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:
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.