On January 10, this year, I wrote “…the U.S. government will not default on its bonds.” And: “Therefore, as usual Congress will raise the debt limit again.” That’s up next (in May) after this little tussle in which Congress did nothing significant about the fiscal gap. The U.S. remains on a collision course with the capital markets. That collision will produce a discontinuity. The government will use that as an excuse for radical measures. A lot of wealth that Americans are counting on will be revealed to be absent or gone or a mirage. It just won’t be there, and a lot of people are going to have to scramble and work more than they anticipated. A coming default on government promises is a fact that is visible here and now, even if Congress raises the debt limit and averts default on its bonds. Since the Fed can print money, the government need never have an outright bond default in nominal terms, and it won’t do that, as it would immediately shut down the government. Instead the government will do some combination of tax increases, budget cutbacks, program cutbacks (especially social welfare), economic controls, inflation, and asset seizure. [This post substantially corrects an earlier version.]

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