"As long as there is diesel fuel to power up the back-up generators that run the government's computers, they will have the money to back their own bonds," – James Galbraith, a professor of economics at the University of Texas in Austin, who formerly served as executive director of the Congressional Joint Economic Committee.
But, in the worst case scenario, those dollars will be worth a fraction of what they once were. The summary dismissal of the S&P's worry about American credit, while well-reasoned, seems a little glib to me. It rests on the assurance that a global reserve currency can never run into trouble in the global markets, the kind of pride that sometimes comes before a fall. Megan:
The problems start not when our debts become totally unsustainable and congressmen start getting into fistfights on the House floor–but when markets stop believing that we'll find some way to solve our budget problems short of inflation or default. And "trouble" consists not of some massive capital flight, but of rising interest rates.This is why I am so steadfastly unconvinced by people who point to our low interest rates as evidence that the market thinks it's safe to borrow. When higher real interest rates come, they will not be a timely signal of problems ahead unless we change course–they will be the problem.