Al Qaeda chieftain Osama Bin Laden was never shy about the objectives of his jihad against the United States. High on that list was the destruction of the U.S. economy which, he declared in 2004, would be accomplished by "bleeding America to the point of bankruptcy." But even with the economic shock after 9/11, the cost of two wars in Iraq and Afghanistan, and the oceans of red ink from the estimated $3 trillion cost to the United States by 2011 to crush his Al Qaeda movement, Bin Laden ultimately failed in quest to permanently undermine the American economy.
But with the United States now on the brink of a sovereign default, House Speaker John Boehner and his radical Republican extremists may succeed where Osama Bin Laden did not.
Back in January 2011, the newly anointed Speaker darkly warned Americans what failure to raise the U.S. debt ceiling, as the nation had routinely done 40 times since 1980, would mean. Holding the debt ceiling hostage and preventing the federal government from paying the bills it had already incurred, Boehner explained:
"That would be a financial disaster, not only for our country but for the worldwide economy."
Two and a half years later, financial leaders here and around the world are ringing the alarm. While the Financial Times warns "Investors hasten exit from US Treasury bills amid default fears," Gallup reported that its weekly measurement of American consumer confidence experienced its largest drop since Lehman Brothers collapsed in 2008. (In the summer of 2011, just the Republican threat of default triggered a downward spiral in consumer confidence, produced a screeching halt to job creation and led S&P to downgrade its U.S. credit rating.) As the New York Times reported on Monday:
The bitter fiscal stalemate in Washington is producing nervous ripples from London to Bali, with increasing anxiety that the United States might actually default on a portion of its government debt, set off global financial troubles and undercut fragile economic recoveries in many countries.
Ten days before the U.S. was scheduled to reach its $16.7 trillion borrowing limit, Bloomberg News was even more apocalyptic ("A U.S. Default Seen as Catastrophe Dwarfing Lehman's Fall"):
Failure by the world's largest borrower to pay its debt -- unprecedented in modern history -- will devastate stock markets from Brazil to Zurich, halt a $5 trillion lending mechanism for investors who rely on Treasuries, blow up borrowing costs for billions of people and companies, ravage the dollar and throw the U.S. and world economies into a recession that probably would become a depression. Among the dozens of money managers, economists, bankers, traders and former government officials interviewed for this story, few view a U.S. default as anything but a financial apocalypse.
"If it [U.S. default] were to occur -- and it's a big if -- one would expect a series of legal triggers, potentially transmitting the default to many other markets," said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co. "It would also undermine the role of the U.S. in the world economy." While Warren Buffett likened the Republicans' admitted debt ceiling hostage-taking to "nuclear bombs, basically too horrible to use," Morgan Stanley CEO James Gorman instructed his employees to contact their congressmen to remind them about the "unacceptable consequences" of a default. As a worried Tim Bitsberger, a former Bush Treasury official put it:
"If we miss an interest payment, that would blow Lehman out of the water. Lehman was an isolated company, and now we are talking about the U.S. government."
In response, an increasing number of Republican "default deniers" are mocking the dire predictions of economists and market experts. In their determination to destroy the Affordable Care Act all costs, GOP members like Rep. John Fleming (R-LA) proclaimed, "I don't think we should run government based on economists' predictions." Florida's Ted Yoho went even further in brushing off the consequences of a first-ever U.S. default, "I think, personally, it would bring stability to the world markets."
If that sounds familiar, it should.
During the first debt ceiling crisis Republicans manufactured in the spring and summer of 2011, the GOP's best and brightest made similar claims. White House hopeful Michele Bachmann (R-MN) declared we don't raise the debt ceiling, but we use the revenue still coming in to pay off creditors first and whatever we think most important second. That way, we "don't violate our credit rating" and "prioritize our spending." Later, Bachmann accused Secretary Geithner of "outright blatant lies" and "scare tactics."
Ezra Klein of the Washington Post described Bachmann's fantasy as "the scariest thing I've ever heard on television."
It makes perfect sense unless you, like me, had spent the previous few days talking to economists, investors and economic policymakers about what could happen if we start playing games with the debt ceiling. Their answers were across-the-board apocalyptic. If the U.S. government is so incapable of solving its political problems that it can't come to an agreement on the debt ceiling, they said, that's basically the end of the United States as the world's reserve currency. We won't be considered safe enough to serve as the investment of last resort. We would lose the most important advantage our economy has in the global financial system -- and we'd probably lose it forever. Skyrocketing interest rates would slow our economy and, in real terms, make it even harder to pay back our debt, which would in turn send interest rates going even higher. It's an economic death spiral we associate with third-world countries, not with the United States.
Writing in Slate, Annie Lowrey painted a similarly disturbing picture of the aftermath of the Republicans' debt ceiling extortion when the Treasury's borrowing options come to an end:
Within 72 hours, Congress has a deal on President Obama's desk, raising the ceiling to $16 trillion in exchange for balanced budgets to take effect in fiscal-year 2015 and some serious cuts now. Treasury starts issuing new bonds and making all payments on existing ones. But the market panic requires the Federal Reserve to reboot its emergency programs, disrupts the housing market, permanently raises the United States' borrowing costs, reshapes the world bond market, and shaves more than a percentage point off GDP growth--enough to throw the economy back into recession. Globally, investors no longer consider the dollar the reserve currency of choice.
As it turns out, that same message was delivered by none other than President Ronald Reagan. As the man who would sign 17 debt ceiling increases while tripling the national debt cautioned in 1983:
"The full consequences of a default -- or even the serious prospect of default -- by the United States are impossible to predict and awesome to contemplate. Denigration of the full faith and credit of the United States would have substantial effects on the domestic financial markets and the value of the dollar."
There are no words to describe an American political party which would threaten to unleash that cataclysm upon the people it claims to represent. Well, almost no words. As a very worried Paul O'Neill, Treasury Secretary under George W. Bush, warned in the spring of 2011:
"The people who are threatening not to pass the debt ceiling are our version of al Qaeda terrorists. Really. They're really putting our whole society at risk by threatening to round up 50 percent of the members of the Congress, who are loony, who would put our credit at risk."
Putting our whole society at risk. Even Osama Bin Laden couldn't do that. John Boehner and his Party of Lincoln just might.
(This piece first appeared at Perrspectives.)
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