What debt default will mean for America

Answer: Very little.

The prospect of a debt default gets a lot of oxygen in the financial press. Scaremongering is the Democrats favorite passtime, and if it is not climate change or a claim the Republicans will end Medicare or Medicaid, it is the presumed calamity of a debt default.

Economists say default will be a “catastrophe” with higher interest rates, a stockmaket crash, a recession and higher unemployment. Those are today’s goals for monetary policy, nothing catastrophic about those outcomes. It is not a catastrophe to achieve the goals the Fed has sought for months and the stock market is still grossly overvalued today, leaving investors with little prospect of reasonable returns.

An actual default will bring Biden to the negotiating table to deal with national debt that is out of control and will be short lived. Financial markets will be roiled which will benefit investors since both stocks and bonds will fall in price and actual investors can put their money to work for higher returns. The class of traders who think higher prices benefit investors need mental health help. Investors benefit from lower prices which are equal to higher returns. Higher prices produce short term taxable capital gains for those who sell, and commissions and trading costs as they search around to find another investment as good as the one they sold so they could claim a win. When prices fall, many will hold on to their investments praying for a rally so they can get out. Me, I will be buying into the market rout.

The fall in bond prices compels higher rates, taking the pressure off the Fed to tame inflation. That is a badly needed benefit, not a risk. The default will trigger an economic downturn, something the Fed has been trying without success to engineer for a couple of years. That is a similar benefit.

The U.S. dollar will come under pressure, improving the competitiveness of U.S. exports, another win. Maybe the greenback will lose some “status” as the world’s “reserve currency” but most people don’t care. The United Kingdom didn’t sink into the ocean when the pound Sterling lost its status as the world’s “reserve currency” and may Brits are thankful for the absence of the pressure to keep the British currency artificially higher than markets would otherwise dictate. Bretton Woods didn’t results in calamity, just a change in horses for the economists and financiers who care what currency has the status of “global reserve currency”. China would love to have the remnibi take on that role.

Democrats need a wake up call to stop reckless spending. A debt default will be a cold shower for the Modern Monetary Theory nutcases who think governments can spend unlimited amounts without consequences. What will put the brakes on reckless spending is a lack of lenders. Imagine an America that lives within its budget and eschews deficits. The U.S. actually operated at a surplus in 1969, and again from 1998 to 2001. It can do it again and be better off for doing it.

Donald Trump was correct in his Town Hall when he said Kevin McCarthy should hang tight and compel less spending or let the U.S. default. Trump may not be everyone’s cup of tea, but he is more often right than wrong on policy matters.