Forest and trees

Excerpts from Bob Woodward's new book have appeared in the Washington Post over the last few days. The excerpt I've linked discusses the period in 2011 when Congress and the president were dealing with raising the debt ceiling and how Congress essentially cut President Obama out of the deal One passage that came up for particular attention was an exchange between Obama and David Krone, a staffer for Harry Reid, in which Krone gets in the president's face about not having a Plan B. I'll not reprint it here because if you are a regular web reader, chances are pretty good you've already seen the exchange.

The more important exchange from Woodward's book comes later and involves Tim Geithner, the treasury secretary. Obama is wondering about the political consequences of vetoing a potential version of the bill under discussion.

Of course he was. Politics are what matters in Washington. But what about the economic problem of the gigantic debt that overhangs everything? When you hear about the "fiscal cliff," do you know what it means? Here's Geithner's explanation:

Could I actually veto it? Obama asked, adopting his law professor manner. What would happen on the day of the veto? The day after?

“It would have massive effects,” Geithner said. Treasury had to conduct a bond auction in the open market in about five days, the regular Tuesday auction, with settlement on Thursday. That first auction could be a kind of tripwire, setting off a chain reaction. The federal government couldn’t pay its bills. “Why would anyone buy U.S. bonds if it’s an open question whether we are going to have the authority to pay for them?”

Another possible outcome, Geithner said, was perhaps worse. “Suppose we have an auction and no one shows up?”

The cascading impact would be unknowable. The world could decide to dump U.S. Treasuries. Prices would plummet, interest rates would skyrocket. The one pillar of stability, the United States, the rock in the global economy, could collapse.

And therein lies the problem. Raising the debt limit merely postpones the day of reckoning and makes the overall problem even greater. Eventually we're going to have to start paying down the debt.

And Geithner's nightmare scenario could happen anyway, of course. It probably won't, because the ripple effect would take down everything. But eventually the treasury holders expect to get repaid.

So how will we do it? My guess is that we'll end up inflating the currency to the point where hyperinflation kicks in. It's already been happening in subtle ways. The price of gas is significantly higher now than it was in 2009. I'm seeing $3.90/gallon around town and it's up well over $4 elsewhere. You can attribute most of that increase to the inflation we don't count because it isn't "core inflation." You also see it in the grocery store and in every transaction you make these days.

In a lot of ways, this election turns on whether or not people believe President Obama will ever have a Plan B. Choose carefully.