Tuesday, July 19, 2011

What I simply do not understand about how the world works

Simon Johnson says it would be pretty scary if the U.S. government decided not to raise its own debt ceiling, and instead defaulted on its debt:
So this is what a US debt default would look like: the private sector would collapse, unemployment would quickly surpass 20%, and, while the government would shrink, it would remain the employer of last resort.

The House and Senate Republicans who do not want to raise the debt ceiling are playing with fire. They are advocating a policy that would have dire effects, and that would accomplish the opposite of what they claim to want, because a default would immediately make the government more, not less, important.
For all I've read about economics as a layman (but a fairly intelligent one, I'd like to think) here is what I simply don't understand about our financial system: what meaning does this debt ceiling have, anyway? From the looks of things, no one can enforce the debt ceiling on our government except itself. What can it possibly mean for the government to declare that it is now allowing itself to owe more money?

Statements like these are simply incomprehensible to my little brain:
The fundamental benchmark interest rates in modern financial markets are the so-called “risk-free” rates on government bonds. Removing this pillar of the system – or creating a high degree of risk around US Treasuries – would disrupt many private contracts and all kinds of transactions.
In other words, Mr. Economist, you're saying that the entire basis of all of our prosperity is the fact that the US government carries a really big stick, and that as soon as they decide to put down that big stick, everything goes to hell?

What makes anyone give the government a good credit rating in the first place? I could be totally misunderstanding the situation here, but it sounds to me as if the government at this point must borrow more in order to pay off the debt it currently owes. Otherwise, why would there be any need to raise the debt ceiling? If it must always borrow more, doesn't that simply mean it never actually has the money it needs to pay off its debts? What credit rating would you give such an entity? I mean, imagine if I never actually paid a bill with money I had earned. I could just go around borrowing from Bob to pay back Bill, and on and on down the line. I'd have a perfect credit score!

It sounds to me as if we have an entire system based on the fact that at least one borrower out there--Uncle Sam--can just keep borrowing, because no one has the power to turn him down. All the other big players benefit from this, because if they get into trouble, they can just borrow from Uncle Sam, who can borrow from someone else, and it always looks like we're paying our bills on time. And things just keep going. It's like one giant procrastination tool. Oh, not that you and I get these little perks. I guess that only works if you're a millionaire banker.

And how can Uncle Sam possibly have such power, that no one can ever turn him down for a loan? Certainly no mere mortal has such power. I'm not an economist, so I guess I don't know how it works. But it seems to me that when you get right down to it, well, Uncle Sam can take your property, Uncle Sam can drop the bombs, so you better not turn down Uncle Sam.

So please, Republicans, let's just get this charade over with and raise the debt ceiling. Apparently all it takes to stay off a depression is to declare, "Hey, we're allowed to owe more money now." As if the rest of us didn't already know.

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