What if we default on our debt?

“Sitting on the Pavement, Thinking About the Government” 

What if we default on our debt?  (Dylan, “Subterranean Homesick Blues”)

capitol2.jpg

 

 

 

 

 

 

 

 

 

 

 

Bill Barclay

The debt ceiling, the dollar and hegemonic currencies

Let’s begin by clearing up a possible lingering misconception about debt and defaults.  If Congress does not raise the debt ceiling and we default, does that mean the U.S. is broke?  No.  The U.S., like any country that 1) controls the creation of its own currency and 2) issues its debt in its own currency, cannot go broke.  However, political calculations can impose deadbeat status on such a country. 

What about other countries, why don’t they have this problem?  The answer is equally simple.  With the exception of Denmark, no other wealthy industrial society has a debt ceiling – and Denmark’s is set at over twice their actual level of government debt – and it is not a political football.  So yes, the U.S. is, as our national meme says, exceptional.  The debt ceiling – and any associated problems – are our own creation.  

In the global world of finance, a significant part of our exceptionalism is the position of the dollar as the world hegemonic currency.  The issuer of the hegemonic currency, today the U.S., can be a global debtor while at the same time providing a default risk-free asset (dollars) to facilitate global trade and capital accumulation.  In more prosaic terms, the U.S. can run a balance of payments deficit while at the same time the U.S. dollar is the currency of choice for trade as well as for safety in times of financial panic.[i] 

Since the rise of the U.K. as a world power in the early 19th century, the capitalist world system has known two hegemonic currencies: the U.K. pound until WWI and the U.S. dollar after WWII. (In the interwar period, the two currencies shared hegemonic status.) 

What if the government is forced to default because the debt ceiling is not increased?

In what follows, remember that predictions are very difficult, especially when they are about the future. 

We can think about both short term and longer term impacts of a debt ceiling-driven default. In the short term there would be increased volatility in stock, currency and debt markets.  We would likely see more days like those in Oct. 2008 when Lehman Brothers went under, Washington Mutual was seized by the FDIC and Merrill Lynch fled into the arms of the Bank of America.  Much of this result flows from the hegemonic role of the U.S. dollar.  If the currency and the debt instruments (treasury bills and bonds) that are at the core of the world financial system are no longer secure (as good as gold, as people sometimes say), many large institutions and individual investors would try to sell assets that were valued in dollars and buy assets that were valued in – what?  The “what” is both the source of uncertainty and the reason the dollar might survive a short-term default.  There are, as of today, no viable alternatives. A few years ago the Euro might have been nominated as the alternative hegemonic currency, but, due to the ongoing economic downturn in Europe, the Euro has lost caché – and value. China’s renminbi (or yuan – your choice) is not yet a viable candidate.

Consider one small example of the short-term disruption that a politically-driven default could cause. There are many institutional investors who can own only AAA-rated assets, or who must have a large percentage of their debt holdings in AAA-rated issues – for example, probably your pension fund. If there is a politically-driven default, it is likely that a second major rating agency would drop their U.S. debt rating to AA from AAA. (S&P did so in 2011, but neither Moody’s nor Fitch followed suit.)  This would, at least in theory, stimulate large sales of treasury securities from entities that would have to seek other AAA-rated debt (such as Canada, Denmark Australia, Finland, etc). The result would be increased interest rates for additional U.S. borrowing and thus increased federal government expenditures.[ii]

The possible long-term results are perhaps more intriguing. Just in the past week, the EU and China have announced an agreement to denominate a significant portion of trade between the two areas in the Euro and renminbi (yuan) without the intermediate step of the dollar. Agreements such as this one suggest the possibility of a longer-term decline of the dollar’s hegemonic role: no long-running trade deficits, no currency of last resort during financial panics. If that were to occur, our privilege of purchasing imports and borrowing across borders more cheaply than others would evaporate. But capitalism in the modern era has never functioned without a hegemonic (or, as noted above, dual hegemonic) currency: we don’t know what the new multi-polar currency world might look like but it would definitely not be the one we in the U.S. have grown up with.

