The Default’s Impact

The US Treasury Department is warning that on Oct. 17th the government will run out of money and be unable to pay its bills unless the debt ceiling is raised.  The news is full of extremely dire warnings about the consequences of a default.  One story is found here.

As a macro-economist I am both concerned and amused by the dire warnings of global collapse.  Numerous countries around the world have defaulted in the last 100 years.  Many Latin American countries have defaulted multiple times.  For some the default caused severe economic pain but for others the pain seemed to have been inflicted primarily on large outside investors and had little impact on the lives of ordinary citizens.

I remember the panic and concern that occurred over Y2K.  People were very worried that dates changing from 1999 to 2000 would cause wholesale computer failures.  I was concerned and stockpiled large amounts of water, food and cash.  I did this because of what happened at a computer company I worked with during 1998, two years before Y2k.

The head of engineering was a very smart guy.  He said, let’s just test out what will happen when Y2k rolls around.  One Thursday just before lunch he arraigned for every computer in the company to have its date reset to 30 minutes before Y2K.  Then everyone in the company went out for a big lunch celebration at a local Chinese restaurant.  We went back to work after lunch, every computer had crashed and a few had crashed so severely that it took hours to get them rebooted.

This showed me that Y2K was a real and severe threat.  It lead me to stockpile.  This exercise, however, was repeated not only in our company but in companies across the globe.  The result was that Y2K was a non-event and I ended up eating for a long time a supply of relatively tasteless canned food.

There are no good macro-economic models for what happens when the US Treasury defaults on its debts but my experience with Y2K suggests the only way the default will cause the massive problems that the news is currently hyping is if banks, investors and the Treasury all do absolutely nothing.  Given both people and institutions are pro-active when faced with an impending problem my feeling is that a default on Oct. 17th will cause some issues but not the end of capitalism as we  know it.

I hope we will never know if my guess is right or wrong.

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