spending. An additional 8% is interest on the debt.
That leaves, in the real world, just 30% of the budget that simply couldn’t be paid for regardless of whether Congress took any action. In 2021, discretionary spending was $1.6 trillion, of which $742 billion was for national defense. That leaves $895 billion to cut - basically, the entire federal government - before another $100 billion or so must come out of the military.
And let’s talk about that $895 billion. Just because of the default, tens of millions of people - families with children, retirees, veterans—would suddenly lose the federal payments that help them stay afloat. Veterans’ hospitals would close. Food banks would be overwhelmed. Even just listening to the radio or watching television would be put at risk, because the Federal Communications Commission would shut. Oh, as for who would be dealing with the market collapse? Pretty much no one; all the financial regulators, such as the Securities and Exchange Commission, would be shuttered.
If you think this is all ridiculous, look back to 2011, when the GOP pushed us very close to the edge in a manufactured debt ceiling crisis. Even without a default, just the mere threat caused market risks to increase persistently. Interest rates climbed to keep investors from dumping our bonds out of fear of political incompetence. Mortgage rates rose by close to a percentage point, a move that lasted two months after the crisis ended because global investors still didn’t trust us. Rates for mortgages, personal loans, business loans and loans for cars and financial products all climbed. A family that took out a $250,000 fixed rate, 30-year mortgage during that nonsensical performance is still shelling out more than $1,000 more per year in interest payments than they otherwise would have. And again, this was without a default, with Congress acting before the Treasury ran out of cash.
The difference between 2011 and now is that the number of crazy Republicans was fewer, the base had not been taken over by numbskulls, and the Speaker was not a spineless wimp who had surrendered power just so he could hold the gavel. I believe the GOP was smarter back then, but they were still awfully stupid. Time and again, Senators and Congressmen blew off the warnings they were getting from the Executive Branch, businesses, financial firms, foreign governments. No, they knew best.
Among the classic statements was one from Senator Richard Burr, who said that the situation would be no different than the occasional government shutdown forced by Republicans, which would save $24 billion a month (Far less than the interest on the debt that would be owed.) Senator Rand Paul shook his finger at financial experts, saying they were trying to “scare the markets.” No, this former eye doctor said, this would simply force the United States to balance the budget - although he was too stupid to understand that doing so at the speed of light would destroy the global economy. But not what he thought: “So if you put it in those terms, all these scary terms of, ‘Oh my goodness, the world’s going to end’ — if we balance the budget, the world’s going to end?”
The best may have been from Congressman Ted Yoho, who said a default would be no different than if the veterinary practice he owned was unable to pay its bills one month. “When you go through that, and you address the problem and you address your creditors and say, ‘Listen, we’re going to pay you. We’re just not going to pay you today, but we’re going to pay you with interest, and we will pay everybody that’s due money’ — if you did that, the world would say America is finally addressing their problem.”
But let’s go to that one last point: The purpose of the extortion. This whole “cut the budget” demand is absurd, and once again, shows that the GOP simply does not understand the basics of America’s fiscal process. The expected budget deficit for 2023 is $1.0 trillion, and it is $1.1 trillion for 2024 (largely a result of COVID.) These shortfalls can’t be closed or even narrowed much through cuts or tax hikes. Everything is already in place: the spending and taxes are set in stone based on laws that were passed in previous years. “Changes to those laws can make a difference in five or ten years, but not immediately,” said James C. Capretta, Senior Fellow and Milton Friedman Chair at AEI, the conservative think tank. “The debt limit is all but irrelevant to those short-term spending figures.”
This conservative economist from a conservative think tank sums it all up quite succinctly, condemning “Republicans’ irresponsibility in playing political games with the debt ceiling.”
But to understand the catastrophic risks we face requires, you know, knowledge and stuff. It’s much harder to learn the economic consequences than it is to make stupid analogies about vet clinics, or to believe that we can just shut down the government for a while to solve the problem, or that a near-overnight balancing of the budget, sucking a trillion dollars out of the global economy, would not lead to a global depression. Yah, understanding that is hard. And talking about it sure won’t get Republicans on Fox.
Maybe I’m wrong. Maybe it’s all an act. Maybe the GOP isn’t as dumb and crazy as it seems. But…15 votes to get a speaker? Refusing to acknowledge a coup was a bad thing? I put nothing past them. All that is certain is that, if they wreck the world, they’ll spend night and day blaming the Democrats for what their own irresponsibility.
Heading Toward a Catastrophic Debt Default
I have no doubt the GOP will try to break it all and the turn around and give massive tax cuts to the wealthy who are their donor class. We should all be very worried.
Great read Kurt.