Could The US Default Due To A Complexity Catastrophe?

Could The US Default Due To A Complexity Catastrophe?

Definitely.

Front  page story in today’s Washington Post by Damien Paletta reports that “Treasury chief hurtles toward fiasco,” the fiasco being a failure to raise the US debt ceiling in time to avoid a default.  Trump has declared that Sec Mnuchin is responsible for this matter, which he should be, but somehow has not made a sufficiently definitive statement to keep his former Freedom Caucus big cheese OMB director, Mulvaney, from opining that Mnuchin is an out of it New York finance guy (Goldman Sachs even) who is not well connected in Washington, and he, Mulvaney, thinks that the dumb games he played as a Congressman threatening to default are appropriate for  somebody in charge of all this.

The deadline is approaching, although it might be somewhere between early September and mid-October, but at some point if the debt ceiling is not raised, the US will seriously default, something we have not seen, and I doubt that any deal Mulvaney might propose would get through this dysfunctional Congress.  And the article reports that while Mnuchin wants a “clean raise” before  the Congress really shuts down in August, well, according to WaPo, he does not have the “stature in Washington to press through a vote on a measure” supported by all previous Treasury Secretaries.  Indeed, the article is right that he may not be able to do so, and the US may well seriously default on its debt for the first time, something the gang that Mulvaney has belonged to has declared is no big deal. We may be about to find out if that is correct or not.

In thinking about this I have come to realize that part of the problem is that this is a very complicated issue, one that few people understand, and that this lack of understanding is self-propagating: that few understand it means that there are few who can teach those who do not understand it what it is about. The upshot is that an incredibly miniscule proportion of the US population has any remote idea what all this  is about, so are not  putting any pressure on these loud mouthed Congresspeople to behave resonably. If in fact there is a default and it leads to a global financial crisis that puts the world economy back into a serious recession, well, who could have known that, and who will be to blame?

So let me get personal on how severe the lack of knowledge about this is, which is exacerbated by the fact that few media talk about it at all, or if they do so, it is with massive  ignorance.  So, over the Fourth of July weekend I was with extended family. A niece is a prominent journalist in Washington. Her brother, a nephew, was the top performer in high school on a statewide math test in California.  He is  now a wealthy high level computer game programmer in Silicon Valley.  They asked me if there was a threat of recession, as some other family members were claiming, and I said the most serious near term threat for  such would be a default by the US  failing to raise its debt ceiling, leading to a global financial  crisis.  It became clear that both of these very smart and well-informed people knew nearly nothing about this  issue. If they do not, well, probably less than 1% of the US population does, which makes it all the more likely that full-of-themselves ignorami in the House  Freedom Caucus will be all too happy to put Secy Mnuchin in his place when he comes calling for a “clean debt ceiling increase.”

Why is this so hard?  Well, one thing is that few  Americans know, and neither my very well-informed and super smart relatives did, that the US is the only nation in the world to have such a stupid thing as a debt ceiling.  The vast majority of professional economists think it should be eliminated.  Congress effectively decides on this when it passes a budget, and this is just an extra nonsensical conundrum.  It is  a historical arttfact from a century ago, when right after  the 1913 passage of the amendment allowing the personal income tax, the US went into WW I, which was not supported by many in the Congress, the Congress imposed this idiotic debt ceiling to retain control over the budget  during wartime. When the war ended, it was not repealed, and we have been stuck with it since, with the vast majority of  both the Congress and the public thinking it is something sacred and important and stuck in marble, when in fact it was an unfortunate mistake that should have been repealed a century ago.

Regarding what will happen if we default, I  do not know, as that could follow many paths. But a serious catastrophe cannot be ruled out, and if  it  comes to pass it may be at least partly due to how complicated this whole thing has become, with neither the public nor most of  the Congress at all aware of what is involved here.  So, we could indeed end up with a complexity catastrophe, and if we do, let us hope that it is not too severe.

Barkley Rosser

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