Right now, many House Tea Party members believe that a default is impossible because we can prioritize interest payments to go first.He provides some very good discussions on the likely impact of default but also notes that the Usual Suspects – Dan Mitchell of Cato, the Heritage Foundation, and the American Enterprise Institute – were happy to parrot this political spin. But seriously – does anyone take these guys seriously? Which I am obligated to provide this from Greg Mankiw:
My Harvard colleague Martin Feldstein writes me in an email: The WSJ and FT continue to write about the risk of default, quoting the Treasury, Boehner and others. There really is no need for a default on the debt even if the debt ceiling is not raised later this month. The US government collects enough in taxes each month to finance the interest on the debt, etc. The government may not be able to separate all accounts into "pay" and "no pay" groups but it can certainly identify the interest payments. An inability to borrow would have serious economic consequences if it lasted for any sustained period but it would not have to threaten our credit standing.Whatever! OK – on a more serious note, Menzie Chinn takes a look at what happened to the S&P 500 index “when we last came close to a breach, but the Government didn't actually default”.