Thinking the Unthinkable

Listen up, class. World War I never happened.

It didn’t happen because nobody wanted it, and everybody grasped the horrific risks. In the event, the common European civilization was destroyed, three empires fell, 16 million people died, and 20 million were wounded. So World War I couldn’t happen because everyone knew how awful it would be.

In August 1914, virtually all leaders anticipated a short set of skirmishes, a readjustment of borders as in other recent wars, and everyone would be home for Christmas. But, you know, stuff happens.

Then there was the American Civil War. It didn’t happen either. Many Southern leaders knew that staying in the Union and accepting some limitations on slavery in the territories and new states would allow them to keep their “peculiar institution” and avoid the economic catastrophe of a war on their soil. Oops.

Thus the Republican game of chicken with the debt default. It can’t happen because its consequences would be too unthinkable, right?

The stock market has been holding its value, reinforcing the conventional belief that politicians will somehow head off disaster at the eleventh hour. And they may yet. On the other hand, risk-averse investors have been dumping short term Treasuries, raising the government’s cost of borrowing.

According to a study by the respected research firm, Macroeconomic Advisers, the games with the shutdown and the debt default have already cost the economy one percentage point of growth and 2 million jobs, and would deepen if a default occurred.

If the United States actually defaulted on its debt, the collapse of September 2008 would look like child’s play. All other money markets are dependent on the ultimate safe instrument, U.S. Treasury securities. Unlike in the crash of 2008, the Federal Reserve would not be able to bail out markets because U.S. Treasury securities would be of uncertain value. Markets would freeze up. Credit and commerce would grind to a halt.

Even after the Republicans came to their senses and approved an increase in the debt ceiling, the United States would be paying more to finance its debt for years to come, and markets would have less faith in the U.S. dollar, further driving up the cost of borrowing.

But this can’t happen, right? Because everyone knows the stakes are too high. Just ask General Robert E. Lee and the Kaiser.

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