Sunday, February 6, 2011

Yglesias on how not to default

Yglesias » Who Gets Stiffed When The Debt Limit Isn’t Raised?: "How about the rest of the government? Well the real issue here, I think, is what happens if the President tells you that you can’t get paid just now because congress is being difficult, but he’d like you to keep on keeping on anyway. Soldiers in the field aren’t going to mutiny, the Pentagon will just keep track of what back pay they’re owed and families back home will complain to their members of congress. Similarly, the firms the Pentagon contracts with will recognize that the long-term viability of their contracting business is at stake and will keep fulfilling the terms of their contracts in exchange for IOUs. So nobody’s going to run out of bullets. And it seems to me that if you really wanted to, you could generally keep things more-or-less going on this basis. Instead of selling bonds to investors to get the cash needed to finance the government, you could de facto borrow money by giving IOUs to service providers. Financial institutions should be willing to buy the IOUs from their recipients, and then Wall Street will find itself lobbying congress to pay the government’s debts."

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