Okay. It’s a simple hypothetical. Let us say that over the last ten years or so you bought a lot of stuff on credit – a new car every few years, a big house, yearly trips to Paris to do your Christmas shopping, or maybe you put your kids through college because you didn’t want them to start their adult lives saddled with massive student loan payments. It does matter which it was. You got what you wanted, or thought you needed, and promised to pay for it, slowly, over time, in small increments that were manageable for you and marginally acceptable to your creditor, as long as you also paid your creditor interest above and beyond the original amount, for the privilege of using their money for your ends. But now the payments have become unmanageable. You’re tapped out. You realize you cannot pay even the monthly minimums – and that only covers interest, not any of the principle amount – not that it matters all that much. After the basics each month there’s nothing left to service the debt, much less pay it down. And you’d be crazy to take out a loan to pay a bit on the other loans, to keep the wolf from the door. You don’t need another wolf dropping by later.
So you have a number of alternatives. You could seek to increase your income – take a second job (or third) or sell all the crap you can find in the garage and attic and basement on eBay, or anything else you can think of. You could buy lottery tickets or write the Great American Novel. Or you could hide – change your name and move out of town. Or you could try to renegotiate the payment schedules and amounts, pleading exigent circumstances – unforeseen things happened and you should be cut some slack here. But of course you have no leverage in such negotiations and can do little more than whine. Of course you could use the special offer checks that come in the mail each month. Use the balance transfer checks from this credit card company to pay off that other credit card company, back and forth – they have cool balance transfer offers. But that’s just temporarily moving debt around and does nothing to address the real problem. Finally, you could decide which bills to pay and which to let slide, juggling and alternating them, and hoping the credit rating agencies don’t notice. But they do notice. They practice universal default. Skip the Visa bill and the interest rate on your Discover Card might jump to thirty percent. No, it will jump to thirty percent. They all track these things. That’s how they manage risk. The credit rating agencies never sleep.
Of course you could default on your debt. You just don’t make the payments. That is, in effect, declaring bankruptcy. You will not borrow again for seven years, or if you do you’ll pay sky-high interest rates. After all, you’ve shown that you’re a deadbeat. You admitted it. Heck, you proclaimed it. And life will become much more difficult. But you just cannot pay, or will not. What are the creditors going to do, take back those December trips to Paris, or make your kid forget everything he or she learned in college and pretend those four years didn’t happen? Heck, you’ll be fine.
But it’s those credit rating agencies that are a big bother. You’re now the classic deadbeat. You might want to tell them all that you’re not – you’ve cut up all the credit cards, you’ve slashed spending to the bone, and although you’ll do nothing, ever, to increase your income, to raise revenue, you will now not ever spend an unnecessary penny, and in the future you’ll spend less than that. You’ve really put your fiscal house in order and shown that you are awesomely responsible. And of course they’ll love you for it, and point to you as the very model of economic and moral probity.
No they won’t. They’ll shrug and note that you are a useless deadbeat, not to be trusted – but a deadbeat that certainly talks a lot. Still, the Republicans are willing to give it a go. Over the last ten years or so they bought a whole lot of stuff on credit – two major wars, nearly free prescription medication for all seniors, and by law at full price from the major pharmaceutical companies, and of course two trillion in tax breaks for the very wealthy, also on credit. And under them the government agreed to pay for it, slowly, over time, in small increments that were manageable for us and marginally acceptable to our creditors.
But now the payments have become unmanageable unless we raise the debt ceiling, so we can sell some more treasury bonds and use the income from that sale to cover the current bills. We’ve been doing that for the last hundred years. But they say we should not do that, not now. It’s not responsible. And we should certainly not seek more revenue – any change in the tax code is unacceptable. Everyone pays enough already. Let America default on what it owes others. But we are not deadbeats! We are awesomely responsible and the very model of economic and moral probity. Everyone knows that. It’s all in the Paul Ryan plan to slash spending to the bone, and although we’ll do nothing, ever, to increase our income, to raise revenue, we will now not ever spend an unnecessary penny, and in the future you’ll spend less than that. We have our house in fiscal order, damn it. It’s all in the debt-reduction plan.
This is odd, as this is talking about two different things. The credit rating agencies, and our creditors, will be saying look here – you don’t pay your bills, and that won’t do. And the Republican plan is to shoot back with the ultimate devastating response – just look at this AWESOME debt-reduction plan! But why would they care?
