This N&O article by a Duke professor and former consultant to the International Monetary Fund (IMF) lays out what most of us already know about a potential federal government “default” on its debt. Should the federal government not make good on some of its debt payments, the government’s bond rating will take a hit, forcing up interest rates.
But a couple of items did stand out in this otherwise unnoteworthy article. First, the author says this:
If congressional leaders wreck the government’s credit by defaulting Aug. 2, they wreck everyone else’s credit too.
Failure to raise the debt ceiling soon will cause Uncle Sam’s credit score to plummet into subprime range.
The premise behind this is that failing to raise the debt ceiling equals default. Not true. Not raising the debt ceiling simply means that the feds can’t borrow any more money. But they still have plenty of money available to make their debt payments. It would simply be a matter of choice to not reduce spending anywhere else and opt to skip out on their debt payments.
Secondly, and even more jaw-dropping, is this:
More broadly, the economy desperately needs a new infusion of credit-driven spending to breathe life into a fading recovery.
This econ professor and advisor to the IMF seriously believes that more credit-fueled consumer spending is needed to help the economy recover? What planet has he been living on? That’s akin to seeing a man on the floor dying due to ingesting poison and saying what he needs to recover is even more poison.
With advisors like this to the IMF, its no wonder so many governments across the globe are so desperately broke. And note to parents with college-aged kids: the author of these ridiculous statements may be teaching your child about economics, at a cost of $55K a year.