Default Dollars

Unlike many members of my generation (X), I have absolute confidence that I’ll receive Social Security payments when I’m old. Thousands of dollars each month, in fact. Granted, with inflation that’ll only be enough to buy a jar of peanut butter and perhaps a loaf of stale bread, but the important thing is that when government accountants tally the actual number of US dollars I paid versus the number I’ll eventually receive, they’ll be able to tell me “See? You did get back all the money you paid into the system!”

If necessary, I’ll supplement my income by writing and selling freelance financial-advice articles with titles like “Save Money On Toilet Paper: Wipe Your Ass With Dollar Bills Instead.”

Yet my vision of the future sounds downright optimistic compared to The Economist, which contemplates the thought that America might do the unthinkable: default on its national debt.

THERE is a story about a science professor giving a public lecture on the solar system. An elderly lady interrupts to claim that, contrary to his assertions about gravity, the world travels through the universe on the back of a giant turtle. “But what supports the turtle?” retorts the professor. “You can’t trick me,” says the woman. “It’s turtles all the way down.”

The American financial system has started to look as logical as “turtles all the way down” this week. Only six months ago, politicians were counting on Fannie Mae and Freddie Mac, the country’s mortgage giants, to bolster the housing market by buying more mortgages. Now the rescuers themselves have needed rescuing.

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The GSEs [government-sponsored enterprises] are not the only liability for the government. IndyMac’s recent collapse is the latest call on the Federal Deposit Insurance Corporation (FDIC). The FDIC has some $53 billion of assets, so it is better funded than most deposit-insurance schemes. But if enough banks got into trouble, the government would be on the hook for any shortfall. The same is true of the Pension Benefit Guaranty Corporation, which insures private sector benefits, but is already $14 billion in deficit.

In the end, the turtle at the bottom of the pile is the American taxpayer. But that suggests that, if Americans are losing money on their houses, pensions or bank accounts, the right answer is to tax them to pay for it. Perhaps it is no surprise that traders in the credit-default swaps market have recently made bets on the unthinkable: that America may default on its debt.

From the perspective of the average American, what would defaulting on the national debt actually mean? Your insights here would be most appreciated; I haven’t the time to add any of my own, as I’m too busy preparing for my future by doing absorbency-comparison tests ‘twixt Washington and Charmin.