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Playing Chicken With Full Faith and Credit

A Commentary by Froma Harrop

New polling by Rasmussen shows voters highly conflicted over which party to blame for our economic troubles and which is best able to end them. But Americans agree on one thing: The economy is lousy. And from that, we can reasonably deduce that they don't want a lousier economy.

Given such uncertainty, is now a politically smart time for Republicans to play a honking stupid game of chicken that could plunge a struggling economy into total misery? No, but they can't resist.

Rep. Paul Ryan, R-Wis., and company have remarkable confidence in their ability to stage manage a fire-twirling act in a gunpowder factory. Not since they shut down the government in 1995-96 have Republicans engaged in such high-wire theatrics. (We note that the voters did not reward those efforts in subsequent elections.)

Despite pleas from their Wall Street allies, Republicans are threatening to vote against raising the federal debt limit unless Democrats cave on the deep spending cuts they demand. Even if one wants these reductions very badly, one ought not go about getting them by risking the full faith and credit of the United States. A default on U.S. debt could have apocalyptic consequences on global markets.

But "Aha!" ringmaster Ryan insists: It's all under control. We're not going to permit a real default on American debt. No siree. As the House Budget Committee chairman explains, Republicans are contemplating only a "technical default" on U.S. debt, and that would not shove our economy over the cliff. You see, the government would continue to pay interest on the debt while putting off payment of other bills -- for instance, Social Security benefits.

Oh, that will go over big. Most Americans may not grasp the economy's inner workings, but they do understand Social Security payments. And they know in their gut that if something happens to the monthly benefits on which many elderly subsist, something awful is going on in Washington. And this time, they won't blame Democrats.

Some economists say that pulling off a "technical default" at this point in the calendar would be technically next to impossible. Bruce Bartlett, a Treasury official in the Reagan administration, notes that while the budget managers can shuffle around who gets paid first, the fiscal year ends on Sept. 30, giving them minimal flexibility.

Of greater concern, a technical default might not be warmly received even by financiers who fully get the concept. Put bluntly, the world markets could think that American leaders have gone out of their ever-loving mind and pound the "sell" button on the United States.

"We think this is no way to operate a highly advanced economy such as the U.S.," write Morgan Stanley economists David Greenlaw and Ted Wieseman. "And, the risk of investor confusion obviously begins to rise as the U.S. political system appears to become more and more dysfunctional."

Always the practical ones, the Morgan economists offer investors advice on how "to play the looming debt ceiling showdown." They offer two very different scripts.

"Under one plausible scenario," they write, "there is panicked selling of Treasuries because of general investor confusion." In another, investors realize that there is virtually no chance of a real default because the Treasury Department has tools to avoid it. The result of the expected Treasury interventions? Yields go lower, and the roof doesn't cave in.

"It really boils down to a high-stakes game of chicken," Greenlaw and Wieseman conclude.

You'd think that Ryan and fellow GOP hot-rodders -- already so busy trying to dismantle government guarantees on Medicare -- would not be inclined to simultaneously dangle the economy over the abyss, but they are. And isn't it exciting?



See Other Political Commentary.

See Other Commentaries by Froma Harrop.

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