Submitted by Harrison Fairbanks, Retired Economist
In the world of economics and finance, defaults are typically dreaded, with a cloud of economic downturn and financial collapse trailing not far behind. However, sometimes in the murkiest clouds, one can find a silver lining. It may be controversial, but let’s ponder the improbable: could a default on the US national debt bring about a positive shift in our fiscal landscape? Let me be clear – I am not advocating for a default, rather, examining the theoretical benefits that could emerge from such an event.
Before we proceed, let’s stress an important assumption for this discussion. It is crucial to remember that this scenario assumes that programs like Social Security, Medicare, and Medicaid would remain untouched and fully funded. The rationale here is simple: these are commitments to the American people that we must uphold at all costs. If a default occurred without impacting these critical support systems, the fiscal dynamics might play out differently than what we commonly envisage.
Firstly, a default could potentially serve as a wake-up call. The US national debt is massive and growing, and yet, it seems like a peripheral concern for most. This detachment from our financial reality has resulted in unchecked borrowing and spending. A default could jolt the nation out of complacency, sparking a nationwide discussion about our fiscal responsibility, and ultimately lead to more prudent financial management.
Secondly, a default might lead to a paradigm shift in how we perceive and use debt. Currently, the low cost of borrowing and the seemingly infinite demand for US treasury securities have fostered a certain degree of irresponsibility. A default might break this cycle, forcing the government to limit borrowing and focus on generating revenue through efficient policies and practices.
Thirdly, a default could prompt a restructuring of the national debt, providing an opportunity to negotiate better terms and reduce the debt burden. Countries like Argentina and Greece, albeit under extreme conditions, have been able to restructure their debts post-default. While the US situation is significantly different, it might still benefit from a forced reconsideration of its debt commitments.
Lastly, a default could make the US rethink its role in global finance. Being the issuer of the world’s primary reserve currency has its perks, but it also contributes to our mounting debt. A default might compel the US to reassess its position, leading to a more sustainable balance between its national interests and global financial responsibilities.
It’s important to underscore the fact that this is not an endorsement of a debt default but rather an exploration of potential benefits. The economic and political fallout of such an event could be monumental, both domestically and internationally. And, while it’s healthy to speculate on all possible outcomes, the primary focus should remain on preventing such a situation in the first place.