U.S. default would be 'financial Armageddon,' economist says

Oct. 16, 2013 at 3:00 AM
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WASHINGTON, Oct. 16 (UPI) -- The Republican wing that shut the government and threatens to force a default on U.S. debt is flirting with "financial Armageddon," a leading economist said.

"It's very hard to see a silver lining to this," Kenneth Rogoff, professor of public policy and economics at Harvard and a former chief economist of the International Monetary Fund, told British newspaper The Daily Telegraph.

"It's a constitutional breakdown, [but] threatening financial Armageddon is blackmail," he said.

He compared President Barack Obama's position to President John F. Kennedy's during the 13-day October 1962 Cuban missile crisis between the Soviet Union and Cuba on one side and the United States on the other side.

In particular, he likened Obama's refusal to negotiate until the government is reopened and the debt limit is raised to Kennedy's refusal to negotiate with Cuba and the Soviet Union despite the threat of potential nuclear destruction.

"President Obama should push them [the hard-core conservative Republicans] to the brink," he told the newspaper. "This has implications beyond the moment. There is a danger of weakening the presidency on a long-term basis."

Republican leaders had no immediate comment.

House Speaker John Boehner, R-Ohio, Senate Minority Leader Mitch McConnell, R-Ky., and other Republicans have generally argued the debt ceiling should not be raised unless spending is cut by an amount equal to or greater than the debt-ceiling increase.

Rogoff said domestically it was increasingly likely Washington would have to resort to making Social Security payments with "scrip," or IOUs, instead of legal tender.

Scrip has been used as a means of payment in times when regular money was unavailable.

Rogoff echoed the view of IMF Managing Director Christine Lagarde that a U.S. default would be "catastrophic" to the global economy.

"A good guess is that it would be worse than you think," he told the Telegraph. "There are so many contracts in the global economy that take as a given that [U.S.] Treasury receipts are cash, that you would expect [severe consequences]."

He added, "We are talking, at the bare minimum, about global interest rates [that] would go up across the board, and that markets would break down."

Rogoff separately told The New York Times visiting finance ministers attending last weekend's World Bank and IMF meetings in Washington indicated they believed Congress and the White House would find a way out of the current fiscal deadlock before Thursday, when the Treasury Department would start being at severe risk of not having enough money to pay all its bills on any given day.

But Rogoff said if the warring factions don't reach a deal and the government defaults, international faith in U.S. credit would be permanently shaken.

"Memories are long -- you do this once, you do this twice, and people start to think," he told the Times.

He told the Telegraph investors' "virginity will be lost."

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