Racing Toward a Cliff

Chicken

[Credit to StevenW. on Flickr]

Jim Hamilton at Econbrowser reviews the game of chicken going on in the debt ceiling negotiations.  Well, he mainly quotes Jeff Frankel on this:

The situation is complicated because there are a number of different people crammed into the Republican car. There is one guy who is obsessed with the theory that, come August 3, the federal government could retain its top credit rating if it continued to service its debt by ceasing payment on its other bills. But this would mean failing to honor legal obligations that have already been incurred … This is like observing that the cliff is not a 90 degree drop-off, but only 110 degrees. It doesn’t matter: the car would still go crashing into the ocean far below. The government’s credit would still be downgraded and global investors would still demand higher interest rates to hold US treasuries, probably on a long-term basis.

There are other guys (and gals) in the car who are even more delusional.

Asks Hamilton:

Keep in mind pension funds and financial institutions are constrained to hold at least some AAA rated securities. What happens if those securities are downgraded; should we expect a smooth, re-balancing of portfolios worldwide?

Actions have consequences, but not all consequences are easily observable or calculable in terms of their impact on your own life.

Think rising gas prices act like a tax on your income? Wait until the bond markets adjust.