Thursday, May 19, 2011

A few weeks ago, I asked...

...the question, "How big of a deal is raising the debt limit, anyway?"

In this morning's Wall Street Journal, Alan Blinder, former Vice Chairman of the Fed, writes about the consequences of a default (my emphasis):

For openers, suppose the federal government actually does reduce its expenditures by 40% overnight. That translates to roughly $1.5 trillion at annual rates, or about 10% of GDP. That's an enormous fiscal contraction for any economy to withstand, never mind one in a sluggish recovery with 9% unemployment. Even contemplating such a possibility is evidence of a dark, self-destructive impulse. Second, markets now assign essentially zero probability to the U.S. losing its fiscal mind. They'd be caught flat-footed if the threat of default suddenly started to look real, possibly triggering a world-wide financial panic. Remember how markets reacted to the Lehman Brothers surprise?

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