It seems surprising that right-wing Republicans want to birth this unknown world.

[i] During the 2008 financial panic, holders of financial assets fled to the dollar and the yen.

[ii] Yields on T-Bills with maturities in late October have spiked over the past few weeks. 

 

Bill Barclay is a member of the Oak Park Branch of Chicago DSA and founding member of the Chicago Political Economy Group (www.cpegonline.org).

 

Individually signed posts do not necessarily reflect the views of DSA as an organization or its leadership.

 

 

Film Discussion: The Price We Pay

January 30, 2017
· 44 rsvps
The Price We Pay blows the lid off the dirty world of corporate malfeasance — the dark history and dire present-day reality of big-business tax avoidance, tax havens - and what we need to do to stop this.  DSA member Bill Barclay, who has a cameo role in the film, will facilitate the discussion. Watch the film prior to the discussion.

Full film available on Vimeo.

How to Plug in New Members

February 01, 2017
· 12 rsvps

Is your DSA chapter growing quickly and you're trying desperately to find ways to plug new members into your chapter's work? Never fear! On this conference call an experienced DSA organizer will go over the basics of new member outreach and developing a plan for plugging new members into your chapter's work. Most of the call will be devoted to troubleshooting specific issues you're facing, so please brainstorm some issues beforehand that you want to bring up on the call.  8 PM ET; 7 PM CT; 7 PM MT; 7 PM PT.

Film Discussion: Salt of the Earth

February 05, 2017
· 8 rsvps

Join DSA members Shelby Murphy and Deborah Rosenfelt in discussing Salt of the Earth, a captivating film made in 1954 by blacklisted writers and actors about a strike at a New Mexico zinc mine. Well before the resurgence of feminism in the 1960s, these filmmakers were exploring gender inequality and solidarity. Available on Netflix.

Shelby Murphy is a Latina from Texas and former Young Democratic Socialists co-chair. Professor Emerita of Women’s Studies at the University of Maryland, Deborah Rosenfelt researched the making of the film and its aftermath for the reissued screenplay. Here is her blogpost about the film.

 

DSA New Member Orientation Call

February 15, 2017
· 61 rsvps

You've joined DSA - Great. Now register for this New Member Orientation call and find out more about our politics and our vision.  And, most importantly, how you can become involved.  8 PM ET; 7 PM CT; 6 PM MT; 5 PM PT.

Film Discussion: Documentaries of People's History in Texas

April 02, 2017
· 3 rsvps

Join DSA members Glenn Scott and Richard Croxdale to discuss videos produced by People’s History in Texas (PHIT), a project that brings to life the stories of ordinary people in significant socio-political movements in Texas. They will discuss The Rag, their newest documentary, which tells the story of an influential underground paper based in Austin, Texas, from 1966-77. Click here to view Part I (the early years as an all-volunteer paper covering the student, anti-Vietnam and Civil Rights movements), Part II (the impact of Women’s Liberation on the paper) and Part III (building community: covering local politics, nukes, co-ops, feminist institutions). But check out their short the video on the Stand-Ins about a group of university students who led a movement to desegregate Austin’s movie theaters in 1961.

Film Discussion: The Free State of Jones

June 11, 2017
· 2 rsvps

Join Victoria Bynum, Distinguished Professor Emeritus of History, Texas State University, San Marcos, to discuss The Free State of Jones. STX Entertainment bought the film rights to Bynum's book of the same title. She also served as a consultant and appears in a cameo scene. What was the Free State of Jones? During the Civil War, an armed band of deserters led by Newt Knight, a non-slaveholding white farmer, took to the swamps of southeastern Mississippi and battled against the Confederacy in an uprising popularly known as “The Free State of Jones.” Joining Newt in this rebellion was Rachel, a slave. From their relationship, there developed a controversial mixed-race community that endured long after the Civil War had ended. View the film here for $6 before the discussion.