Everyone seems to still be assuming that somehow the US government will work out a compromise and raise the debt limit by the August 2 deadline. That's reassuring, because if it doesn't all hell will break loose.
I don't think that's actually going to happen immediately, because I think Barack Obama would rather cut his own hand off than be the president who let it happen. But I think we're all underestimating how comfortable some key political actors will find the status quo on the far side of August 2, when the US passes the singularity into the black hole of default.
First things first: The Treasury has made very clear it will keep up interest payments on government bonds. So, though lots of ratings agencies say they will consider the US in default on August 3, I suspect bond investors who have kept the faith so far (pushing US bond prices near all-time highs, such that some people are actually paying money for the privilege of lending to the US government) will continue to keep the faith, more or less, until every other option has been exhausted.
So what you have on the far side of the singularity is, at least initially, an old-fashioned spending fight. Politically, the US government has three types of liabilities: ones that both parties regard as sacrosanct (ie., interest on government bonds); ones that Republicans like more than Democrats; and ones that Democrats like more than Republicans.
After August 3, Timothy Geithner and the White House will have the job of prioritising which of these payments to make. Debt payments will come first, so the battle is over whether to please the Democrats' favoured groups, the Republicans' favoured groups, or some mix of the two.
The assumption within the Beltway commentariat is that they'll cut off Republican interests at the knees, unleashing a storm of lobbyists who will force the Republicans to come to their senses and raise the damn debt ceiling. I think that could be a serious miscalculation.
The US government has been described as an insurance plan with an army, and that pretty well describes the Administration's spending options: one, payments to defence contractors; two, healthcare programmes for the aged and the poor; and three, welfare programmes for retirees, the unemployed, and the disabled. The other stuff is pretty small-scale.
Liberals like me are hoping that the minute Tim Geithner touches a hair on the defence industry's head, the Republicans will give up and raise the debt limit. But the defence industry is cashed up, can surely get by for a while on IOUs, and is strongly pro-Republican. Plus, defence payments don't add up to much of the immediate bills coming due.
So quite soon, the US has to start defaulting on payments to the welfare state. And, crucially, this is what Republicans want to happen. They want the welfare state wound down. They passed a budget two months ago promising to do exactly that.
Now the problem with that budget was that, while Republican voters in next year's primaries will love it, mass electorates in the election itself will hate it. Republicans in Congress are already trying to kick it under the sofa.
But imagine if, as a Republican facing re-election, you could take the credit for refusing to raise the debt ceiling and forcing Obama to make spending cuts, without having explicitly voted for any of those spending cuts? You could blame Obama for withholding social security cheques, for forcing cuts in healthcare programmes, and for tipping the country into a second recession with the inevitable fiscal squeeze. And you could wave your hands a lot and say that if things had been done your way, everyone would be a lot better off. Yes, that's an utterly inconsistent position to take: welcome to the modern Republican party.
A lot of Democrats are banking on the idea that the playing field will start tilting in their favour come August 3. I think the range of choices just gets worse.
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