Debt-ceiling fights destroy many kinds of money, and money in many countries.

I wrote before about how worries about a possible default or interruption in payments on US debt, resulting from Congress failing to agree a rise in the debt-ceiling, destroy money and liquidity.  Just to tease two things out of the analysis that need emphasising, even if they were already there….

First, fights over the debt-ceiling don’t just destroy the money-ness of US Treasuries.  Though they certainly threaten to do that.  They destroy other kinds of money.  In modern financial systems, many other institutions’ liabilities become money.  The most familiar being deposits in a retail bank, of course.  [This is partly why we don’t want them to fail, because their failing would amount to a devastating monetary contraction].  But short-term paper issued by retail and other banks into wholesale financing markets also serve similar kinds of functions.  When these markets are working well, those liabilities are convenient and predictable places to park your wealth and redeem it for something else you want by trading later, in the knowledge that the price at which you can trade will be fair and predictable, because there will always be plenty of people to make the trade with.

Those institutions who have parked their money in Treasuries, and are threatened with a shock to their cashflow by a default (or more realistically an interruption or deferral in payment) by the Congressional fights, may also have issued liabilities into the market that other people use as money.  Because people may worry about whether they can really pay up on those liabilities, or worry that others will worry (and so on, ad infinitum), those liabilities can quickly become much less money-like.  I wonder if there are any Wall St CEOs funding Tea Party Republicans?  I will wager that there aren’t.  Because those institutions earn a lot from the fact that their liabilities function as money.  [Just like the US Treasury].  If you happen to mix in those circles and read this blog [very small joint probability] and you know a Wall St CEO who is funding a Tea Party Republican, set them straight.

The second thing to tease out of this is that those institutions may be domiciled abroad.  The Tea Party Republican threats destroy money created by and that provides services in other countries.  Those people in the other countries affected by those Republicans’ threats don’t have any say in what is going on.  They can’t currently turn up to the primaries in which those extreme candidates are elected and register their protest.  Though I guess the TPR’s could not care less about that.

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