Too Big To Disappear

S3: Right?

S1: The fact that without triggering default, that would involve a default. We have already failed to raise the debt ceiling, the debt ceiling. This is I mean, this is the whole thing is profoundly dumb. And this tell us, are you still single most boring? And everyone believes that thing you can say about the debt ceiling is it is profoundly dumb. It is the really dumb thing which should not exist. OK, get that out of the way. We have said that on this show in the past. What’s more interesting right now is like, what happens? If so, OK, let me rewind a bit. In 2019, it was suspended, which is great, and it should always be suspended, but it’s been suspended indefinitely and for all the time, but the suspension came with a. You know, an expiry date basically, and the expiry date was August, the 1st of this year. So on August the 1st of this year, the debt ceiling came back and it was set according to law, according to this law that was passed in 2019. And I cannot emphasize how surprisingly dumb this was, according to the law, which was passed in 2019. The debt ceiling was re-imposed on August the 1st of this year at wherever the debt was. Whatever the debt was on August the 1st of this year, that was the new debt ceiling.

S2: So five seconds later, we see five things.

S1: So basically, what happened is since then we have not been able to increase the debt by one penny. Of course, we have been running a government deficit since then. And the only reason that we’ve been able to do so is because Treasury had some reserves and the Treasury had some money in its bank accounts, and it can spend that money instead of having to borrow the money. But yeah, we have hit the debt ceiling. We’ve we are at the debt ceiling. We’ve been at the debt ceiling since August the 1st, so that’s, you know, getting on for two months now. And it is getting really painful right now, and we are going to start having to effectively default on our obligations if this debt ceiling doesn’t get raised pretty damn quick. Now the question is. Which obligations are we going to default on and how are we going to default on them, right? And so there are some obligations like government salaries, which, you know, it’s bad if you don’t pay your employees the money that they’re owed. But financial markets don’t consider that in the event of default. On the other hand, another obligation is Treasury Bond coupons, and if you fail to make your Treasury Bond coupon, that’s when people start bringing out the parade of horribles. And what Janet Yellen has been saying is she doesn’t distinguish, she doesn’t. She’s not going to play favorites. She’s not going to, you know, stop paying her own salary just so that she can continue to pay bond coupons. And so the Bond coupons might start getting missed at some point. And this is where she writes this. Wall Street Journal op ed. And I’m just going to quote this because this is the classic formulation of the parade of horribles. Doing so would likely precipitate the historic financial crisis that would compound the damage of the continuing public health emergency. Default could trigger a spike in interest rates, a steep drop in stock prices and other financial turmoil. Current economic recovery would reverse into recession, with billions of dollars of growth and millions of jobs lost. That is basically what everyone believes will happen if the debt ceiling isn’t raised.

S3: That is terrifying and but maybe untrue, says again, Felix Felix.

S1: I’m not convinced that we’ve never really done it, we haven’t tried it. I am pretty convinced that if you did wind up getting into that state of default, it wouldn’t last long. Right? Once you start like not paying congressional salaries, they’ll be like, OK, fine, we’ll raise the debt ceiling.

S3: It seems like when you tell when parents tell their children like horror stories about drugs, like if you try marijuana, you’re going to jump off a building terrible. Your future is imperiled by the prospect of taking illegal drugs. And then the kid obviously eventually tries some kind of illegal drug and everything’s just fine. Is that what we’re looking at here?

S1: I think so, I mean, because this is because late in the bond markets, everyone is terrified of default, because default means you lose your money, except for in this case, it doesn’t mean you lose your money. If you lend money to Evergrande by buying an Evergrande bond and then Evergrande defaults, you lose your money, you take that money is gone. You’re never getting it back. If you lend your money to the US government by buying a US Treasury bond and then the Treasury defaults, you get all of your money back. There is no way that you actually lose any money at all. It’s it seems to be a much less painful default than any other kind of default. A default where you get recovery of 100 cents on the dollar is is kind of weak tea, and I feel like there would be this kind of flight to quality and people would be buying Treasury bonds, especially if they were paying statutory past few interest of seven percent. The Fed would probably be buying as well to make sure that there wasn’t crazy liquidity problems in the Treasury market. I don’t think the prices of bonds would go down a lot. I don’t think there would be a recession, but you know, it would be ridiculously stupid and damaging, and it would damage America’s reputation, and it would make us look like a tin pot stupid country.

S3: I mean, we already do.

S2: OK. Well, indeed. But I do think the point about the reputational element of this is perhaps understated in the context of everything else that we’re talking about. You know, it’s just the idea of the U.S. failing to meet its obligations, even if there are not necessarily any practical consequences does seem to Emily’s point to be like a psychologically challenging thing to overcome.

S3: Yes. But I mean, can our reputation get any worse at this point? Like the U.S., I checked the stats on the Times this morning, and the U.S. is a quarter of all COVID related deaths right now. I mean, it’s just so embarrassing. What have we been doing? We had we already lived through the Trump era, then we kind of screwed up this pandemic thing. And now this, I feel like it’s like, OK, yeah, I’m reading.

