We are less than a week away from the United States of America becoming the biggest deadbeat of all time, and the rhetoric coming from the right is getting thick. The Republicans are simultaneously running two opposing talking points (sometimes from the same people): one is that Obama is destroying the economy by allowing the nation to default, and they are also saying that nothing is going to happen if the Republicans don‘t extend the debt ceiling and we do default. It depends on who they are trying to frighten at the moment.
Clearly Obama has decided to ride it out. At this point the only thing Congress could hope to pass would be a clean bill to raise the debt limit, because there isn’t time to write up any spending cuts. The corporate media is spreading the rumor that Obama would accept a 30 day extension, but they’ve been consistently wrong so far.
What would default really mean? The tea baggers keep saying that there is plenty of money to pay the interest on the debt and of course they don’t know what they are talking about. Mature T-bills and government bonds don’t pay interest, they are due and payable in full. Congress could authorize extending them except for that pesky 14th Amendment and there are Supreme Court rulings on this, in short the ruling was “pay up”.
This also obligates Obama to pay them but a bond holder would have to go to court to force him to do it. On a practical note, the mature bonds would likely be bought up by the Federal Reserve in the interest of not crashing the economy. The Fed could refuse to do this however because nobody can tell them what to do. The majority of economists polled this week say that the US will lose its AAA credit rating, but these are the same economists they poll every week and they are almost always wrong.
If Chairman Bernanke were to go ahead with buying expired bonds that would stave off a government shutdown for awhile as this would cover a big slice of the budget crisis. Obama would still need to cut spending and would by virtue of the emergency he would have something that no President has ever been able to get his hands: a line-item veto. That big slab of pork the Republican cronies back home have been chewing on could be yanked out of their mouths so fast that they could lose teeth.
The Fed option seems likely as the Chinese were being briefed a couple of months ago on the practical aspects of guarantying international transactions with cash instead of using T-Bills as collateral. The Fed issues all the cash so they can make plenty of that available. It’s good to know the big corporations and China will be just fine.
Things won’t be just fine for the rest of us however. You can expect interest rates to spike, but there again the Fed should be able to intervene, not that success is assured. Then there is the downward pressure on jobs. Rumor is that July and August will see big layoffs from the “job creators” with over 40,000 planned layoffs already announced in June.
We could see upwards of a million jobs lost in a default crisis, according to some estimates circulating in the business news. This would happen if the major corporations see credit tighten suddenly in the Repo Market, and already slow consumer spending starts to collapse the demand for goods. Private sector layoffs, combined with government spending cuts, and even more public worker layoffs pushed by the Republicans would make this a self-fulfilling prophecy.
More on the Repo Market: “repo” is short for Repurchase Agreement, or really a sort of short-term loan contract secured with some sort of collateral. A Repo can usually can be cancelled overnight by either party. Big money is tied up in Repo’s and it was the use of these by dodgy Wall Street banks in 2008 that finally triggered the crash. This could again be the flash point for an economic collapse.
Concerning the rightwing talking point that “we can’t tax corporations because they just pass it along“: Because anti-union legislation embedded in the FAA budget passed by the Republican House failed to clear the Senate, the FAA has stopped much of its operations including the loss of its tax-collecting authority. Federal taxes amount to about 10% of a ticket’s cost and airlines include it in the price without disclosing it. The tax ended, but the airlines simply kept ticket prices the same; capturing the money for themselves raking in $30 million a day. Money that won’t be going for new airport runways or aircraft safety, things the right doesn’t want for us anyway. Airline CEOs can use it for bigger golden parachutes so they’ll be safer flying in their private jets. Some people say you as a ticket buyer are entitled to a refund but I wouldn’t hold my breath, in the “free” unregulated market they can charge you as much as they want. www.prairie2.com