rickyp wrote:Defaulting would be suicidal. You don't solve problems by first making them worse .

Right. I get it. So, stop borrowing (aka "making [the problem] worse"). Good call.

Richard, as I see it, no one is calling for default, are they?

If we don't raise the debt ceiling (a dubious proposition--Republicans will eventually vote to extend the credit limit so Obama can continue destroying the future, er, "winning the future"), does that mean "default?"

Answer: "No."

It does mean we pay interest first, then required spending. It would mean shuttering many government services and offices. It could mean some government employees won't be paid.

Frankly, the only constitutional amendment I would accept is one that says the budget must be balanced--unless there is a declared war. There really is no other reason to keep borrowing like this.

My point exactly, Steve.

Could step one be the repeal of the ethanol subsidy? It passed!

Step 2 is the House takes up the bill ... Step 3 is the President signs.

$5,400,000,000 saved, about
$1,000,000,000,000 to go for a balanced budget.

Doctor Fate wrote:It does mean we pay interest first, then required spending. It would mean shuttering many government services and offices. It could mean some government employees won't be paid.

It doesn't work this way. Default is default. I just really hope people in congress don't think the world works like this.

geojanes wrote:

Doctor Fate wrote:It does mean we pay interest first, then required spending. It would mean shuttering many government services and offices. It could mean some government employees won't be paid.

It doesn't work this way. Default is default. I just really hope people in congress don't think the world works like this.

Right.

Please define "default." Wouldn't that be when we stop paying our debtors? Or, do you have some special insight?

Fitch Ratings is the latest credit watchdog to warn about the consequences of a missed interest payment by the United States. Yet there’s a faction in Washington that seems increasingly inclined to push the country’s debt fight that far. Maybe only the ensuing mess could persuade the brinkmen to back off.

So, is there some special definition you're using? If not, it seems you don't know what you're talking about. Not being able to borrow more is not "default."

Btw, how many more trillions should we borrow before going bankrupt? I hope people in Congress don't think like you do here--let's just keep borrowing!

George,
I do not want to harp on you, but will the problem be worse next time if we do nothing about it this time? I don't mean to scare you. I don't want default any more than you do. However, is it worse to do nothing, and have the problem come around in 2 years with even more debt?

I think it is...

If the US defaults it'll make Lehman look like a bump in the road.

There seems to be great anxiety regarding the prospect of a default. So, for someone unfamiliar with the intricacies of the financial markets, what are some of the consequences of a default?
The United States has an AAA long-term credit rating from Standard & Poor’s which, in the event of a default would be downgraded, but will this significantly decrease the United States’ access to credit? [I think it would be unlikely for the US to fall to the non-investment grade rating.]

Prior Proper Planning Prevents Poor Performance.

Apart from the consequences of a default, another question I have is whether or not the United States can avoid default through spending reductions? The current debt ceiling, I understand, will be reached by August of this year. Does the US have sufficient time to reduce spending in a careful manner? The Government of Canada, for example, is conducting what I believe is a thorough, yearlong study of ways in which the government reduce inefficiencies. I’m not sure if the United States has time for such research.

Perhaps the debt ceiling should be raised immediately to prevent the embarrassment of default. I say raise the debt ceiling before balancing the budget as a time-buying mechanism. Once the debt ceiling has been raised there must be efforts to reduce spending so as to avert a similar crisis in 2013.

Magister Equitum wrote:[I think it would be unlikely for the US to fall to the non-investment grade rating.]

The Financial Post carried an article wherein Fitch Ratings warned that:
U.S. treasury bonds, seen worldwide as a risk-free investment, could be labelled “junk” if the government misses debt payments by Aug. 15.

What is the mechanism for rating bonds?

Here is the article:
http://business.financialpost.com/2011/ ... t-on-debt/

Right now we have $14 trillion of debt, but only pay interest at about 2% or $280 billion a year. However, if our interest rates were to rise because of a lower bond rating, our deficit would get much worse. For example, if our interest rate increased by 2%, that would increase our deficit from $1 trillion to $1.3 trillion. The potential spiraling is very worrisome.

Let me start by saying no one knows what would happen if the US defaulted on its obligations.

