Dean Baker - "let's Just Default"

Bruce Krasting's picture

An interesting article by Dean Baker today. "Defaulting on debt is not the end of the world".
Dean has gone over the top and is now advocating a debt default by the
USA as a way of “fixing” our problems. Dean thinks that the existing
obligations of Social Security and Medicare are much more important to
maintain that our credit rating. His words:

Compared to these outcomes, (cuts in SS and Medicare) a financial crisis and the subsequent slump that follows may seem like a relatively small cost.

Baker thinks this would be an easy matter. He points to Argentina as an
example. This just proves that Dean has no clue what he is talking
about. Yes Argentina defaulted and recovered after a few years. But
Argentina is not a reserve currency that has a linchpin role in the
global financial system. Argentina is a fraction of global GDP
(Argentina = 0.5%; US = 25.0%). Their default was painful to all. Both
citizens and creditors suffered. Savers lost everything. Pensioners got
worthless script versus the payments they were promised. Dean thinks
following Argentina is the right thing to do:

The
experience of Argentina may be instructive in this respect. Argentina
defaulted on its debt at the end of 2001. By the end of 2003 it had
recovered its lost output.



it is also likely the case that the United States would rebound and possible rebound quickly from a default.

I don’t know how to handicap the possibility for a debt default by the
USA. In 2007 I would have said it was a near zero possibility. Today
it's no longer zero and the odds rise by the month. The scary thing for
me is that no one is doing a damn thing about it. The budget silliness
of last week is a case in point. The idiots in D.C. damn near shut the
government down over a few billion bucks. Lunacy. And now ‘important’ voices like Baker are suggesting default is a viable option.

It’s hard to imagine what a debt default for the world’s biggest
creditor would be like. Some of the things that I think could happen:

-Mr.
Baker must come to grip with the facts of default. As he and many other
defenders of Social Security have said repeatedly; the assets of the
Social Security Trust Fund are equal in legal status to the debt issued
to the public by Treasury. This means that it isn’t possible for the US
to default on its public debt without also defaulting on the Special
Issue bonds in the SS Trust Fund. As SS is running a cash deficit on a
monthly basis it would only take 30 days for all checks to stop. Period,
full stop. Social Security would cease to exist.

-The
Medicare Trust Fund, Military Pension Trust Fund, Federal Workers Trust
Fund would also default. They too would stop issuing checks. Medicare
would no longer function. Some level of medical care would be
maintained. But older people who needed lifesaving treatment wouldn’t
get it. Hundreds of thousands would die. The number could easily go into
the millions.

-Surely
we would see a collapse of the dollar. The cost of everything we import
would triple++ in a very short period of time. The price of gas would
be $10? 50? 100?

-Equity
markets in the US would collapse. A loss of 50% would be a good
outcome. It could be much worse than that. We know that the wealth
affect drives the economy, so this result would insure a collapse of US
GDP. How long would the depression/recession last if this were to
happen? At least a decade. It would be worse than what happened in the
US during the 30’s.

-Unemployment? A minimum of 25% would be the result.

Interest
rates? Who knows? There would be no debt market left in the event of a
default by the US. There would be no credit available.

-If
Treasury were to default, every mortgage borrower would follow suit. If
the banks were not wiped out by the federal ‘no pay’ they certainly
would be wiped out by the mortgage defaults. Almost all banks would
shut. This would cascade back to the FDIC. The withdrawals from account
holders would force the FDIC to honor its obligations. As they have no
reserves this would force Treasury to issue coinage ($100 bills) to
satisfy the run on the bank. This is the hyper inflationary environment.
The price of basics (food) would explode. Shelves would empty. People
would go hungry. In the years that followed a default many would starve,
many of those would die.

-All
municipalities would be forced to default. All muni savers would be
wiped out. The business of local government would shut down. They would
be unable to make payroll, so no one would work. Garbage collection
would stop. There would be no police. Crime would be rampant. Armed
robbery, rape and murder would be common. Vigilantism would rise. Open
conflict on a regional basis would be the result. There would be no fire
departments. Cities would burn.

-All
infrastructure repairs and investments would stop. In a very short
period of time roads, bridges, ports, airports would become
dysfunctional. It would not really matter that much. There will be no
gas or diesel to power vehicles, so the broken roads would be empty.

-Most public education would end.

-There
would be no real estate market. There would be no Fannie, Freddie or
FHA. There would be no lenders to finance a home. There would be no
liquidity. Prices would collapse. A house would sell for a few months of
food.

-It’s
difficult to image the consequences outside of our borders. Neighboring
countries like Mexico and Canada would implode. The decline of the US
economy would ripple around the world. Other countries would be forced
to repudiate their debt. It’s possible that a default in the US would
force all big debtor countries to follow suit. At that point all seven
billion people would suffer.

-Functionally
there would be no US military. Regional warriors and pirates would
rule. Major nations could start wars over natural resources.

I suspect that a number of readers will agree with Dean. Pull the plug on the whole system. Let the chips fall, let the shit fly. That may happen.
We are most certainly headed in that direction. The probability of this
happening just increased a notch or two. Dean Baker has a big audience
and a fair bit of support. Big shots like Paul Krugman quote him all the
time. Now that Dean has put his reputation (and CEPR) on the line by calling for a debt repudiation he will be forced to push his agenda. Like I said, this is a “popular” option.


Dean Baker is the champion of Social Security and Medicare. His
many supporters should understand that he is advocating policies that
insure that their savings, benefits and medical protection would be
wiped out. He would destroy exactly the group that he thinks he is
trying to protect. They should at least seem him for what he is. A fool that will ruin them.