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Debt Deniers Want to Make Federal Bills Disappear

The debt denial movement is one of the scariest things I’ve seen to come out of the far-right fever swamps. These are the same people who insist that America has had a runaway spending problem. They don’t deny the existence of that. They just deny that the country has to pay for that spending. I hope it’s just brinksmanship, but to at least some segment of conservatives this is epistemic closure to an extreme degree.

And that number may include House Majority Leader Eric Cantor:

House Majority Leader Eric Cantor (R-Va.) told reporters in Richmond Wednesday that financial markets watching discussions over raising the nation’s debt limit are looking to see progress on cutting spending in Washington — rather than a resolution of negotiations by any deadline.

“What I think is that the markets are looking to see credible progress on changing the fiscal trajectory in Washington,” Cantor said, after a job forum for local business executives at Virginia Commonwealth University. “The markets are not fooled by some date imposed to say that that is the trigger for the collapse. I think the markets are looking to see that there is real reform.”

First of all, the markets are buying debt incredibly cheap right now. So they have no problem with the CURRENT trajectory of the US fiscal position. That’s just a missed opportunity to take advantage of low rates, like not refinancing your mortgage if you have a 15% interest rate and they’re advertising at 4%. Second, this notion that there’s no drop-dead default date, and worse, that a few days of default DOESN’T MATTER as long as spending is getting reined in, which is the sentiment of approximately one right-wing hedgie, is utterly contradicted by reality. This is from Moody’s, back in February.

As a general practice, we place ratings under review when the probability of a rating change is substantial, such as 25% or more. Considering the array of cash management tools available to the government and the speed at which political compromises can be reached when necessary, we believe it is extremely unlikely, although not impossible, that this condition will be reached during the political negotiating process. We would place the rating on review if the positions of the political parties evolve to a point where we believe that possible default is no longer a low probability event.

The rating is very unlikely to be downgraded in advance of a ceiling-driven default, since a missed payment would only result, in our opinion, from an astonishing miscalculation by the government. We see an extremely high probability that there will be a political compromise, even if it has a last minute nature, so an anticipatory downgrade would have a very high likelihood of rating reversal.

If debt service were interrupted – however briefly – we would consider downgrading the rating. However, consistent with our practices elsewhere, a payment that is missed for a brief period would not automatically lead to a “penalty downgrade.” Rather, the rating would consider both the recovery prospects and our updated forward-looking credit view.

Not that Moody’s or S&P have a lot of credibility right now, but common sense dictates that any default event by the United States would trigger nervousness and fear from investors that they would be next. And they would seek more security from the US before they bought debt again. And because US Treasuries are seen as the safest investment in the world, this would have a global effect.

As long as we’re in the brinksmanship phase, why not propose, as Felix Salmon did, to just stop paying US lawmakers to save money? Or better, just cut off all payments to a random conglomeration of states. You could pick them out of a hat. Start with Wyoming, Utah, Idaho, Alabama, Tennessee…

That’s about as useful a strategy as debt denial.

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David Dayen

David Dayen