March 2, 2021

Deal May Avert Default, but Some Ask, ‘Is That Good?’

But will the sky really fall?

It is a question more people were asking as the nation’s cash dwindled and lawmakers remained stuck in gridlock before the framework of a settlement emerged late Saturday. President Obama and Congressional leaders were working Sunday to negotiate an 11th-hour deal, and then must hope it can pass in both chambers of Congress this week.

Most people would rather not risk finding out and are hoping lawmakers can turn the framework into a bill that would raise the debt ceiling. But in recent days there has been growing attention on a few economists and financiers who have been arguing that it would be all right to miss the deadline — and even, a few of them say, default on payments to the nation’s bondholders.

These economists and traders argue that lawmakers need to focus on the nation’s long-term financial health rather than its current bind. They point to historical examples involving local and national governments that defaulted on some obligations, and said the short-term pain that befell those places when they tried to borrow again eased over time.

In the case of the United States now, they say such short-term pain would be worth it if it helped lawmakers achieve a sweeping plan to finance the country’s future — including costly programs like Social Security — without running such a large deficit. A few on the fringe even say the country would be better off if it wiped its hands of some or all of its debt because it might mean future generations of workers will not have to see taxes go up as much as they are otherwise likely to do.

“We have an opportunity now to get ahead of this and we might not in a few years,” said Christopher Whalen, who writes the Institutional Risk Analyst newsletter. “If a democracy requires more time, then take more time. I don’t think a default is as big a deal as people say it is, because where do investors go?”

Indeed, most investors believe they have few safer places to park cash other than the Treasuries that the United States issues to borrow money. Recently, as lawmakers failed day after day to reach a deal, investors have piled into long-term Treasuries, paying more to purchase them and driving down the United States’ borrowing cost. That may be because of weak economic data that has thrust the prospect of stocks into question, but it also underscores the unique status Treasuries hold as a global safe haven and a currency in countless financial transactions each day.

No one really knows what would happen if the United States defaulted on its debt, and a default could come in many forms, including a late payment of interest, a renegotiation of the absolute level of debt or missed payments of some of the government’s other obligations, like payments to its vendors. The idea of some sort of default has been tossed around by big names on Wall Street and Washington, including by Stanley Druckenmiller, a private investor who spent many years working with the billionaire George Soros. In May, former president Bill Clinton reportedly said at a panel that “it might not be calamitous” if the country defaulted on its debt for a few days.

It is difficult to separate viable proposals from political posturing in the budget debate, and the warnings given on both sides may be exaggerated. There are no historical examples that could be considered directly comparable. Several Republican lawmakers have been urging their peers to take more time on the debt talks, saying doomsday is not imminent. The Obama administration, which months ago announced this Tuesday as the deadline, has vigorously disagreed. Historians still debate what would have happened in 2008 if there had not been a bailout for the banking system. Many in Washington and on Wall Street had argued there would have been a catastrophe back then if the government hadn’t intervened.

The question really is whether United States Treasuries, the country’s instrument of financial power, is something to be preserved at all costs, as most economists say, or if their status gives the country some leniency in the markets if lawmakers decide to temporarily default, for instance.

Julie Creswell contributed reporting.

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