I laid out four possible scenarios for the debt ceiling crisis last month. I did not include a fifth scenario in which some payments are made under a prioritization scheme. We were told during the Obama years that this was practically impossible, and I’m sure Biden will say the same thing, but circumstances might have changed. If so, what happens next?
Priority would undoubtedly be given to bond payments and to entitlement programs. Everyone else–federal employees, recipients of government spending programs, and contractors–would be left out in the cold. It would be similar to a government shutdown, but worse, because the line of victims would be much longer.
Confidence in the federal government would fall. Bond and stock prices would drop significantly. Making payments on the federal securities that are universally viewed as safe harbor investments would, however, prevent a worldwide financial crisis.
It would be a victory for Republicans who want to dismantle the government at virtually any cost, but it wouldn’t last. Within a week or two, mounting pressure from angry investors, public employees, national security hawks, and taxpayers denied essential federal services would result in a deal. The GOP will deservedly get the blame for the chaos in the interim, with the Democrats gleefully pointing out that the bond payments were largely made to foreigners, including the Chinese.
Is this really worth it, Kevin?