Atlas Shrugged: The Mocking

Wednesday, February 2, 2011

A Puzzling Situation

This post is beyond my capacity for explanation. Megan McArdle seems to be warning the US that it will get a bad credit rating if it doesn't pay back its debt to its creditors, and therefore we should cut Social Security. She knows about quantitative easing; is she really acting as if we are going to run out of money when we can continue to print more?

[...]In the first place, our debt payments do not simply go to enrich feckless corporations. They go into things like insurance pools, 401(k)s, and pension funds. If the government stops payments, yes, some rich people would take a bath. But so would a lot of ordinary people.

Even more importantly, if the government misses a debt payment, that's it for borrowing more money in the near future--and I, for one, am skeptical that the IMF would be able to mount a bailout, which is what we do when developing nations have this sort of trouble. The United States currently runs a $1.5 trillion budget deficit. If we miss a debt payment, that means we immediately have to balance that budget, and keep it balanced. You have probably seen a lot of blog posts lamenting the terrible plight of the states, who cannot run budget deficits during recessions and are therefore forced to make draconian cuts to services unless they are bailed out by the Feds. Well, if we can't borrow money, no one's going to bail us out--or the states. And you can expect a default to be followed by a pretty ugly recession in an economy as credit-driven as ours.

That said, obviously the best thing to do is raise the debt ceiling, and not put the US government at risk of default. But second best is to buy time while preserving our credit rating. Over the long run, if the credit taps get cut off, the social service cuts will be deeper, uglier, and permanent.

States can't print money. The federal government can. What is going on here? Several commenters noticed this too but their protests were drowned out in the general din.


Kathy said...

OK to reneg on American citizens who contributed in good faith to the SS fund all their working lives; but Disaster! if corporations & other countries miss an interest payment.

Its a perfect example of how our government is being run to promote and protect the already extraordinarily wealthy. Take pension payments of Americans and give them to Goldman Sachs or China.

Susan of Texas said...

The elite must get whatever they want or they won't create jobs!

Lurking Canadian said...

Does she even address the fact that there is no US debt crisis? US Treasuries are currently selling faster than the US can print them, at bargain-basement interest rates. The only people who think the US is in a debt crisis are people who want the US to stop spending for ideological reasons.

In the early 1990s, the Canadian government used to ask Moody's to downgrade our debt so they could pretend we had a debt crisis, so they could slash health care spending. This is the same kind of thing.

Anonymous said...

I'm a little curious about one aspect of this. I'm not sure if McArdle is one of the "government debt is bad because household debt is bad" analogists (I don't read her all thaqt regularly, so I may have missed something), but it sounds like she's saying something close to that. Then she says if the US misses a debt payment that's it for further borrowing.
I've been pretty good about paying things, but I have missed (or at least missed the deadline for) a few payments over the last 40 years. My interest rates went up, my credit scores went a bit down, but I didn't lose all access to credit. If that's what she's afraid of, does anyone who knows anything about finance say the same?