It’s time to stop throwing around the term ‘default’
January 12, 2013, 5:46 pm
Filed under: Uncategorized

Memo to econ-bloggers of all stripes: Cut out the BS and stop throwing around the term ‘default’.

I’ve mentioned before but it really bears repeating that a lot of influential commentators, who should know better, are really misusing the term ‘default’ when they say, or imply, that not-raising-the-debt-ceiling = ‘default’.

Yes, if the US stopped sending out (say) Social Security checks, there’s no doubt that would be terrible. Disruptive. But it wouldn’t be a default.

That is not what ‘default’ means. There is a difference between spending money and repaying borrowed money. It is an important difference. It is an important difference, in particular, to would-be lenders. That is because would-be lenders have an interest in knowing and surveilling whether they are likely to be repaid on loans they have made. To this end an entire infrastructure of credit rating and analysis has been built up. And it is this event and this event alone – not-repaying-a-debt – that the term ‘default’ is intended to capture. That’s what lenders care about. That’s what they charge interest for. The risk of wondering, will their loan be repaid. They don’t give a rat’s ass whether you’re spending money on toys for yourself. (In fact, all else equal, they’d probably rather you not.)

Default is not necessarily always 100% unambiguously definable of course. What a rating-agency such as Moody’s might consider a state of ‘default’ for the purpose of removing your credit rating or calling you a ‘D’ might be slightly different than what ISDA might consider a ‘default’ for the purpose of triggering CDS protection, and so on. Greece was a bit fuzzy in that regard. But as long as the US kept making debt-service payments, under no sane definition of ‘default’ would not-paying-some-discretionary-spending be a default.

Bad, perhaps; you could certainly make that assertion. But default? No.

Words means things. We have various words for various things. We have a seemingly huge and always-growing super-Smart, financial-journalist/blogger class which comments on all these subjects daily at great length, some of them professionally. (I am not one of them.) They are supposed to know, at bottom, what the word ‘default’ means in this context.

And a lot of them apparently don’t. Or: they’re pretending not to. Because they keep muddying the waters on this point by throwing around ‘default’ so loosely.

Either way, it’s worth pointing out that such commentators are doing a grave disservice to their readers, misleading them either intentionally due to their ideology or unintentionally due to their ignorance.

6 Comments so far
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Is this a matter of assuming that the US government would sooner stop paying interest on its debt than stop discretionary spending?

If that assumption is present then what they are saying makes sense, right? Otherwise, it’s just a matter of what we don’t spend on.

Comment by tangentstyle

They *can’t* ‘sooner’ stop debt-service than to stop discretionary spending. That would be a violation of Section 4 of the 14th Amendment which (ironically) many of these same bloggers have lately been reminding us of.

In any event if they (who, Congress? Treasury?) *did* decide to prioritize discretionary spending over debt-service, *that* would be a default. But under the present circumstances, debt ceiling or no debt ceiling, we simply won’t default unless we choose to.

Comment by The Crimson Reach

Makes sense.

How is it decided what government initiatives would be stopped if we could no longer borrow to fund operations?

Comment by tangentstyle

I don’t know that there’s any hard-and-fast rule, indeed I don’t think so. That’s why I think my Split The Difference/uniform-slash-across-the-board rule is as good as any other. With any luck, we’ll find out! :-) (I doubt it though, presumably either Obama will ‘use the 14th amendment’, they’ll make payments in ‘registered warrants’, or there be another ‘deal’)

Comment by The Crimson Reach

Well, the answer is that it’s probably up the President to prioritize things.

However, since the President does not want to be responsible for failing to pay Medicare checks because he wants to ensure the debt is serviced. Thus, he and his minions characterize any situation where the President would be held responsible for failing to pay Social Security or Medicare or Medicaid as a “default”.

Comment by Dave

Exactly. All of which is totally understandable. What I don’t get is why people who are supposedly being paid for their expertise in financial matters (like, to name names, Joe Weisenthal) would go along with the charade.

Comment by The Crimson Reach

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