S1: I’m already reading op ed in The Washington Post about how the 2024 election is certain to be a constitutional crisis. Oh yeah. A bunch of states refusing to certify their vote.

S2: You know, Texas is doing is following in the footsteps of various others and doing audits, even though the Republicans like roundly swept to every possible election. There are many. They’re laying the ground confusing.

S1: This is really worrying to me, right? So there’s a bunch of audits in Texas if the 2020 election results. Clearly, it’s not because the Republicans think that the results were. Long because they won. The reason they’re doing it is to basically put all election results in question so that anywhere that any Republican loses an election, they can just say that was rigged. People are going to believe it. Just a lot of people believe that the 2020 election was rigged. So, yeah, I think Stacey is absolutely right that we are in this state right now that the global standing of America in the sort of minds of the rest of the world was severely damaged by Trump and is not being repaired nearly as much as one might have hoped by. You know, Tony Blinken or Biden or anyone currently in power is also going to talk about submarines.

S3: I was just going to say the brinksmanship with default and the debt ceiling is just as destabilizing as sort of like this auditing of elections. There’s this bedrock thing that we have in the U.S. government and the Treasury in the fact that we’re like this very powerful economy that doesn’t default on debts were not some like when?

S1: Not Argentina.

S3: Yeah, we’re number one, y’all. But like, we’re doing this brinksmanship in Congress that kind of makes everything sort of uncertain around that. And it’s very destabilizing of the most sort of bedrock things about the country, like we have free and fair elections. I mean, sort of we can we don’t want to get into like a whole civil rights discussion, but we have like pretty stable real elections and we have this very strong economy. And yet these political forces are seeking to throw those things in question. And it’s it’s bad for our reps.

S1: It’s such an unforced error. I mean, Mitch McConnell, bless him. It keeps on coming out and saying this thing, which he’s like, we have to raise the debt ceiling. It is vital that we raise the debt ceiling and is what it is 100 percent something that we have to do. We have no choice, but he refuses to vote for it.

S2: Everyone’s taking like a collective deep breath sort of deciding that we should talk about submarines now.

S1: So the submarines thing is interesting. The submarine thing is the way I read it anyway, is an attempt by the United States to really start projecting its power internationally in a way that no country has ever done, ever in the history of the world, which is specifically by exporting their nuclear technology to a second country. Every nuclear submarine in the world is a domestically built nuclear submarine. Right now, the Americans have American submarines, the Brits have British submarines. You know, the French have French submarines and these are the nuclear powers have nuclear subs. What the deal that Australia, the UK and the US came to was basically the. The U.S. and the U.K., both of whom make their own nuclear subs, would for the first time ever, export that technology to Australia, they would allow Australia to have its own nuclear submarines using U.S. and U.K. technology. And that seems, you know, I don’t know if people don’t seem to be particularly shocked by this, but we are explicitly increasing the number of nuclear powers here for the sake of it’s not entirely obvious, but something containing China, something Indo-Pacific, something which, like Stacey, you can tell me, how many times have you heard the word Indo-Pacific in the past few weeks compared to how many times have you ever heard it in your life before that?

S2: I was like, Is it 1992? What’s happening right now?

S1: What is Indo-Pacific? I don’t even understand what Indo-Pacific is.

S2: It does make me think of Indo-China, which you know how to live music.

S1: But it is basically like this idea that, like the new place the American security and the global security needs to care about is this sort of confluence of the Indian and Pacific oceans, which happens to be where Australia is.

S3: My rudimentary understanding is that Australia is closer to China than Europe is. So now we do nuclear stuff and deals with Australia to somehow contain China, which is apparently a military threat, though it is what I don’t. That’s my underst. That’s my tldr.

S2: I think one of the things you know, this sort of continuing the idea of the perception of various countries like one of the things that I have found interesting is kind of the degree of peak in the French commentary around feeling sort of betrayed, but also, you know, the on the record comments about the UK and just like how they perceive things. My my sort of realist. International relations brain is like, who is this a realignment of the global order? What are we seeing here? But I do actually think given the the pandemic induced outbreak of nationalism right where we have seen real tensions about borders, where we have seen real tensions about vaccine production, and now everybody’s trying to figure out how to protect their supply chains because nobody can get anything from anybody else. This, to me, just seems like of a piece in terms of you have a simultaneous doubling down of we need to do what is right for us, and there’s a re a reconsideration of what the coalitions are, who might be on your side.

S1: So, Stacey, can you like rewind a little bit and just explain like, how is France involved in this whole submarine saga and what do they think of what just happened?

S2: Well, from what I’m gathering is that they feel cut out by, you know, their more traditional allies, and I think that probably, you know, I think one of the one of the earliest headlines was that they canceled a gala after the U.S. entered into this agreement and everybody was like, Oh, that’s so French, they’re thinking about parties. But you know, I think in the context of understanding diplomatic relations, it does seem to be interesting to me that Europe, in the aftermath of Brexit, is trying to figure out who they can rely on, having not particularly gotten those signals from the previous administration and appearing to like, really hope that under Biden, some of that reliability around everything from, you know, climate pact to Nieto, et cetera would come back. There’s a sort of a strong sense of disappointment and surprise.

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