Now the U.S. Treasury Dreads Its Own Default

“Default.” Bankruptcy. Never in the past has a U.S. secretary of the treasury dared to suggest this risk for the richest economy on the planet — that is, its own. Timothy Geithner did this yesterday, using the taboo word in an official letter to Congress.

At the same time at which the Treasury Department dared to utter the unthinkable, the euro weakened, rather than strengthened, against the dollar — a confirmation of the fact that, of these two sick patients, the eurozone is even more fragile than the United States.

New revelations in the meantime confirm China’s crucial role in preventing the most fragile European states from failing. Beijing is preparing to buy 6 billion euros worth of Spain’s public debt to prevent Madrid from becoming the “next on the list,” after Greece and Ireland. If 2011 should be marked by some sovereign bankruptcy, then even the People’s Republic of China, despite its thriving finances, is exposed to significant losses on the currencies of others.

Geithner’s letter has some rather unnerving passages. In the event that Congress does not quickly approve a bill to raise the legal limit of the federal debt, authorizing the Treasury to issue more bonds to finance itself, “the damage would have catastrophic economic consequences.” The robustness of the Treasury would be at risk, as well as the role of the dollar as the currency of international payments. “Given the gravity of the challenges facing the U.S. and world economies,” said Geithner, “the world’s confidence in our creditworthiness is even more critical today.”

In dramatizing of the risks of default, he also plays a tactical element. Washington has just inaugurated a new House of Representatives in which the Republicans have the majority. The right wants to take the Obama administration hostage, denying it the votes needed to issue new Treasury bonds. “The American people,” declared the new House Speaker, Representative John A. Boehner, “will not stand for such an increase unless it is accompanied by meaningful action by the president and Congress to cut spending and end the job-killing spending binge in Washington.” In some ways it is a case of déjà-vu. The right is pursuing the Reagan strategy of “starving the beast”: denying resources to the state in order to dismantle the entire edifice of the Welfare State, which the right regards as public enemy number one. It is the same right that gave itself “20 days” to repeal all of Barack Obama’s reforms, including health care. The Democratic president, outvoted in the House — like Bill Clinton in 1994 — reacted to this blackmail by denouncing it as a senseless game without end. In a stalemate, it could happen that all the federal offices of this administration could be closed for lack of resources, just as they did for several weeks in 1995.

Today, however, the tactical clash happens against a backdrop immensely more fragile than in the ‘90s. The threshold of the public debt in Washington is about to break. It is equal to $14.3 trillion, or rather, $14,300 millions, which is 99.3 percent of the U.S. GDP. The current deficit is 10percent of the GDP — an alarming level, never approached during World War II. It is the same level as that of the PIGS (Portugal, Ireland, Greece, and Spain).

Fantasy politics? An American default? But an unstable political climate is conducive to creating panic among investors. The American right is dominated by fundamentalist currents prone to view a national financial apocalypse as a kind of catharsis to atone for the sins of statism.

Look at what John Tamny writes, a prominent economist of the Cato Institute, a think tank that serves as a link between the neo-liberalism of Reagan and the tea party of today: “It’s time we learn to love the idea of a U.S. default . . . For Americans to worry about a debt default is like the parent of a heroin addict fearing that his dealers will cease feeding the addiction.”

Bruce Bartlett, a moderate economist who denounces these ramblings, is forced to admit: “there is a widespread belief among the nuttier right-wingers that a debt default is just what the country needs to force massive spending cuts into effect . . . The important thing for readers to realize is that the prospect of default is not theoretical; it is real. The Tea Party people really are crazy enough to do it and may have the votes to make it happen.”

There are “minor” variations of this scenario. The crisis of local finance is still more severe with respect to the problems in Washington, thanks to the fiscal rigidities of the state constitutions. A default in California would force them to skip payments on the governmental debt of an economy richer than Italy’s. As for the Federal Treasury, its salvation rests so far on the dollar. Washington still has the imperial privilege to print a currency that the rest of the world accepts, albeit reluctantly.

It’s the seigniorial privilege that the eurozone lacks. Therefore, if 2011 should be the year of the sovereign default, the markets bet that this will happen first in Europe. And even the concerned generosity of China would not be a miraculous lifesaver.