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IPFS News Link • Government Debt & Financing

Ready Or Not: Dean Baker - "Let's Just Default"

-Mr. Baker must come to grip with the facts of default. As he and many other defenders of Social Security have said repeatedly; the assets of the Social Security Trust Fund are equal in legal status to the debt issued to the public by Treasury. This means that it isn’t possible for the US to default on its public debt without also defaulting on the Special Issue bonds in the SS Trust Fund. As SS is running a cash deficit on a monthly basis it would only take 30 days for all checks to stop. Period, full stop. Social Security would cease to exist. -The Medicare Trust Fund, Military Pension Trust Fund, Federal Workers Trust Fund would also default. They too would stop issuing checks. Medicare would no longer function. Some level of medical care would be maintained. But older people who needed lifesaving treatment wouldn’t get it. Hundreds of thousands would die. The number could easily go into the millions. -Surely we would see a collapse of the dollar. The cost of everything we import would triple++ in a very short period of time. The price of gas would be $10? 50? 100? -Equity markets in the US would collapse. A loss of 50% would be a good outcome. It could be much worse than that. We know that the wealth affect drives the economy, so this result would insure a collapse of US GDP. How long would the depression/recession last if this were to happen? At least a decade. It would be worse than what happened in the US during the 30’s. -Unemployment? A minimum of 25% would be the result. Interest rates? Who knows? There would be no debt market left in the event of a default by the US. There would be no credit available. -If Treasury were to default, every mortgage borrower would follow suit. If the banks were not wiped out by the federal ‘no pay’ they certainly would be wiped out by the mortgage defaults. Almost all banks would shut. This would cascade back to the FDIC. The withdrawals from account holders would force the FDIC to honor its obligations. As they have no reserves this would force Treasury to issue coinage ($100 bills) to satisfy the run on the bank. This is the hyper inflationary environment. The price of basics (food) would explode. Shelves would empty. People would go hungry. In the years that followed a default many would starve, many of those would die.