Skip to main content

Doomsday is the day after tomorrow: what would the default do?

There are many stories about doomsday, i.e. the breaching of the debt-ceiling limit of US$16.7 trillion, which would basically force a balanced budget amendment on the Federal government. As I noted, and Dean Baker too (although I disagree that if the dollar was not the key currency it would mean more jobs, but that's for another post), it is unlikely that the default would lead to a dollar crisis. The position of the dollar is relatively safe, if nothing else because Europe and Japan are in crisis, and China's currency is not convertible.

On the other hand, the default will impose severe austerity. Note that deficits have been falling since Obama took office, as can be seen in the figure below, from about US$1.5 trillion, in the first year of the Obama administration (inherited from Bush) to around US$1 trillion last year, and an estimated smaller number this year (without a default).

If a balanced budget was imposed the immediate impact would not be a decrease of spending of US$1 trillion, but that would be what would have to be achieved over a full fiscal year. Even if you assume a small multiplier of say 1.2, that would imply a staggering fall in output of around 8% of GDP. Not a recession, but a huge one. Note that the deficits will actually not decrease, since revenues would collapse, and with it renewed efforts to cut spending.

The fact that something as simple as the multiplier, and as clear in the historical record, and supported by tons of empirical data, could be ignored is incredible. But remember that the people behind this in Congress do NOT believe in evolution, and do think we are living in the end of times. Maybe that's the reason they want to default! Of course all of this could be avoided with a simple vote. Hope springs eternal.


  1. " China's currency is not convertible."

    Few currencies are convertible. Most are only exchangeable.

    A very important difference that makes Gold Standard thinking inapplicable.

  2. Re the so called "national debt", I'd like to ask you to consider joining my campaign to give it a new name: "national savings". See:



Post a Comment

Popular posts from this blog

A few brief comments on Brexit and the postmortem of the European Union

Another end of the world is possible
There will be a lot of postmortems for the European Union (EU) after Brexit. Many will suggest that this was a victory against the neoliberal policies of the European Union. See, for example, the first three paragraphs of Paul Mason's column here. And it is true, large contingents of working class people, that have suffered with 'free-market' economics, voted for leaving the union. The union, rightly or wrongly, has been seen as undemocratic and responsible for the economics woes of Europe.

The problem is that while it is true that the EU leaders have been part of the problem and have pursued the neoliberal policies within the framework of the union, sometimes with treaties like the Fiscal Compact, it is far from clear that Brexit and the possible demise of the union, if the fever spreads to France, Germany and other countries with their populations demanding their own referenda, will lead to the abandonment of neoliberal policies. Aust…

A brief note on Venezuela and the turn to the right in Latin America

So besides the coup in Brazil (which was all but confirmed by the last revelations, if you had any doubts), and the electoral victory of Macri in Argentina, the crisis in Venezuela is reaching a critical level, and it would not be surprising if the Maduro administration is recalled, even though right now the referendum is not scheduled yet.

The economy in Venezuela has collapsed (GDP has fallen by about 14% or so in the last two years), inflation has accelerated (to three digit levels; 450% or so according to the IMF), there are shortages of essential goods, recurrent energy blackouts, and all of these aggravated by persistent violence. Contrary to what the press suggests, these events are not new or specific to left of center governments. Similar events occurred in the late 1980s, in the infamous Caracazo, when the fall in oil prices caused an external crisis, inflation, and food shortages, which eventually, after the announcement of a neoliberal economic package that included the i…

What is the 'Classical Dichotomy'?