A US Default Should be Unthinkable
Think back to your introductory finance classes. Or, if you haven't taken any, you'll have to believe us here. What was considered the best measure of the risk free rate when computing the value of any financial instrument?
A lot of people use the US treasury. In order to prevent any risk due to interest rate fluctuations from creeping in, a lot of people use the three month treasury. Why do they use this?
Because the United States has never defaulted on its debt. Ever. Through the progression from a small agrarian nation to an economic and military superpower, one thing always happened. The United States paid its debt. There were two World Wars, one Great Depression and one Great Recession, a civil war, and untold financial crises. We went from a country that relied on walking and to which the Appalachians were a next to impenetrable barrier to one where tens of thousands of people fly cross country every day.
And one thing stood true for all these years. If the United States owed you money, you could count on getting it.
That's one of the reasons why when there's a "flight to quality," traders flock to Treasuries. It's another reason why the ten year treasury yields around three percent while Greek debt yields around 18 percent.
So if you're a person who's entrusted with the country's finances, why would you mess with that? Why risk the enviable position of being able to say, look, if you loan us money, you will get it back with interest? Why take being the equivalent of being the borrower with the perfect credit store for granted?
And why would you do that when people like Jamie Dimon, who ran one of the few banks that went through the financial meltdown relatively unscathed, say that defaulting on the debt would be a "moral disaster," "catastrophic," and that it would "dwarf Lehman?" Fed Chairman Ben Bernanke added his voice to the warning, saying a default would be a disaster "for our financial system, for our fiscal policy, for our economy." And Treasury Secretary Timothy Geithner said "it would make the crisis we went through look modest in comparison."
Why would you say, like Paul Ryan did, that holders of government debt would be willing to miss payments for a few days? Why would you risk this track record?
Because you're trying to score political points with your base. We looked up Ryan's votes on previous debt ceiling increases. In 2008, he voted to allow the debt ceiling to go up from $10.6 trillion to $11.3 trillion. In 2004, he voted to hike the debt ceiling from $7.4 trillion to $8.2 trillion. In 2002, Ryan voted to increase the debt ceiling from $6 trillion to $6.4 trillion. As an aside, that increase from the $6 trillion limit was the first vote to increase the debt ceiling since 1997.
Playing with the financial system and risking a repeat of the fall of 2008 is not something we should think about. We don't like the swelling federal debt any more than others, but it's not something we're willing to risk another Great Recession on.
We're especially not willing to do it when the person who's pushing the hardest for a default is a person who's voted to raise the debt limit in the past.
There was a very good movie staring Matt Damon and Tom Hanks called Saving Private Ryan. In this case, the country needs to be saved from Ryan.
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