When President Obama took office, the Republicans announced their strategy quite openly. It was not to rule as the minority party, to contribute an opposing point of view to the debate. It was not to counter any radical tendencies that might crop up when the White House and Congress are in the same hands. It was not to help deal with the worst economic crisis of the past 75 years. No, it was simpler than that. It was to make the Obama presidency fail. No matter what.
And they've been executing their plan rather well. While President Obama rather naively thought that he could invite bipartisanship by creating "gangs of six" and the like, the opposition never, ever negotiated in good faith. They were out to do whatever it took to make things fail. And it paid off. The economy improved somewhat since the changing of the guard, but not as well as people had hoped, so Obama was punished at the polls in 2010. Democrats stayed away in droves and the most extreme Banana Republicans took control of the House.
Now the debt ceiling has been hit again and we're seeing something unprecedented. Enough Banana Republicans are serious about not extending it so that the country could actually go into default. Damn the consequences, this is teabagger principle at work. The harm would be enormous. And that's precisely their plan.
The whole idea of a debt ceiling is silly, of course. It is always raised on time, and that helps maintain the US Treasury securities as the world's most trusted debt instrument. A country that prints its own currency can always pay its debts. We saw the worst-case scenario for over-extending the debt during the Johnson and Nixon regimes -- they printed money to cover the shortfall, leading to inflation. But the bonds were paid.
If the debt ceiling is not raised on time, the US goes into default. Then what? Risky debt carries a much higher interest rate than low-risk debt. So the interest on the T-Bill could rise by as much as 200 basis points (2%) right away. And keep rising as the default continues. This will cost the country billions or even trillions of dollars, of course, since the future interest on the debt will be higher, and that interest is a large part of the national budget. In other words, the fastest way to worsen the deficit is to default on debt! Good credit is cheaper than bad credit. If you're really worried about the deficit, the last thing you want to muck with is the credit rating!
But that's just the tip of the iceberg. Because US debt has been the worlds' safest, other debt instruments are often priced relative to the T-Bill. So if Uncle has to pay 200 points more, so will corporate borrowers, mortgages, credit card debt, other countries' debt, and anything else pegged, directly or indirectly, to US debt.
When the economy is in a recession or depression, cheap debt is stimulative; conversely, high interest rates are a way to slow down an overheated economy. Gerald Ford's pathetic "WIN" program ("whip inflation now") led to higher interest rates, which the Fed continued through the Carter administration. It hurt jobs. In 1980, mortgage interest rates were around 13%, sometimes even higher.
When the brakes are applied during a recession, a deep depression results. That's what Hoover did -- he tried to balance the budget as recession lowered federal revenues. That led to fewer jobs and lower revenues. It was a downward spiral that created the Great Depression. Roosevelt helped by applying stimulus, largely in the form of public works projects that hired many people.
But when he took bad advice and tried to lower the deficit in 1937, the depression hit a double dip. Only the beginning of WW II led people to stop thinking about the deficit. The huge burst of Keynsian deficit spending to finance the war ended the Depression. This led to the ridiculous notion that "war is good for the economy", which was one of the stupid aphorisms that some supporters of the Vietnam War recited. Of course the war didn't help per se; it merely provided an excuse for adequate stimulus.
Keynsian economic theory worked so well that by 1972, even Dick Nixon had accepted it. Hoovernomics was no more popular than leeches or phrenology. Yet the blood-sucking worms of yesteryear are back in Washington and are again in control of the lower house of Congress. Keynes is once again a dirty word to the Banana Republican base, along with such heresies as evolution, gay rights, and recognition of man-made climate change.
So they're serious about not allowing the debt ceiling to rise. Sometimes they claim that default is not necessary, because federal revenues exceed debt payments. The government just has to stop paying other expenses, like Medicare, Medicaid, Social Security, Tricare, salaries, and everything else that the Congress has appropriated funds for. This is of course a feint. The idea is to force default. The idea is to create a disaster.
A default would lead to massive unemployment. Corporations would not only have trouble raising funds, but they'd lose the confidence needed to expand. Layoffs would result quickly. It would be worldwide, too, due to the prevalence of US debt. So demand from overseas would dry up. Salaries would fall too. The pain would be widespread. This is what the teabaggers want, though, becuase they have a plan. They'll blame it all on Obama and the Democrats. They'll pretend that the entire deficit is silly liberal programs like "aid to dependent negroes" (racism is a key element of their economic program, since their white working-class base falsely assumes that African-Americans are the major recipients of domestic spending) and foreign aid. Rush, Sean, Glenn, Savage and the rest of the Fox-Clear Channel echo chamber will parrot the lies. This, they hope, will cause the victims of the depression to blame Democrats for Republican actions.
And what 2010 illustrated is that the electorate pins too much on the presidency. Since Obama did not by himself fix the whole economy, it's his fault. The fact that Congress won't allow the needed stimulus is not relevant; after all, the Banana Republicans in the echo chamber have successfully turned "stimulus" into a half word, the first half being "failed". And Democrats have been too weak on the defense. So a Republican-caused Depression would likely put more Republicans in power, to cause even more harm.
But who wins in this scenario? Naturally, there are winners. A real deep depression caused by a default would help those who have money, the big lenders. They're getting very little for their cash now, in times of low interest rates. So they'll make out like bandits. Resource owners would do well too, as barter and commodities might become more important. The Koch Brothers have probably had their own economists do a study on how much profit they could make from this scenario. The Saudis, the Chinese, and other big lenders know that they'll eventually get paid off. In the meantime they'll make tons more on their investments in the newly junk-bond US Treasury.
And a deep depression lowers the cost of labor, making the rich seem even richer. Servants will be easier to hire. Corporations will pay less, and there will be pressure to take dangerous jobs and not report workplace safety violations. What works in Bangladesh will work here too. That's the calculation. And even in dirt-poor Bangladesh, the rich are very rich.
So don't assume that Wall Street has it under control and that it's entirely a feint. Let's hope that's true. But the risk of default is real. The consequences would be real. And they're consequences that the Banana Republicans want to see happen. They want to reduce the USA of 2012 to the Argentina 1912. They want to sabotage the country, because they see it as their only way to regain power. We have to stop them.