We are now one week away from the US government defaulting on its debt. As everyone knows this crisis arose because Congress passed a set of laws for the US to carry out — namely, spending more than it takes in in revenue — and now that same Congress will not authorise one means — to be sure the primary means — of making up the shortfall, borrowing. This they do on the mantra of ‘good fiscal management,’ ie., not getting too large a debt as to cause a future problem when people refuse to lend to them. In the process, they may ruin the world economy. If I were to explain this to my children I would put it thus: “people are stupid. Really stupid.” I can’t explain this to my children. I’ve spent the better part of a month not explaining it to myself.
But to step back for a moment, we should appreciate just how ludicrous the situation is. It is pretty clear that all this is being caused by brinkmanship (and that is the kind way of putting it) on the part of the Republicans. The want to ‘win’ at all costs. But, in the process, they have admitted a fundamental lack of faith in markets. If I had a legitimate reason to spend more than I earn (and this is something that I have done on a long-term basis as have most of you), then I would pursue that. If the people who might lend me money to allow this to happen, decided that I was a bad risk, then I would be forced to do something else. But if they lend me money, they have assessed the risks and decided that that is a good transaction.
The exact same reasoning applies to the US Government. The market has decided that they are a good risk understanding fully their spending and taxing behaviour, their politics and their growing debt. In fact, the market continues to believe this despite all we are seeing now. So to not accept greater debt on the basis of some possible future problem is to form a belief that the market has poor judgment on that very same equation. In other words, they are saying “if we borrow now, then in the future the market may refuse to lend to us. So we will bring that situation forward right now and refuse to borrow from the market. So there.”