Below is a Facebook conversation I recently had with a brilliant politically-minded friend, who has asked not to be named because he is involved with the Lower House of a certain state’s legislature. Comments welcome. Read on:
TMB: Why are you up so early?
A: Haha I’m always up at 5:30, man. Usually in the gym, but my biceps tendon is being a little b*tch this morning.
A: So I did some debt ceiling research instead.
TMB: What’d you find out?
TMB: By the way, talked to a guy who founded a massive telecom company and was huge at AT&T before that. He supported austerity in Europe and here. We talked about his time working for those companies and why he was so successful.
A: A few things.
TMB: He said he didn’t worry about costs, just about increasing revenue by any means possible and staying ahead of competitors.
TMB: And didn’t understand the irony.
A: Haha…sounds like an interesting conversation.
TMB: What’d you find out today?
A: I found out that the big problem is more the uncertainty regarding the technical processes that govern the treasury’s activity during a default than an actual default in the textbook sense.
A: Which really makes things worse, because even if we avoid a default, we still risk causing serious economic harm to ourselves and other countries, which ultimately threatens the cornerstone of American power, which is our position at the foundation of the global economic system.
A: Instead of celebrating avoiding some sort of theoretically catastrophic event, we should be lamenting the further erosion of that position.
TMB: OF COURSE we should. This year has been an unmitigated disaster. I will suggest one thing, though. Our position at the foundation of the global economic system is pretty unshakable for the same reason that a default would be catastrophic: the entire system, from the most basic assumptions to the most complicated mechanisms, relies on the one central assumption that there is a riskless asset against which all others (including the relatively risky (!) gold) can be measured. That, of course, is US debt. Just as it would wreck the world if that were undone and we had to rebuild the whole system from scratch, any attempt to factor true risk of US debt into global financial theory will also have to rebuild the whole system from scratch. That is the second of the great trilogy of ironies here.
TMB: So 1) US debt is the most powerful bomb in the world if you somehow can light that fuse, 2) if you don’t blow it up, it’s the most stable substance in the world, and 3) the people willing to blow it up are willing to do so, at least in part, because they don’t understand either of the first two. The first point means default destroys the world. The second really means we could go on a ten-year spending spree of Caligulan proportions and we could catapult ourselves back to the forefront of education, science, space, everything, as well as reestablishing our ability to produce at a level that might allow us to reduce the debt, without risking default on pure trust terms, because the system isn’t rigged to judge our debt in pure trust terms — only if we blow it up in one go.
TMB: That’s a pretty liberal suggestion, I think, but I actually believe it. I agree with you. What we are doing now is devastating, because we could triple the g*ddamn debt without making it less attractive. We just can’t do this.
A: Man, I’ve been thinking/arguing part of that for years now. The dollar figure attached to our national debt is almost totally irrelevant, yet conservatives seem to think it’s the only thing that matters. They all think the United States government can and should operate on the same financial principles that apply to most successful households.
A: It’s not the f*cking same.
A: Increasing the effectiveness of our investments is the key to ultimate economic prosperity.
A: Does that mean we can’t cut anything? No. It means we have to move resources from less effective areas into more effective areas, adding additional resources as necessary to increase returns in the most productive ones.
TMB: I’m with you. I think I’m gonna hit the next person who makes the household analogy.
As a follow-up to this conversation, I shared a post on Facebook asking for suggestions as to why the dollar figure of the US debt matters. I got zero responses, but maybe my friends who can answer that question just didn’t see it. What do you think?