The debt limit dilemma in a nutshell

As three-sentence summaries go, this captures quite a bit.

Senate Republican leader Mitch McConnell said “there will have to be a deal” on raising the nation’s debt limit before August, when the country will be unable to pay its bills. But he said the deal will have to include significant spending cuts.

“To get my vote we’d have to do something significant both short term and long term and long term means Medicare and Medicaid” cuts, McConnell said.

Right. McConnell knows there has to be a deal, but he continues to argue that he’s prepared to help kill a deal. The hostage taker knows he can’t pull the trigger, wants to maintain the pretense that he may end up shooting anyway. Policymakers don’t really have a choice, McConnell implicitly concedes, but he’s creating one anyway.

In the meantime JPMorgan Chase & Co. CEO Jamie Dimon, who isn’t exactly an ally of the Obama administration, continues to press the line that Republican-mandated default would be “potentially catastrophic” to the U.S. economy.

Apparently, McConnell agrees, but is willing to create the catastrophe anyway unless Democrats cut Medicare to his satisfaction.

Making matters slightly worse, a growing number of congressional Republicans are “under the spell of an unorthodox group of financial experts who dispute the views of their peers and say that the U.S. could default briefly on debt payments without major, lasting consequences to the U.S. economy and international markets.”

All available evidence suggests they’re completely wrong.

Druckenmiller did not immediately respond to a request for comment. But the ascent of his view alarms everyone from industry insiders to Treasury officials to economists, conservative and liberal, to non-partisan analysts who say the consequences of the U.S. missing even a single interest payment to a debt-holder would be catastrophic — even if it was followed immediately by a legislative course correction.

“The U.S. dollar would be among the first casualties. If hot money were to flee what was once its safest haven, the dollar would sink and U.S. interest rates would rise,” writes Princeton economist, and former Fed Chairman Alan Blinder, also in the Wall Street Journal. “The latter could lead us back into recession.”

It’s not that investors would no longer have faith in the U.S. government’s technical ability to pay its bills. Nobody doubts that the U.S. can in theory manage its debt for years on the current fiscal trajectory before running into trouble with the markets. The fear is that buyers of U.S. debt would have to consider a new, previously unthinkable risk — that the country’s political system is too dysfunctional to set brinksmanship aside and steward the economy responsibly.