THE BLOG
10/10/2013 08:47 pm ET Updated Dec 10, 2013

A Crash Course in Debt Ceiling Consequences

Imagine you are driving in your car on the freeway. Despite all the traffic, the engine is purring. Then imagine someone pokes a big hole in the oil pan. Oil runs out of the engine, onto the highway. Then what happens?

Your engine seizes as the metal parts rub against one another at great speed. The engine stops. And not gently, but violently. Probably, some of the engine pieces fly off as shrapnel, shredding other systems under the hood. If you're lucky, the shrapnel won't penetrate the cabin, but don't count on it.

Without the engine, the car slows. But without the engine, the power brakes and power steering don't function. If you didn't get shredded by the engine shrapnel, you still have a very hard time controlling what is now a two-ton hurtling bomb with enough explosive potential in the gas tank to level many city blocks.

Eventually, the car will come to a stop. It may be sudden, as you hit another car, or a bridge abutment. Even if you are so lucky as to avoid a collision, friction will inevitably bring the vehicle to a stand-still.

Suppose by some miracle, you survive to this point. Do you think you could patch the hole in the oil pan, add back 6 to 8 quarts of oil, and drive off? No way. When your engine seized, internal parts that were meant to slide past one another on a film of lubricant welded themselves together. Permanently. Your car is, to use a term of art, totaled. Odds are, you are also totaled.

So what does this have to do with the debt ceiling debate? Everything. What most people do not realize, including GOP Congressmen, is that the U.S. national debt is the world's money, and that money is the lubricant not just for our economy, but for the entire world.

How can debt be money? First, consider just what money is. Money is whatever people believe has value that can be exchanged for goods and services.

It can be beads, wampum, gold coins, or other things people find intrinsically valuable. The problem with that kind of money is that the supply of it is limited compared to all the goods and services people want and need, and it is awkward to carry. So society invented paper money. Paper has little intrinsic value, but paper money is valued because everyone trusts the issuer, typically a national government.

Debt instruments function as money for the same reason: people trust the issuer, and thus rely on the debt as a store of value. U.S. Treasury notes and bonds are the biggest source of this kind of money in the world: about $15 trillion. You and I may exchange $20 bills for everyday transactions, but companies and institutions can't deal with stacks of Benjamins. They exchange money electronically, and store their balances in Treasuries. When a company talks about "cash on hand", they really mean their holdings of immediately negotiable debt instruments, of which U.S. Treasuries are the leading and, until now, most reliable.

So when the Republicans in the House threaten not to raise the debt ceiling, they are talking about destroying the value of U.S. Treasuries, and in effect, calling the value of money into question.

It is just like putting a hole into the oil pan of the engine of the world economy. We personally may, or may not, be able to walk away from the twisted, smoldering wreck that used to be our jobs, our wealth, and our social and material world.

Other than that, nothing is at stake.

Full disclosure: the author drives a Tesla.

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