Wednesday, October 09, 2013

The next stage after a debt default

While I readily admit that I have less ability to predict what will happen in Washington than those who are closer to the scene, I can see a plausible debt ceiling breach scenario going forward.  Unfortunately, it is not a very pleasant scenario.

It appears clear that crashing through the debt ceiling would lead to a sudden and very sharp fiscal contraction, which very likely would lead to a severe recession.  It might also lead to a catastrophic credit event from failure to honor U.S. debt obligations promptly, although admittedly the timing and even the certainty of this aspect are less clear.

The Republicans oughtn't to let any of this happen if they will clearly get the blame.  But they have room to dispute responsibility on both.  A disastrous recession could be blamed on Obamacare, or on naming Janet Yellen to head the Fed, or on excess regulation, or on anything else that "balanced" media commentators are willing to present as one side's view of a legitimate debate.  A credit event could be blamed on the Treasury, for mismanaging cash flows after the debt ceiling breach - perhaps with the further argument that it was deliberate.

So long as responsibility can be disputed - and especially if the Democrats will inevitably "own" the state of the economy in 2014 and 2016 - the Republicans may in the end see no good reason not to do it.  Add the possibility that they will be able to convince themselves that these self-serving explanations are actually true, and you have a very scary situation indeed.

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