Wednesday, April 20, 2011

Economic Armageddon Redux

Think back to 2008, a day when Henry Paulson took members of the House and Senate into a closed room for a meeting which resulted in them leaving with white faces and shaking hands. Remember what was going to happen if Congress did not give Paulson $700 billion within days, if not hours, in order to “buy the toxic assets” of firms that were insolvent to the point of bankruptcy. Financial Armageddon. Global Economic Meltdown.

Well, what happened was bad but the “buying of toxic assets” never happened, of course; the $700 billion wasn’t spent for months and some of it never got spent at all. The "toxic assets" never got bought, are still on the books of the firms in question, and are still just as toxic as they were then. The dire warnings of just how short the fuse was were a massive hoax, perhaps designed to coerce Congress into action that it would only take when acting in unthinking fear?

And here we are again. Failure to raise the debt ceiling would cause this nation to default on its debt and cause an immediate global economic crisis that would make the recession of 2008 look like a tiny ripple. It would cause a catastrophic depression. Seniors would not get their Social Security checks, soldiers on the battlefield would run out of bullets, airplanes would be grounded. The list is endless.

Failing to raise the debt limit is not “a statement that America is not going to pay its debts,” it is merely a statement that we are not going to borrow any more money than we already have. We would not have to default on debt which is coming due, as that existing debt can still be “rolled over” into new notes without increasing the debt; that is done all the time.

The government only borrows 40% of what it spends so, while it would create serious disruption, government could continue to operate at a 60% rate and would have to choose which things not to pay. Government probably would not choose to let soldiers on the battlefield run out of bullets, or to withhold checks from seniors. The nation would have to live with a balanced budget.

It would be immensely problematic, but… Financial Armageddon?

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