Bruce Bartlett, a guy who knows a lot more than me was interviewed a while ago here:

http://www.salon.com/technology/how_the_world_works/2011/01/05/bruce_bartlett_on_tea_party_monumental_insanity

And explains a lot of why this is extraordinarily dangerous and you should read it if you think a default is no big deal.

That said, here’s my take of the worst-case outcome, which is more extreme: US debt is considered zero risk, and a lot of people and organizations hold it throughout the world. The sum of US obligations is multiple orders of magnitude larger than Lehman Brothers. Lehman Brothers’ default and the chaos that ensued nearly ended the world as we know it.

If you don’t believe that and you think Lehman was no big deal, then sure, maybe you can believe a gov’t default doesn’t mean anything. Maybe you can compartmentalize default into talk about credit ratings. RJ, the credit rating for a bond in default is D. As in Default, or Done, or Dead. If you’re a D, you don’t have a credit rating, you can't float a bond at any interest rate, you're done. But worry about a credit rating is a tiny concern.

So if the US defaults, what about your money market account? Most of ‘em hold short-term gov’t paper, or t-bills. If the gov’t is in default, you can’t get money out of your money market. It not only breaks the buck, it goes to zero, until the default is cured. What do you care? You don’t have money in market accounts. Well then how about the people you do business with, or your bank, or your landlord, your employer, or your grocery store, or your pension fund? A US gov’t default will put the liquidity of our system to nearly zero. Without liquidity, the economy stops, dead.

Hell, I’ll go even further. Why does a dollar have value?

Old timers know I’m certainly not a hard money advocate, and consider a dollar to be worth something because other people think it’s worth something and will give things and labor for it. But what happens to the value of the dollar if the gov’t defaults? Well, we might actually prove that Pigmaila and TheodoreLogan were right in their belief that metals were the only way to preserve wealth.

Because if the gov’t defaults, and liquidity goes to zero and the economy goes to zero, which will pretty much mean the dollar goes to zero, and life as we know it will end. That’s contagion in a highly interconnected financial world, and I can’t fathom why anyone would consider this possible outcome a reasonable gamble for any return.

Brad, maybe an analogy will help. You are a doctor in an ER. You have a patient that is dying. He is obese, and has diabetes, heart disease, high blood pressure and is killing himself with food. He is also bleeding out from a ruptured femoral artery. His lifestyle diseases will surely kill him in a few months or years, but he’ll bleed out in a minute if you don’t fix the artery. What are you going to do first?

take the donut out of his mouth ;)

The consequences of default are serious. For one thing, it's not just the Chinese who are Treasury debt-holders. Banks, pension funds, life insurance companies, state and muni governments....all T-bill holders. Not to mention the Social Security Administration. All holders of vast amounts of US debt...all expecting the money to be there when their instruments mature or their regular interest payment times roll around.

So what happens if the money isn't there? Thankfully it's all conjecture but the events in Russia of the 90s give us a pretty good idea. It's not a perfect comparison, the US of 2011 is not like the former Soviet Union of the 90s...but their defulat still provides a cautionary tale and some likely scenarios.

- The dollar takes a hit. The national standard of living takes a dive as the dollar won't go as far as it used to. Without international (and national) confidence in our currency, the dollar becomes worth less. As such you can't buy as much coffee, VWs, bananas...or whatever your favorite import is, without shelling out more cash.

- Debt becomes more expensive. For investors to buy obviously more risky US paper...they'll need more of an incentive, That means a higher interest rate which means even more money has to be spent by the Treasury to service the debt that goes out.

- Interest rates for consumers and businesses spiral up which would stifle new business creation.

- The stock market would...ah...suffer.

But this assumes a 'general' default. A condition where the U.S. shrugs its collective shoulders and says, "We can't service our debt" and watches the financial machine it has spent decades feeding explode like a 747 engine with a flock of geese passing through it. That won't happen.

Far more likely, based on the Administration's past actions (see General Motors) is that only certain bond holders would be selected to take a haircut. That is, some bond holders would get a fraction of their paper's notional worth while others would continue to enjoy full payment. You can bet officials would be criss-crossing the globe assuring everyone that they are part of the elect group that will continue to get full payment if only they'll accept another tranche of 2% paper. You'd still see the above effects...but not as serious.

Now the question is...if you're the Administration and you choose option B...how do you pick who gets hosed?

Debt is a myth.