The meaning of “hubris” has evolved over the centuries. Today, it has come to mean too much pride and even an insolent sense of self-confidence. One of the definitions of the word “ύβρις” in ancient Greece was disregard for the gods, a belief that man could outsmart fate and the laws of nature.
Whichever definition you use, both would apply to the conduct of Speaker Kevin McCarthy and President Joe Biden in their talks regarding the debt ceiling and avoidance of default by the U.S. Treasury. Both are deeply dug in and unwilling to compromise: they are holding not only the U.S. hostage in their vain ways, but also much of the world that holds U.S. Treasury securities and believes in the integrity and creditworthiness of a $24 trillion pool of capital. Their sense of hubris may have led them to believe in the invulnerability of themselves and the United States. (READ MORE: Playing Chicken With a Psychopath)
For decades in financial theory and practice, the U.S. Treasury has had a risk-free rate, a financial base to which premiums for inflation and risk are added in the pricing of securities. Presently, foreign governments and investors hold an estimated 30 percent of U.S. Treasury indebtedness — with China, Japan, and the U.K. being the leading foreign investors.
In recent years, the Trump and Biden administrations have injected an estimated $5 trillion of monetary stimulus into the economy. Although not known for his fiscal austerity, Biden is correct that increasing the debt ceiling should not be dependent upon cuts or freezes in government spending. There is a process for setting fiscal priorities, a forum where career politicians can joust, posture, and bluff in front of the gushing anchors on CNN — it is called the budget. During the budget process, priorities are defined and tradeoffs are calculated, and, in the private sector, there can be headcount reductions.
The United States should not even be having this destructive conversation about the debt ceiling, which should be increased by Congress as and when needed. The U.S. is on a Sept. 30 fiscal year. Budget planning starts a year in advance, and a proposed budget is submitted to Congress by the president early in the next year. At that point, it is vetted by numerous committees, with separate House and Senate resolutions created and merged before the budget is forwarded to the president for approval. The way to cut or freeze federal spending should be through this process, and not by threats that frighten the general public and imperil the U.S. Treasury’s standing in the world.
Some members of our political class evidently do not understand the interdependency of world markets. They come to Washington with local horizons and bravado. With their insularity, they have no idea what would happen should the U.S. Treasury fail to make a payment. Playing chicken with the reputation of the U.S. Treasury may seem peppy and exhilarating to them in the name of “principle,” but it risks an economic cataclysm.
Much has been said and written about who could be damaged should the U.S. Treasury not have enough cash. This includes retirees on Social Security and Medicare, active-duty military and veterans, Medicaid and welfare recipients, and contractors and suppliers of the U.S. government, as well as individuals, companies, pension funds, and governments invested in U.S. equity and debt securities. Anyone with a retirement plan would receive a rude awakening — the Congressional Research Service reports that 56 percent of civilian workers (private industry, state, and local government) participate in employer-sponsored pensions.
A potential default by the U.S. Treasury might be announced after equity and credit markets have closed for the day. However, during our night, the markets in Japan, Shanghai, Hong Kong, Australia, and India would crash, and the meltdown would move westward and spread to the exchanges of Europe. At the opening bell on Wall Street, it would be over. Margin calls would imperil those who had leveraged positions, and there could be runs on banks, with financial authorities having to intervene. The shocked expressions of shouting traders in front of ticker displays would be flashed around the world at close to the speed of light. Loss of business confidence and recession would be inevitable. Interest rates would soar, and the reputation of a downgraded United States would suffer indefinitely.
The People’s Republic of China would gloat about the demise of democratic capitalism, the decadence of the West, and the superiority of their communist command and control system. The U.S. Treasury meltdown would further enable China’s forays for influence into Latin America, Africa/Middle East, and Southeast Asia as part of their Belt and Road Initiative.
With a U.S. Treasury default, everyone loses: red states, blue states, and the world. However, this writer believes that a deal will be struck at or at nearly the last hour. The consequences of a default by the U.S. Treasury are so horrific that even McCarthy and Biden will stop playing Treasury roulette and come to their senses. They should also remember the spirit of former President Ronald Reagan — who believed in the art of compromise.
Frank Schell is a business strategy consultant and former senior vice president of the First National Bank of Chicago. He was a Lecturer at the Harris School of Public Policy, University of Chicago and is a contributor of opinion pieces to various journals.
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