There are two things you can’t get back: your virginity and your credibility.
Investors buy the debt of the United States because it is liquid and is backed by a strong economy and military. Investors assume they will get their money back, that there will no doubt (no doubt at all) that they can sell this debt at any time. This belief is our reputation. If we default on our debt, few will trust us not to play games in the future.
This needs to be readily understood.
The U.S. Congress continues to battle over raising the debt ceiling. Many Republicans think that a taste of default will force Democrats to cut spending. This is like teaching your kid “responsibility” by letting him go to jail for six months with hardened criminals for coming home an hour late after a date. The consequences will be much, much worst than the “crime.”
Is it just petty blackmail involved here, or it something much worse, a blindness to how foreign buyers of our debt view this game? This worldview needs to be taken into account, especially in light that AAA-rated mortgage debt had before it defaulted.
We are not an island unto ourselves any more, no matter how much we convince ourselves that other’s opinions do not count. They do.
Moody’s, the rating agency, has warned of a downgrade of our debt. They have warned of the disaster a default would have on U.S. debt. Some have dismissed this. They should not.
China holds $1.14 trillion of our debt. They see a default as a real risk, viewing this as greatly a political situation, since Republicans want to hurt Obama. They and others will be harmed, especially in light of the fragile recovery. The very successful bond mutual fund company Pimco understood this and exited the U.S. Treasury debt market.
It reminds me of the story of the blonde who caught her husband with another woman. She points a gun to her head as if to shoot. Her husband yells, “Don’t do it!” She screams back: “Don’t worry. You’re next!”
Raise the debt ceiling. Argue about cutting expenses, raising taxes and having the government operate more effectively. But don’t play dice with the economy. All of us will lose.
Bob Chernow is a Milwaukee businessman.
