David Keohane at FT Alphaville delivers the first bit of reassuring news about the debt ceiling that I’ve seen—American government debt does not include what are called “cross default” clauses. The idea of cross default is that if I owe you a bunch of money through several different loans and then one loan comes due on Monday and I don’t pay you, I’m considered to have defaulted on all my obligations to you. That’s a kind of basic borrower protection, ensuring that nonpayment of your debts will be a disaster for you.
In the case of the looming debt ceiling crisis, however, disaster is what we want to avoid. And so what this means is that if Republicans force us to default on payments that come due on Nov. 1, that doesn’t put the U.S. government in the legal position of having defaulted on all its debts. In principle, you could have a minor disaster on the 1st followed by a hasty congressional recognition of the error of its ways and then the problem is addressed on Nov. 2 before the whole world burns.
Now, again, I don’t want to put people’s minds too much at ease. The sequestration experience has been, to me, sobering. The fact that the damage to the economy is “only” things like thousands of kids losing their place in preschool programs and a gutting of America’s long-term scientific research has been widely interpreted as showing that actually it’s totally fine. That seems to me to be too low a bar for non-disaster. The situation Keohane is describing still strikes me as pretty epically disastrous—just a little less cataclysmic than I’d thought previously.