no default prediction

The Shutdown and the Economy by Jared Bernstein

If you think that the extremist wing of the Republican party will have been sated by shutting down the government, or, more realistically, if you believe that the moderate R’s will decide that it’s time to turn off the Cruz control and regain control of the vehicle, then you believe that the shutdown lowers the odds of default.

But if you think this just heightens their blood lust, and the moderates have lost, or ceded, control, then you believe the shutdown heightens the odds of default.

I’m in the former camp—I don’t think we’ll default. But I’m not sure, and you simply can’t over-estimate the recklessness of the House R’s and the dyfunctionality of the current governing process.

Just for fun, and admittedly using made up numbers, let’s say there’s a 15% chance of default, and that this would raise the risk premium on government bonds of the average maturity by 75 basis points (0.75%). The debt held by the public is now $12 trillion (that number is not made up). That means my expected increase in debt service as a result of this dysfunction is $14 billion. If you think there’s a 40% chance of default, you’re at $36 billion.

That’s real money.