Dean Baker: “Let’s Just Default”

An interesting article by Dean Baker today. “Defaulting on debt is not the end of the world“. Dean has gone over the top and is now advocating a debt default by the USA as a way of “fixing” our problems. Dean thinks that the existing obligations of Social Security and Medicare are much more important to maintain that our credit rating. His words:

Compared to these outcomes, (cuts in SS and Medicare) a financial crisis and the subsequent slump that follows may seem like a relatively small cost.

Baker thinks this would be an easy matter. He points to Argentina as an example. This just proves that Dean has no clue what he is talking about. Yes Argentina defaulted and recovered after a few years. But Argentina is not a reserve currency that has a linchpin role in the global financial system. Argentina is a fraction of global GDP (Argentina = 0.5%; US = 25.0%). Their default was painful to all. Both citizens and creditors suffered. Savers lost everything. Pensioners got worthless script versus the payments they were promised. Dean thinks following Argentina is the right thing to do:

The experience of Argentina may be instructive in this respect. Argentina defaulted on its debt at the end of 2001. By the end of 2003 it had recovered its lost output.

It is also likely the case that the United States would rebound and possible rebound quickly from a default.

I don’t know how to handicap the possibility for a debt default by the USA. In 2007 I would have said it was a near zero possibility. Today it’s no longer zero and the odds rise by the month. The scary thing for me is that no one is doing a damn thing about it. The budget silliness of last week is a case in point. The idiots in D.C. damn near shut the government down over a few billion bucks. Lunacy. And now ‘important’ voices like Baker are suggesting default is a viable option.

It’s hard to imagine what a debt default for the world’s biggest creditor would be like. Some of the things that I think could happen:

Mr. Baker must come to grip with the facts of default. As he and many other defenders of Social Security have said repeatedly; the assets of the Social Security Trust Fund are equal in legal status to the debt issued to the public by Treasury. This means that it isn’t possible for the US to default on its public debt without also defaulting on the Special Issue bonds in the SS Trust Fund. As SS is running a cash deficit on a monthly basis it would only take 30 days for all checks to stop. Period, full stop. Social Security would cease to exist.

The Medicare Trust Fund, Military Pension Trust Fund, Federal Workers Trust Fund would also default. They too would stop issuing checks. Medicare would no longer function. Some level of medical care would be maintained. But older people who needed lifesaving treatment wouldn’t get it. Hundreds of thousands would die. The number could easily go into the millions.

Surely we would see a collapse of the dollar. The cost of everything we import would triple++ in a very short period of time. The price of gas would be $10? 50? 100?

Equity markets in the US would collapse. A loss of 50% would be a good outcome. It could be much worse than that. We know that the wealth affect drives the economy, so this result would insure a collapse of US GDP. How long would the depression/recession last if this were to happen? At least a decade. It would be worse than what happened in the US during the 30’s.

Unemployment? A minimum of 25% would be the result.

Interest rates? Who knows? There would be no debt market left in the event of a default by the US. There would be no credit available.

If Treasury were to default, every mortgage borrower would follow suit. If the banks were not wiped out by the federal ‘no pay’ they certainly would be wiped out by the mortgage defaults. Almost all banks would shut. This would cascade back to the FDIC. The withdrawals from account holders would force the FDIC to honor its obligations. As they have no reserves this would force Treasury to issue coinage ($100 bills) to satisfy the run on the bank. This is the hyper inflationary environment. The price of basics (food) would explode. Shelves would empty. People would go hungry. In the years that followed a default many would starve, many of those would die.

All municipalities would be forced to default. All muni savers would be wiped out. The business of local government would shut down. They would be unable to make payroll, so no one would work. Garbage collection would stop. There would be no police. Crime would be rampant. Armed robbery, rape and murder would be common. Vigilantism would rise. Open conflict on a regional basis would be the result. There would be no fire departments. Cities would burn.

All infrastructure repairs and investments would stop. In a very short period of time roads, bridges, ports, airports would become dysfunctional. It would not really matter that much. There will be no gas or diesel to power vehicles, so the broken roads would be empty.

-Most public education would end.

There would be no real estate market. There would be no Fannie, Freddie or FHA. There would be no lenders to finance a home. There would be no liquidity. Prices would collapse. A house would sell for a few months of food.

It’s difficult to image the consequences outside of our borders. Neighboring countries like Mexico and Canada would implode. The decline of the US economy would ripple around the world. Other countries would be forced to repudiate their debt. It’s possible that a default in the US would force all big debtor countries to follow suit. At that point all seven billion people would suffer.

Functionally there would be no US military. Regional warriors and pirates would rule. Major nations could start wars over natural resources.

I suspect that a number of readers will agree with Dean. Pull the plug on the whole system. Let the chips fall, let the shit fly. That may happen. We are most certainly headed in that direction. The probability of this happening just increased a notch or two. Dean Baker has a big audience and a fair bit of support. Big shots like Paul Krugman quote him all the time. Now that Dean has put his reputation (and CEPR) on the line by calling for a debt repudiation he will be forced to push his agenda. Like I said, this is a “popular” option.

Dean Baker is the champion of Social Security and Medicare. His many supporters should understand that he is advocating policies that insure that their savings, benefits and medical protection would be wiped out. He would destroy exactly the group that he thinks he is trying to protect. They should at least seem him for what he is. A fool that will ruin them.

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About Bruce Krasting 208 Articles

Bruce worked on Wall Street for twenty five years, he has been writing for the professional press for the last five years and has been on the Fox Business channel several times as a guest describing his written work.

From 1990-1995 he ran a private hedge fund in Greenwich Ct. called Falconer Limited. Investments were driven by macro developments. He closed the fund and retired in 1995. Bruce also been employed by Drexel Burnham Lambert, Citicorp, Credit Suisse and Irving Trust Corp.

Bruce holds a bachelor's degree in economics from Ithaca College and currently lives in Westchester, NY.

Visit: Bruce Krasting's Blog

1 Comment on Dean Baker: “Let’s Just Default”

  1. I wouldn’t buy a roll of toilet paper from Dean Baker or his side-kick Mark Weisbrot. They are far left chumps of Hugo Chavez, let them sell their prescriptions there. He is not a credible spokesman on any topic.

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