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The Political Benefit of Stupidity

Halloween is a silly recurring event that scares children. The Debt Ceiling debate is a stupid recurring event that scares adults. At least Halloween adds a tiny bit to GDP with candy and costume sales. Because increased uncertainly is bad for business, the Debt Ceiling debate only subtracts from GDP in delayed capital expenditures, like factories.

The Debt Ceiling debate has never reduced spending by a single dollar. It doesn’t work. It’s simply stupid! It is a device for political parties to “fight” . . . and do fund-raising. It is way for the out-of-power political party to criticize the in-power political party, while increasing anxiety among the voters and the financial markets.

Foolishly, I had hopes the political parties would eventually see the stupidity of their ways and vote to end it. The closest we came to seeing that stupidity was in 2011. There are three primary credit-rating companies, and one actually downgraded the U.S. from AAA to only AA that year. Importantly, we were downgraded not because we didn’t have the resources to pay our bills . . . but because Congress didn’t have the political will to do the right thing. Reflecting the slow-motion bear movements of Debt Ceiling debates, stocks eventually dropped 17% before recovering.

What would happen to the financial markets today if we burst thru the debt ceiling and don’t pay our bills. Every economics firm and Federal agency have developed computer models of a default, and they are all different . . . except they all predict bad outcomes.

At some point, it will be better to deal with this stupidity than to tolerate it. It’s hard to evaluate that without knowing what to expect, but a stock market drop of less than 17% is very unlikely.

Most old soldiers will tell you their most dreaded duty is administering the “coup de gras” to a fellow soldier, or putting them out of their misery or pain. If politicians cannot end the misery of the stupid Debt Ceiling debate, maybe they should consider ending the misery and uncertainty with an economic coup de gras – temporarily?

Of course, it is both imprudent and unprofessional for any economist to recommend default, but do you think any politician, in search of votes or campaign dollars, will ever vote to end the stupidity of the Debt Ceiling debate? Any other options? What is the probability we will never default?