The Lies about the Fed's Default Risk

[Eupher]

Let's face it - Yellen just wants permission to keep printing more money that we don't have. Modern Monetary Theory isn't a theory to Yellen. It's her mantra and her hall pass.

Failure to raise the Federal debt ceiling limit could "roil the financial markets and cause severe economic problems," "cause profound damage to our country," and have “dire consequences.”  So wrote the Los Angeles Times, Washington Post, and New York Times.  But the year was 1995, not 2021.

“(O)ur country would likely face a financial crisis and economic recession,” Biden administration Treasury Secretary Janet Yellen warned the Senate Banking Committee on Tuesday.

Other ills predicted during that contentious debate were rising unemployment, reduced GDP growth, and soaring interest rates.  That was at a time when President Clinton and Democrats were fighting off attempts by Republicans to link cutting the deficit to the increase in the debt ceiling and a continuing resolution on spending.

Then as now, there was a widespread misperception that failure to increase the debt ceiling would produce a default: "congressional Republicans are threatening to provoke the nation's first-ever default" (Washington Times).  The Los Angeles Times reported: "the first real risk of a government default could occur November 15 [1995]." Even the then Chairman of the Federal Reserve, Alan Greenspan, warned that congressional Republicans should drop their efforts, declaring: "To default for the first time in the history of this nation is not something anyone should take in any tranquil manner."

So what happened back then?  After shutting down the government for five days in late November, a temporary extension to the debt ceiling was passed, but the government was shut down again from December 16th, 1995 to January 6th, 1996, before President Clinton finally agreed to the cuts that the Republicans in Congress had been pushing and a long term increase in the ceiling was enacted. 

No default ever occurred.  In retrospect, it is not surprising.  Default only occurs if the government stops paying interest on the money that it owes. Not increasing the debt ceiling only means that the government is forbidden from borrowing more money and that spending is limited to the revenue the government brings in. And, with interest payments on the debt making up only a small fraction of revenue, the interest itself was relatively easy to pay.

More at the link.

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