What? But a few weeks ago, Senate Minority Leader Mitch McConnell said he’s looking for a debt-reduction plan that makes credit rating agencies happy – even if the rating agencies Republicans are so eager to impress are scared shitless of the Republicans’ approach to the debt ceiling. McConnell is an odd duck – “Rather than thinking of this as a crisis, I think of this as an opportunity to come together.” No one knew what he was talking about.
And the two of the biggest ratings agencies, including Standard & Poor’s, said they would downgrade the United States’ credit if the government missed even one debt-service payment – default on your payments and end up with a credit rating like Greece. A cool debt-reduction plan is nice and all that, but what does that have to do with anything? That’s an internal matter. Your creditors want to be paid. It’s that simple.
But it’s not. The Republicans control the House and can vote down raising the debt limit – so there will be no money to pay the incoming bills. And don’t mess with them. Agree to shut down most of the government – two or three trillion in immediate cuts, at least – and certainly agreed to end Medicare as it now exists – or they will pull the trigger. It will be default.
And now a third rating agency said the country’s rating would be at serious risk if Republicans push this game of chicken just a little more:
Moody’s Investors Service said Thursday there is a very small but rising risk of a short-lived default by the United States if the country’s debt limit is not increased in coming weeks.
In a statement, Moody’s said it would put the AAA U.S. credit rating on review for a possible downgrade if lawmakers in Washington do not make substantive progress in budget talks by the middle of July.
“Since the risk of continuing stalemate has grown, if progress in negotiations is not evident by the middle of July, such a rating action is likely,” Moody’s said.
And Steve Benen comments:
It’s worth appreciating exactly what Moody’s is saying here. The message isn’t that the United States would suffer after it missed a payment on its debt obligations; the message is that the United States would suffer well before this if it looks like the country might miss a payment on its debt obligations.
And he is amazed:
There’s a certain beauty to the Republicans’ clinical insanity: they’re eager to impress rating agencies, so they’re pursuing a strategy that would aggravate rating agencies. If you’re reading this and thinking – Wait, how could anyone in a position of power be that dumb? – then you and I are on the same page.
It comes down to this:
Literally all of the “Big Three” ratings agencies are now flashing a bright red light in the GOP’s direction, hoping cooler heads prevail.
House Speaker John Boehner (R-Ohio), oddly enough, seems to understand this, and told the White House yesterday he wants to work out a deal by the end of June, precisely to avoid making the markets nervous.
One right-wing lawmaker, Rep. Devin Nunes (R-Calif.), recently said, “By defaulting on the debt, in the short and long term, it could benefit us.” Not even Boehner believes such rampant stupidity.
As for the rating agencies, in April, when S&P issued a weak warning, Republicans freaked out and said it’s incumbent upon all federal officials to take these warnings seriously. Well, now all of the rating agencies are pleading with Washington not to default. Will the GOP listen?
The National Review disagrees and does a little mindreading, and they have figured out what Moody’s was thinking but not actually saying:
The White House will try to spin this as primarily a consequence of default fears resulting from Republican obstinacy in the debt-ceiling debate, but that is not the case: Moody’s expected the debt-ceiling debate to be an opportunity for producing a credible fiscal-reform program. That has not happened, meaning that the debt will probably keep piling up until after November 2012.
Yes, that’s what they meant. You just had to read between the lines, because they didn’t say it. But everyone knows….
This New York Times article by Jackie Holmes just reports what Moody’s said, that the immediate priority is to raise the debt ceiling:
Moody’s warning was two-pronged. First, it said, if Congress does not raise the $14.3 trillion debt in coming weeks, the nation’s credit rating could be lowered “due to the very small but rising risk of a short-lived default.” That would likely translate into higher interest rates at a time when the recovery is again slowing.
And second, Moody’s warned with an implicit slap at both parties, whether the United States keeps that triple-A rating “will depend on the outcome of negotiations on deficit reduction.”
Yeah, yeah – but what good is a newspaper that reports only what is said, not what is hidden, what is really meant? The Washington Post’s Jonathan Capehart suggests we start praying – because the real Rapture is upon us. The full faith and credit of the United States is being questioned for the first time in its history – “When that questioning turns to a lack of faith in this nation to pay its bills, pray.”
