Default not end of the world

With all the discussion of the how the sky is falling if we do not raise the debt ceiling and talk of "default" Peter Klein has a different take on the situation that you have probably not seen discussed.  In his recent article Default not end of the world he writes "Financial markets have been restructuring debt for many centuries, and they’ve gotten pretty good at it. From the discussion regarding T-bills, you would think no one had ever heard of default-risk premiums before.

Interestingly, this seems to be a case of American exceptionalism: People aren’t particularly happy about Greek, Irish and Portuguese defaults, but no one thinks the world will end because of them.

So, isn’t it time to demythologize all of this? Treasuries are bonds just like any other bonds. There’s nothing magic, mythical or sacred about them. A default on U.S. government debt is no more or less radical than a default on any other kind of debt.

“What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom,” Adam Smith famously observed. Bankrupt firms, like bankrupt families, restructure their debt obligations all the time. The notion of T-bills as sacred relics to be once and forever “risk-free” seems more like religion than economics to me."

Klein argues that we should be willing to consider that financial markets are capable of restructuring debt even government debt.