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Staring at default

Many years ago, when I studied economics, I learned that every so often, Congress has to authorize an increase in how much money the nation could borrow, meaning the national debt.

One student asked what would happen if Congress didn’t authorize a debt increase. “Something that would make the Great Depression look like a picnic,” the professor said.

He explained that the world financial system was built on the soundness of the American dollar, and the global belief that our debts, like U.S. savings bonds and the $20 bill, were backed by the “full faith and credit” of the United States of America. He also told us that the odds of this nation ever defaulting were less than a nuclear war.

Well, that professor is dead and the Cold War long over. But for the first time, there seems a real possibility that we could, at least temporarily, go into default. We aren’t talking about Detroit here, but the United States of America.

Last week the New York Times interviewed some prominent Republican senators and congressmen, including Grand Rapids’ Justin Amash, who thought default wouldn’t be such a big deal. 

One of their leaders is a freshman congressman named Ted Yoho, who compares government to his large animal veterinary practice in Florida.

“Everybody talks about how destabilizing doing this will be on the markets,” he said, admitting, “you‘ll see that initially, but heck, I‘ve seen that in my business.”

Others said, hey, don’t worry; this will just force Washington to balance its budget. To make sense of this, I turned to the economist I most trust, especially about this state, Michigan State University Professor Charley Ballard, author of the excellent book, Michigan’s Economic Future.

Ballard told me my old professor was right. Defaulting on the debt by failing to raise the debt ceiling could, he said, “have devastating effects on the entire world economy, effects that could last for a very long time.”

Ballard reminded me that, quote, “Five years ago, with the collapse of Lehman Brothers, we saw what happens to financial markets when there is a major loss of trust. As a result, credit froze, and we got the worst recession of our lifetime, We are still suffering the aftereffects of the Lehman meltdown, and we will continue to suffer them for years. But comparing Lehman Brothers to (a potential default) by the U.S. Treasury is like comparing a minnow to a whale.” A default would be catastrophic, Ballard added.

Across the nation, other economists agree. The U.S. Chamber of Commerce and the National Association of Manufacturers are pleading with Congress to stop this. 

Other countries have had the same faith in the “full faith and credit” of our currency as I did as a boy buying U.S. savings bonds. That’s why they link their currencies to the dollar. Lose that, and we’ll never get it back.

Ballard said, “It is extremely disappointing that anyone would even consider using the faith and credit of the United States as a bargaining chip.”

I would guess that if people understood that a default could wipe out the value of their retirement savings, they’d find “extremely disappointing” far too mild a term. 

Jack Lessenberry is Michigan Radio’s political analyst. Views expressed in the essays by Lessenberry are his own and do not necessarily reflect those of Michigan Radio, its management or the station licensee, The University of Michigan.