Posted in Rants on April 21st, 2011 by Ed

Do you ever get the feeling that some non-negligible share of the polarization and disagreement over issues in our society results from people being contrary simply for the sake of being contrary? When we establish that the world is round, someone has to argue that it is flat. When we see two planes hit the World Trade Center, someone has to argue that they were actually holograms to cover up a controlled demolition. I don't even think people who say this kind of thing believe it; they just get off on trolling and watching other people get riled up.

My theory is not well developed yet it might come closest to explaining why we are now seeing economists and people in the banking industry coming out of the woodwork to argue that refusing to raise the debt ceiling, thereby forcing the Treasury to default on its obligations, is a good thing. This "pro-default" "movement" (which must remain in quotes until enough of them appear to justify using the term) consists of either people who are dumber than a bag of doorknobs or the economics equivalent of a doomsday cult. They should probably be off in a field somewhere praying for Hale-Bopp to strike the Earth and bring about the apocalypse.

In the past few days alone Bank of America's Jeffrey Rosenberg and the Cato Institute's Jagadeesh Gokhale have thrown caution to the wind and booked two first-class cabins on the USS Retarded. I can't do this as much justice as Mike or the finance folks could, but I'd like to draw your attention to two of Mr. Sokhale's points:

In contrast, the current prospect of a technical default, from failing to increase the debt limit, would not be due to any real national insolvency. Given today's low interest rates, the federal government could easily raise the resources needed to meet today's contractual government obligations.

In other words, the government can just borrow money to pay the obligations it will default on because it reached the debt ceiling and therefore can't legally borrow any more money. Are you sure this guy is an economist? He worked for the Federal Reserve? No way. Prove it.

Given its purpose is to avoid a real future crisis, by bringing to heel run-away spending on entitlements and other wasteful government programs, here's an opportunity for experiment: Would a debt-limit "crisis" beget better fiscal policies?

After the global economic meltdown, famine, and societal collapse it might.

How might investors really view this ersatz U.S. debt crisis? If some lawmakers' refusal to vote for increasing the debt limit without also passing prudential fiscal policies resulted in a technical U.S. default, it would demonstrate their significant political strength.

By cutting off our nose we will be sending a strong message to the rest of our face.

Might that not actually induce investors to buy long-term U.S. debt — reducing long-term interest rates and improving the U.S. investment climate?

You win, Jagadeesh. Yes, defaulting on its obligations will convince people to buy long-term Treasury debt. We must improve the "investment climate" by reducing long-term interest rates…which are at historic lows right now.

War is peace. Freedom is slavery. 2+2 = 5.