Misunderstanding: Why would US Government Bonds Be Downgraded?

Kevin Williamson gets it:

The United States is not on a downgrade watch because the markets fear we won’t raise the debt ceiling in time to avoid a default; the United States is on a downgrade watch because the markets believe the debt-ceiling debate presents the last real opportunity for the government to enact a meaningful fiscal-reform program before it is well and truly too late to avoid a national crisis. The credit agencies, wisely or not, aren’t worried about the short-term political fight leading to an immediate default, but about the near- to medium-term fiscal situation, which is plainly unsustainable.

Those who think that a downgrade would result from failure to raise the debt ceiling have it exactly backward. The issue facing the US – and the world – is the apparent inability of too many governments to control their urge to spend beyond their means.

Glenn Reynolds reader Michael McFatter is beginning to suspect that the issue is the failure to face reality; misunderstanding the opposition.

I’m worried. See if you follow my concern. Thus far the Democrats have proved intractable on these negotiations. But more than that, they seem to be living in denial as regards the national debt and more importantly the deficits. Right now we’re projecting deficits of 1.5 trillion every year for the next ten years. But those projections are based on growth rates of something like 3 – 3.5% from 2013 onwards. Which is unrealistic when you consider the current debt load plus piling on 1.5T more every year. It’s obvious that these projections are pure fantasy. They’re in denial about Social Security, Medicare, and Medicaid sustainability and about Obamacare. They genuinely believed O-care was going to “bend the cost curve”! It’s ridiculous.

Now, we all know this. None of this is new information. What has me worried is the idea that the Democrats ACTUALLY DON’T UNDERSTAND THIS IS THE END OF THE ROAD. What if they actually aren’t capable of recognizing when they’ve lost? Or when we’ve run out of other people’s money? None of these people work for a living. Their concept of where money comes from and how wealth is created (and destroyed) is completely divorced from reality because they live in a government bubble. And the very small minority among them that do understand this from previous jobs and experience are okay with Progressive policies aimed at leveling/equalizing/delivering-economic-justice because they just assume that the economy can handle some siphoning. And usually it can. But not at this volume or for this time scale.

Here’s the position I think we may be in. We’ve been negotiating with the President and The Democrats in Congress on the assumption that they’re sane. It’s okay to play hardball with these guys because eventually, whether they like it or not, reality insists upon itself and they have to cave. It’s a painful process so you expect some tantrum throwing and caterwauling, but eventually they HAVE to accept reality. Except if they’re not sane. If they want five apples and there’s only two plus two but they CAN’T ACCEPT that two plus two equals four. Orwell wasn’t just writing a parable about the eventual end point of IngSoc. He was describing what human psychology can drive Ministers to inflict upon the populace for the sake of “justice”. I’m worried they’ll pull the trigger on default as just one more “political” step in the march towards freedom from want or whatever other principle they’re operating under. They’re playing this game as if they could win, as if taxes in a downturn are a good idea with benign consequences. As if debt equivalent to GDP is survivable for the world’s anchor economy/currency, let alone sustainable.

And so maybe, just maybe, Republican strategy (what little there is of it) has badly misread the opposition. Obama tried to add 400 billion in taxes to a deal he had already agreed with Boehner at the last minute. Boehner walks out cause Obama is negotiating in bad faith and has been all along, but what if Obama is actually incapable of good faith negotiation? I think right now that it’s actually possible we won’t see a deal at all. Because the Republicans are looking at the math and at reality and saying “Okay, Democrat demands can’t be serious because they can’t possibly work” and Democrats are looking at politics and how it works and saying “We don’t have to give in cause that’s not how you win these things. You pin it on the other guy politically and then reap the political dividends.” I wasn’t around for the start of WWI, but I get the feeling I understand Kennedy’s fascination with Tuchman’s Guns of August. I’m not talking about a shooting war, but about leaders overestimating and underestimating and just plain misjudging each other in a brinksmanship scenario. In short, it could be too late to do anything when people finally wake up. The crisis may have already arrived with an economic and fiscal momentum all it’s own that no amount of dealing or compromise or statesmanship can stop..