Week In News: U.S. Bonds

As the debt ceiling debate continues to paralyze Washington, D.C., host Guy Raz checks in with James Fallows of The Atlantic about the partisan spectacle and the reaction of foreign creditors on the U.S. bond market.

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GUY RAZ, host: We're back with ALL THINGS CONSIDERED from NPR News. I'm Guy Raz.

President BARACK OBAMA: For the first time ever, we could lose our country's AAA credit rating, not because we didn't have the capacity to pay our bills - we do - but because we didn't have a AAA political system to match it.

RAZ: President Obama from his regular Saturday address to the nation. James Fallows of The Atlantic joins us now, as he does most Saturdays, for the stories behind the headlines. And this week, from Portland, Maine. Hi, Jim.

JAMES FALLOWS: Hello, Guy.

RAZ: For the past several months, weeks, and now even days, there's one thing every leading politician on either side of the political divide has said, has agreed on, and that is that the United States will not default on its loans. And yet, Jim, on Tuesday, it seems a better than 50% chance that, indeed, the United States will default.

FALLOWS: I think we're genuinely in one of those rare circumstances where you really don't know what's going to happen next because we haven't been in just this predicament before. Probably the last time like this was during the Bush v. Gore recount.

And I think that as a technical matter, this is not going to be like somebody turning out the lights on midnight on August 2nd. It's sort of a flow issue where the Treasury technically will not be able to balance its accounts on that day.

One would expect - and I certainly assume that the Federal Reserve and other people involved will find ways to take emergency measures to avoid a real default, which would be a catastrophe for the world financial system. But what exactly that will mean, I think literally no one knows.

RAZ: And no one knows what the consequences of even those measures might be.

FALLOWS: Exactly. I think it's important in this whole case to distinguish between the short-term consequences and the long-term ones. I think one reason why this issue may not have been as present in people's minds is that many people assume the technical immediate default, oh, everything just goes to hell right at once, that's not going to happen, that probably is true.

But I think the medium and long-term effect of financial instability on America's credit rating in the world, of the view of the U.S. and its institutions, that is something where the consequences we can be feeling pretty soon.

RAZ: And yet, Jim, there isn't a whole lot of evidence so far the foreign creditors are losing faith in U.S. bonds.

FALLOWS: I think, again, we have the short-term versus long-term question. I think that in the central banks around China and Germany and Japan or wherever else, they recognize, number one, there are only so many places they can put their money and U.S. Treasury notes have been - still have a lot of advantages.

And second, they think somehow, this is going to be finessed at the last minute. The longer-term recalculation, though, I can tell you are in the newspapers every day in Europe and in Japan and in China about what this shows, even as President Obama was saying, about the nature of the political system in the U.S. and how it can address the big issues the nation has to face.

RAZ: Jim, you've been following Washington politics a long time. You've seen partisan spectacles in the past, government shutdowns, impeachment proceedings. What makes this different?

FALLOWS: We've had over the last decade or two a sort of greater and greater polarization within the Congress, a much more frequent use of the filibuster as a blocking means in the last 10 years. We also had a very large contingent of the House of Representatives in particular who were, number one, elected on the premise of no compromise, compromise is evil.

You know, we need some kind of revolution in public affairs. And number two, they seem genuinely indifferent to - or even carefree about the consequences they're playing with here. I mean, I think that anybody who has looked at world economics and American economic history thinks that it would be a genuine needless disaster for the U.S. to will a default upon itself.

But I think many people in the House of Representatives right don't think that, and trying to reconcile their views with the rest is a challenge.

RAZ: That's James Fallows. He's national correspondent for The Atlantic. You can find his blog at jamesfallows.theatlantic.com. Jim, thanks.

FALLOWS: My pleasure. Thank you, Guy.

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