But Jake Tapper covers the back and forth on this:
The Obama administration said that the Moody’s threat backs its position.
Mary Miller, Assistant Secretary of the Treasury for Financial Markets, said in a statement that the move “simply underscores the need for Congress to move quickly to ensure that the US can meet all of its obligations, while continuing to work on a consensus approach towards long term fiscal balance.”
Republicans argued that the threat backed their position since much of the report focused on using this opportunity to get significant deficit reduction.
“This report reinforces the point Republicans have been making all year: an increase in the debt limit without major spending cuts will hurt our economy and destroy jobs,” said House Speaker John Boehner, R-Ohio, in a statement. “This report makes clear that if we let this opportunity pass without real deficit reduction, America’s financial standing will be at risk. A credible agreement means the spending cuts must exceed the debt limit increase. The White House needs to get serious right now about dealing with our deficit and debt.”
Nope. That’s not what Moody’s said. House Speaker John Boehner is just saying that they meant to say that, really they did – and so they kind of did. Boehner must have been a real pip in high school English, with that paper on how Hamlet was actually about the Vietnam War, because Shakespeare really meant it be, really he did.
And there was this:
“Of course, it’s dangerous,” a House Republican close to Boehner said of the politics of a government default. “But it’s dangerous for everybody, especially the president. At the end of the day, [Obama] will have to give in.”
“Who has egg on their face if there is a sovereign debt crisis, House Republicans or the president?” asked another senior GOP lawmaker.
And see Matthew Yglesias with Will the Egg-On-Face Factor Lead to an Economic Calamity?
This is, incidentally, why it was a mistake of the White House and Congressional Democrats to get dragged into a negotiation in the first place. That said, the evidence from political science does appear to suggest that if Republican intransigence destroys the American economy, that the voters will respond to this by punishing the incumbent President and electing a Republican. Obviously the models on which that conclusion is based don’t include a scenario in which out-party irresponsibility leads to sovereign default. No model is better than the parameters in which it’s based, and a sovereign default could easily be a model-busting occurrence. Still, it seems like at least one “House Republican close to Boehner” thinks this isn’t the case and the president will get most of the blame for a default. That’s a dangerous case of power without responsibility.
And there is Kevin Drum:
I guess the optimistic take here is that Republicans are just playing the negotiation game really well. The pessimistic take is that they really believe this and think the political benefits outweigh the damage a debt crisis would do to the United States. I’m not really sure which it is anymore. I used to be an optimist, but that attitude is getting a lot harder to sustain these days.
And there’s this:
Treasury Secretary Timothy Geithner made an appeal Thursday to House Republican freshmen, a group of lawmakers skeptical of his warning that a failure by Congress to raise the nation’s borrowing limit would have grim financial and economic consequences…
This did not go well:
Rank-and-file Republicans, however, claim Geithner’s predictions of economic calamity are an attempt to force GOP leaders to cut a deal. “He just said it will be ‘instant lights out’ on America, but he didn’t give a basis for that,” said Rep. Tim Huelskamp, R-Kan., who attended Thursday’s meeting.
And it got worse:
His chief foil in Congress is Republican Sen. Pat Toomey, the Pennsylvania freshman who has promoted the view that, even without a borrowing increase, the Treasury would have enough money to pay the annual interest on debt, roughly $200 billion. That would be adequate to avoid the default, he has said.
Toomey proposed legislation to force the Treasury to first pay U.S. obligations and then use the remainder for other parts of the budget.
The bill has garnered 22 Republican co-sponsors, nearly half the GOP members of the Senate. A House version introduced by Rep. Tom McClintock, R-Calif., has 96 co-sponsors.
The show of support reflects public opposition to raising the limit and shows the effect of persistent pressure from outside Congress, where tea-party conservatives want to force the government to begin living within its means immediately.
Doing so would require government spending to drop by one-third – greater than $1 trillion, or roughly the cost of Social Security and Medicare – virtually overnight.
Geithner has rejected this approach, telling Toomey this year that global markets would not be satisfied if the country solely made interest payments on its debt.
Ah, this is going nowhere. The full faith and credit of the United States is being questioned for the first time in its history – and there will be neither. There will be economic collapse. But we will have a way cool debt-reduction plan.
Or we could hide – change our name and move out of town. But where?