Follies with Consequences: The US Debt Default Dance

Self-inflicted wounds get you coming and going, especially when suffered in public.  The fiscal follies last month of the US Congress over the federal government debt ceiling and budget sequester are more than simply embarrassing.  They have damaged the US economic recovery, and they have done lasting damage to US financial stability and negotiating power.  And the whole breakdown was completely avoidable in economic terms, which if anything increases the reputational damage.

There is no known other example of a solvent democracy flirting with default through sheer political stubbornness.  While many democracies with fragmented party systems spend themselves into crashes – think of Italy in the 1970s or Argentina repeatedly – the crashes only came when they had run out of credit.  On the fundamentals, the US government is perfectly capable of rolling over its debt at historically low interest rates, and the dollar remains strong.  As many of us forecast, the federal deficit is shrinking rapidly on the basis of even the anemic economic recovery.  So the debt to GDP ratio of the US is on a downwards trajectory.

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