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What Might a USA Default Bring

Anthony Randazzo
May 15, 2011, 12:35pm

Secretary Geithner said this weekend that if Congress failed to lift the debt ceiling and the U.S. defaulted on its debt then the American economy would slip into a double dip recession...

Two things on this:

First—It is a fallacy that failing to raise the debt ceiling = a U.S. debt default. We can use tax revenues to pay bond holders and if necessary start shutting down parts of the government or cutting off some entitlement spending to be able to meet those obligations. It is not a great alternative, and certainly not one the hundreds of thousands of government employees want to hear. But not only are there financial "tricks" Treasury can employ to push off the debt ceiling hit, but Treasury also has the authority to pay bond holders first, and could do so for a while with the couple of trillions in tax revenues if the result of a default meant a double dip. The equation of the two is a scare tactic that has no place in reasoned debate on this issue.

Second—Geithner might be wrong about his claim that a default would create a double dip. Say for a moment that Treasury decided to keep the post office open and send out social security checks and ask bond holders to delay getting paid (a default of sorts). This is not entirely outside of the realm of possibility. In Geithner's world this means all hell breaks loose. But what does that ACTUALLY look like? We really don't know. And there are some smart people that hold a different view than Geithner.

In the weekend WSJ interview, infamous money manager Stanely Druckenmiller says:

"I think technical default would be horrible," he says from the 24th floor of his midtown Manhattan office, "but I don't think it's going to be the end of the world. It's not going to be catastrophic. What's going to be catastrophic is if we don't solve the real problem," meaning Washington's spending addiction.

Of course, he could be wrong too. But he makes a more reasoned argument than the terror inducing words of Secretary Geithner. See the whole interview here.


Anthony Randazzo is Director of Economic Research


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