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”)

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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.

 

 

Grassroots Fundraising: Paying for the Revolution (9pm Eastern)

June 23, 2017
· 46 rsvps

Are you new to socialist organizing? Or after many years do you still struggle, raising money from members when you need it but without a steady flow of income or budget to plan ahead? Are you afraid to tackle fundraising because it seems so daunting or you are uncomfortable asking people for money?

In this webinar, you will learn why fundraising is organizing, and how to do it – face to face, through fundraising events, and other ideas.

Join us for our latest organizing training for democratic socialist activists: DSA’s (Virtual) Little Red Schoolhouse.

Instructor:

  • Steve Max, DSA Vice Chair and one of the founders of the legendary community organizing school, The Midwest Academy

Training Details:

  1. Workshops are free for any DSA member in good standing.
  2. You need a computer with good internet access.
  3. Your computer must have preferably headphones or else speakers; you can speak thru a mic or use chat to "speak".
  4. If you have questions, contact Theresa Alt talt@igc.org.
  5. If you have very technical questions, contact Tony Schmitt schmittaj@gmail.com 608-355-6568.
  6. Participation requires that you register at least 21 hours in advance -- by midnight Thursday for Friday's webinar.

NOTE: This training is scheduled for 9:00pm Eastern Time (8pm Central, 7pm Mountain, 6pm Pacific, 5 pm Alaska, 3 pm Hawaii).

Introduction to Socialist Feminism Call

June 27, 2017
· 68 rsvps

Join DSA activist Judith Gardiner to explore “socialist feminism.” How does it differ from other forms of feminism? How and when did it develop? What does it mean for our activism? 9 pm ET, 8 pm CT, 7 pm MT, 6 pm PT.

Data Security for DSA Members

June 27, 2017

Ack! I googled myself and didn't like what I found!

WHAT: A DSA Webinar about "Doxing"
WHEN: 9PM EST, 6PM PST

We're proud of our organizing, and chapter work is transparent for both political and practical reasons. However, there are basic precautions you can take in this time of rapid DSA growth to protect your privacy.

Key Wiki is a website that meticulously documents DSA activity and posts it for the world to see. If you're an active DSA member, likely your name is on their website. This is an example of "doxing".

As DSA becomes larger, more visible, and more powerful, we might expect that more websites like this will pop up, and more of our members' information might be posted publicly on the web.

Join a live webinar on Tuesday, June 27 with data security expert Alison Macrina, to learn:

  1. what is doxing? with examples and ways to prevent it
  2. how to keep your passwords strong and your data secure
  3. where to find your personal info on the internet and how to get it removed
  4. social media best practices for DSA organizers
  5. what to do if you've already been doxed

Zoom Link: https://zoom.us/j/9173276528

Call-in Info: +1 408 638 0968
Meeting ID: 917 327 6528

Film Discussion: Pride

September 10, 2017
· 11 rsvps

Join DSA members Eric Brasure and Brendan Hamill to discuss the British film Pride (2014). It’s 1984, British coal miners are on strike, and a group of gays and lesbians in London bring the queer community together to support the miners in their fight. Based on the true story of Lesbians and Gays Support the Miners. The film is available for rent on YouTube, Amazon, and iTunes. 8 ET/7 CT/6 MT/5 PT.

Film Discussion: Union Maids

September 24, 2017
· 8 rsvps

 

Join DSA member and labor historian Susan Hirsch in discussing Union Maids (1976). Nominated for an Academy Award, this documentary follows three Chicago labor organizers (Kate Hyndman, Stella Nowicki, and Sylvia Woods) active beginning in the 1930s. The filmmakers were members of the New American Movement (a precursor of DSA), and the late Vicki Starr (aka Stella Nowicki) was a longtime member of Chicago DSA and the Chicago Women's Liberation Union. It’s available free on YouTube, though sound quality is poor. 8ET/7CT/6MT/5PT.