Chris Matthews Doesn't Get It

Discussing the Ryan Budget Plan on April 6, 2011 Chris Matthews illustrates America's big problem in the coming months and years. It's the liberal blind spot. Liberals cannot imagine an America in which the government is not paying for Medicare and the other entitlements. Here's Matthews talking with Mark Halperin and Chris Cillizza. He asks:

Why would the government stop paying the bills of Medicare patients?

He just cannot imagine it. He knows how the world works.

The government will provide the health care for seniors it has promised to provide them, or we will be out of business. The people won't elect them any more. And the government that comes along, the president who says I'm not going to pay the health care of seniors which we promised to do is in big trouble.

You see the problem here. Chris Matthews cannot imagine an America in which the government can't afford to pay for Medicare. And why should he? He's lived his entire life in a world in which the government has paid on its obligations.

But if you step out the warm glow of the present you find that governments are always reneging on their promises. Right now there are a ton of books out there that go through the history in gory detail. There is Carmen N. Reinhardt and Kenneth S. Rogoff in This Time is Different. There is John H. Wood and A History of Central Banking in Great Britain and the United States. Not to be left out is Transferring Wealth & Power from the Old to the New World: Monetary and Fiscal Institutions in the 17th through the 19th Centuries edited by Michael D. Bordo and Roberto Cortes-Conde. A more popular financial history is Niall Ferguson's The House of Rothschild.

These authors tell the story of the many, many government defaults in the past few centuries. Reinhardt and Rogoff are perhaps the most direct. When government debt payments get to about 10 percent of GDP, they argue, then chances are the government will default.

Let's look at our own governments with debt at about 120 percent of GDP (including state and local) and interest payments at about 2 percent of GDP. No problem, you say.

But suppose things change. For instance, right now in 2011 the Feds are paying $206.7 billion in interest on a debt of $15.4 trillion. That is a mere 1.34 percent interest.

Suppose that average interest rate goes up to about 7 percent in a couple of years when the debt is $17.8 trillion. Why then interest payments on the federal debt will go to $1.2 trillion. At that point we are talking about real money. But what happens if the government can only roll over its debt at 12 to 13 percent interest, as happened to Greece recently? If that happens the government will be looking at a interest bill of about $2 trillion a year crowding out Medicare at $500 billion and Medicaid at $350 billion.

I will tell you what will happen. Politicians will start making back of the envelope calculations about who they can afford to piss off. Do they piss off the government workers? The unemployed? Or to they short the geezers and fiddle around with Medicare?

I'll tell you what I think. When the government starts defaulting and people start demonstrating in the streets the politicians will figure that the geezers can go eat the paint off the walls. They will be worrying about civil unrest and riots in the inner cities. They won't be worried about seniors and their hip replacements.

You can understand the reluctance of liberals like Chris Matthews to get out of the liberal bubble, do a bit of reading, and find out what actually happens when a government defaults. It misses the point to say: "the president who says I'm not going to pay the health care of seniors which we promised to do is in big trouble." The president who says that is not saying it just because the mood takes him. He is saying it because he is already in trouble so big that the rage of 50 million seniors doesn't seem all that much of a problem.

In fact, of course, those seniors won't be angry when the balloon goes up. They will be frightened, and they will be desperately hoping against hope to retrieve something from the financial catastrophe of a government default.