Not raising the debt ceiling is the economic equivalent of hitting the nuclear button.
By John B. Wood
I started to reexamine the comparison I used to mutually assured destruction (MAD) in a blog post I wrote a few weeks ago to describe the current dynamic in Washington, after thinking of a wonderful man by the name of Dr. Fred Iklé.
Dr. Iklé not only served President Reagan as Under Secretary of Defense for Policy, but was an influential and well respected voice in the national security arena for six decades. I had the privilege of knowing Dr. Iklé, as he served as chairman of the Telos board from 1995 until 2002.
Dr. Iklé passed away in November of 2011, but left behind a legacy of denouncing mutually assured destruction as a “sign of moral impairment.” He wrote about MAD in 1971, "It is a tragic paradox of our age that the highly humane objective of preventing nuclear war is served by a military doctrine and engines of destruction whose very purpose is to inflict genocide." He also said he rejected MAD, because it rested “on a form of warfare universally condemned since the dark ages — the mass killing of hostages.”
MAD exists under the assumption that those involved are rational people – which is where Dr. Iklé took issue. What rational people would in an act of aggression push another to commit genocide? The same can be said today. What rational political leaders would put the national and world economy at risk by letting the nation default on its debt obligations?
I started thinking about what Dr. Iklé would say about the state of current government affairs.
Our elected officials are on the brink of dropping a financial nuclear bomb. Think that comparison is too stark? It isn’t.
“… U.S. Treasury bonds are vital to the functioning of the global financial system. The government has $12 trillion in outstanding debt that is used (not least) to underpin short-term borrowing among banks and investment houses on Wall Street. A default could freeze that market and lead to widespread bank collapse, a debacle that would be sure to spread worldwide.” The U.S. Can Survive a Shutdown but Not a Default, Bloomberg
The entire world economy is based on the American currency, under the presumption that the American currency is the most stable. What happens when America defaults? Interest rates shoot up 2-3% and the markets destabilize.
Not raising the debt ceiling has global consequences, a few of which are outlined below (pulled from a recent Bloomberg article):
Global markets will see the U.S. government as grossly and dangerously incompetent.
Forced spending cuts will kill the economic recovery.
The U.S. government might actually default on its debts.
A default could trigger a global crash.
The government’s fiscal problems will only get worse.
A few minutes ago, press reports indicate that the Senate is working on a deal that would raise the debt ceiling. Though, even if approved by the House, it will likely only kick the can down the road a few months. Our economy – and the world economy – is too important to be taken hostage.
The origin of the word economy comes from the Greek words oikos (meaning house), and nemein (meaning manage). Perhaps it’s time we reflect on the word’s etymology, and begin to “manage our house” by paying for our obligations and sticking to a balanced federal budget.