Next Time, Dammit, Just Default

Next Time, Dammit, Just Default

Democrats feared a monster called “default”—but it’s just another Washington scare story.


The debt deal is now law. Far-right Republicans were unhappy, because it doesn’t cut spending by enough. Center-left Democrats (there are no far-left Democrats in Congress) are unhappy, because they got nothing: It’s all concessions to win Republican votes.

True, it could have been worse. The fiscal effects are small (for now), and the deal lasts only two years. The problem is that it institutionalizes debt-ceiling hostage taking; the precedent is set, and the pattern will repeat.

Why did the Democrats cave? They feared a monster called “default.” This horror, we are told, would sink our national credit, drive up interest rates, destroy the dollar, wreck the economy, and undermine our national security. Vladimir Putin and Xi Jinping, Hillary Clinton told us, would have been the true victors if the deal fell apart.

It’s a typical Washington scare story, for two reasons.

The first, as I have written for The Nation previously: The Treasury Department had legal paths to avoid default with no need for cuts or caps. They were rejected only because President Joe Biden chose to negotiate and make concessions. And once the terrible deal was struck, most Democrats were too terrified to vote it down.

So, what about that specter of “economic catastrophe” in case of “default”?

The debt ceiling exists for only one reason: to authorize the Treasury to issue bonds. Contrary to many claims, breaching the ceiling would not have stopped any checks from going out. The Treasury has no power—and also no procedure—to stop or delay making payments ordered by law.

Without bonds, there might have been a problem when the banks tried to clear those payments at the Fed. What would have happened if there were no funds in the Treasury’s General Account? Without violating the debt ceiling, the Fed could have given the Treasury a no-interest, unsecured line of credit. This is highly contentious. But it is arguably legal. And it would be better than bouncing checks. If that had happened, the pitchforks would have come out, and the Fed (or the Republicans) would have buckled. Any other scenario is absurd.

Once payments cleared, maturing bonds would convert to bank deposits. Since 2008, the Fed has already been paying interest on bank reserves, so US banks no longer need to buy Treasury bonds. Anyone wanting interest can hold a bank deposit.

It’s likely that unless the Fed reacted by raising rates to the rafters, the dollar would fall as investors bought some other government’s bonds. Import costs would rise. Some cheap imported comforts would disappear. But then domestic production would start to revive. US workers would recover bargaining power. The global banks would shrink; some might have to be reorganized to concentrate on making business loans at home. Wall Street would suffer; Main Street would gain. In short: The US position in the world economy would change. And this could be a good thing.

Moreover, precedents exist. A new article by the historian Eric Toussaint reminds us that the US has done this before. In April 1933, Franklin Roosevelt abrogated the gold clause in debt contracts and banned almost all private ownership of gold. He later devalued the dollar. This was a default. But it survived the Supreme Court. And it worked. Debts lost value. Working people regained confidence, and the economy grew for the next four years. Going off gold was a key early step in the New Deal.

If bondholders were to take a bath, the media, the lobbies, and the kept politicians would scream. Just as they did in 1933. But these changes would help bring about desperately needed economic and political reforms. This could mean creating more good jobs at better wages, generating new industries, transforming the energy industry, effecting social renewal—and (best of all) putting an end to the death grip of Big Finance on our national life.

Maybe it’s time to end the 40-year suffocating reign of the God-Almighty Dollar. It might be the beginning of something great—a new era. You might call it a new New Deal. Next time, Democrats, show some spine and bring it on.

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