Excellent point from Bob Kuttner, who argues that just because a debt ceiling related catastrophe would be catastrophic is no reason to assume it won’t happen:
For those who think that a default won’t happen because it is in nobody’s interest, think back on World War I. It was in nobody’s interest. Yet it destroyed Europe’s common civilization and ushered in nearly a century of economic instability and war. World War I occurred because both sides dug in and assumed the other would have to blink first. But that was a miscalculation. Instead of a last-minute deal, we got four years of trench warfare, economic ruin, and millions of wasted lives. Oops.
Call it Angell’s Fallacy: “X won’t happen because X would be insane.” But these things do happen! What’s more, I think I already see people underestimating the downside to even a small TARP-like “blip” where a deal is reached at the 11th hour, but fails in Congress, and then passes a day or two later. The U.S. has a AAA-rating because the amount of debt we have outstanding is modest compared to the economic resources of the country. The fact that we’re currently a low-tax country further counts in our favor, because it indicates that we clearly have the capacity to raise more revenue if needed to pay our bills. But the current standoff is revealing the fact that compared to other AAA-rated sovereigns, the decision-making apparatus of our political system doesn’t really function. Unless that turns around in the next few days, there’ll be a price to be paid. Chinese currency policy will probably moderate its impact in the short-term, but the impact will last.