It has never been believable to me, and still is not, that the United States would hit its debt ceiling and suddenly be without any ability to borrow or to pay the running costs of the U.S. government beyond incoming cash. In that scenario, it could pay its bills without borrowing to do so, effectively spinning the presses, though in fact checks would continue to be issued and would effectively increase the money supply and inflate the currency, a model often followed in Africa and Latin America, and even in Germany in the early Twenties. The second possibility is that the U.S government, like that of New Zealand nearly 30 years ago when it couldn’t sell its bonds, could arbitrarily cease almost 40 percent of its spending functions, an immense percentage of non-contractual costs. This would involve laying off large numbers of civil servants, cutting the pay of the surviving federal employees, demobilizing a large chunk of the immense American armed forces, and virtually eliminating most of what was left of discretionary spending. The government in Washington would become almost a municipality, distributing contractual benefits to pensioners, Medicare and Medicaid recipients (the elderly and the poor), and running a military reduced to pre–World War II levels.
Utterly irresponsible though both parties have been, contemptible though this chicken game as the country hastened toward the debt ceiling has been, even at this late date, I don’t think the direst fates were ever in prospect. In fact, it is not so far from where New Zealand was when it could not sell its bonds: Seventy percent of American treasuries, when issued, are bought by the Federal Reserve, and paid for with a computer click of Federal Reserve notes. This prolongs the questionable notion that the debt will be repaid when the government’s accounts come back into balance and surpluses are applied to debt reduction, as happened after America’s major wars (the Revolutionary, Civil, and World Wars). Despite purposeful noises, there is still no evidence that the U.S. has the will to pay down the debt rather than just devalue the currency in which it is denominated. And unless the debt really is repaid, the immense deficits of the last several years are, in their consequences, just additions to the money supply.
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