Thursday, July 21, 2011

Default by Design?

As the kabuki dance of fiscal death spirals towards its uncertain conclusion, amidst conflicting reports of deals made (or not made) to raise the ceiling of the US national debt -- thereby staving off a default on same --it becomes permissible to ask whether or not certain powerful parties view fiscal default as a positive outcome, and if so, why.

There is off course the Tea Party caucus in the US House of Representatives, who are the most visible agitators for default, and in my view, the least interesting.  Their gestalt is best summarized in a quotation from the great Sam Rayburn, who (reportedly) said, "Any jackass can kick a barn down, but it takes a carpenter to build one."  The comparison to the Tea Party caucus is of course insulting to jackasses, but my point is simply that the Teahadists are puppets, incapable of much independent thought, essentially cannon fodder in a larger Class War now being fought in our once-great nation.

Of greater interest to me is the anti-tax oracle and agitator Grover Norquist, who famously declared his desire to shrink the US federal government to a size small enough to permit its being drowned in a bathtub. Although he perhaps does not pointedly attack the great social contract programs of the New Deal and Great Society -- most notably Social Security and Medicare -- both are surely in his gunsights, because of their size and scope.

So how does default work towards his benefit?  Through the medium of Bond Vigilantes.  These mythical beasts -- financial unicorns I call 'em -- are supposed to magically appear in these troubled times of bloated government spending, and magically enforce fiscal discipline by driving up the interest on US government debt.  The only problem is, they haven't.  US government debt remains cheap by historical standards, and would easily permit (were policy makers in Washington but to will it) expansion of the national debt, to finance entitlements, but also anti-recessionary stimulus measures.

However, it doesn't take a rocket scientist, a brain surgeon, or a Nobel laureate in economics to see that a default on the US national debt -- or even the threat of default -- could drive up interest rates over the long term, thus effectively conjuring into existence the heretofore imaginary bond vigilantes.  Therefore from Norquist's viewpoint (and that of like-minded individuals) a default is desirable; and I have little doubt that he is stirring the  congressional pot to this end, through every resource of undercover private lobbying.

Another curious fact has recently been noticed: big banks are not actively lobbying against default.  This is odd on the face of it, since banks have much to lose should default occur.  Have the banks gone over to the Norquist camp, despite the obvious dangers to them of a further financial crisis?

Another point.  Why has not President Obama strongly asserted his right to  unilaterally raise the debt ceiling under the 14 Amendment of the US Constitution?  To the cynics, the answer is of course obvious.  It has been clear, ever since he convened the infamous catfood commission, that the President's much vaunted notion of 'bi-partisanship' means simply helping the GOP accomplish its long-held goal of destroying the Social Contract in America -- or any functional equivalent.  This means Social Security and Medicare must be cut, hopefully with such severity that they will bleed to death.

He has therefore, instead of insisting on a clean bill to raise the debt ceiling, pursued the chimera of a 'grand bargain' with congressional Republicans, to reduce the deficit, and cut social entitlements.  To call this a fools' game is to be unkind to fools.

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