Grumpy Economist on The Coin
January 13, 2013 1 Comment
Hate to be a broken record, and the few remaining RWCG readers who have stuck with me through my posts on Coinology and ‘default’ semantics may get deja vu, but John Cochrane is a must-read on the Coin and the Debt-Ceiling. Anyone convinced I’ve been talking out of my butt on these matters will be surprised to learn that someone else actually confirms what I, and not Paul Krugman, have been saying.
Debt: US government bonds, issued by the Treasury. Promises to pay for your healthcare is not “debt,” and if the government reneges on that promise it’s not a “default.”
If a $100 bond comes due, the Treasury can sell a new $100 bond to pay off the principal without increasing the total amount of debt. And there’s still $2.5 trillion of tax revenue coming in. That’s plenty to cover interest payments. If anything, the law is pretty clear that interest payments on the debt are the last thing the government can stop paying, not the first.
This is simply a red herring. Social security checks might stop, farm price support payments might stop, they might have to send the TSA home from airports and let the NRA take care of security (joke here, please don’t go nuts). All this might cause a lot of hardship, but there is nothing forcing the government to default. Default would be a choice.
Golly! Now where have you heard this before?**
Parse [Krugman's piece] carefully for Clintonian veracity. “Defaulting on its obligations” could mean not paying promised farm price supports, or delaying payments (as the State of Illinois does) to vendors, not actual default on Federal debt. So it’s just a nanometer this side of factually incorrect. But you’d have to be very knowledgeable not to infer from the following sentence “disastrous effect on financial markets” that Krugman is not talking about actual “default” (a term meaning “not paying back bonds”) from this more metaphorical sort of “default” (meaning breaking an implicit promise).
How ill-served we are by our Smart People financial commentariat when everyone on up to Paul Krugman the Nobel-Prize winner is being more misleading than “The Crimson Reach”.