Consequences of a US default

[we vs us]

Thought this was a good walkthrough of what we can expect if the debt ceiling isn't raised. It certainly isn't encyclopedic, but it should be enough to scare the bejesus out of anyone.  Worth reading through the whole thing.

BOSTON (MarketWatch ) — It's no joke. The sky over the investment world and everything under it, including bonds, stocks, money markets, commodities, you name it, will fall unless lawmakers raise the $14.3 trillion Federal debt ceiling by Aug. 2.

It could be nothing less than catastrophic and worse than the financial meltdown of the late 2000s should Uncle Sam fail to raise the legal limit on government borrowing and default on U.S. debt, according to Greg McBride, a CFA charterholder and senior analyst with BankRate.com. "There will be no safe haven," said McBride, from his perch in Florida.

In a press conference Monday, President Obama called for compromise as party leaders seek to craft a deal that raises the legal limit on how much the U.S. government can borrow while slashing projected deficits over the next decade. Democratic and Republican leaders held talks Sunday, but discussions broke down over taxes.

Obama said he would keep convening with party leaders every day until a debt-limit deal is reached. He also said he would reject a stopgap measure of 180 days or less. Congress has to raise the federal government's legal debt limit by Aug. 2 or the nation could be in danger of defaulting on its debt, Treasury Secretary Timothy Geithner has said. A U.S. default could put the economy back into recession and create panic in global financial markets.

And the sad part is that most Americans (and lawmakers for that matter) don't realize just how bad things will get if the U.S. fails to pay any of its obligations, even if it's the teeniest, tiniest bill.

The crux of the matter, according to BankRate's McBride, is that people on Main Street don't understand the connection with, and the unintended consequences of, lawmakers not raising the debt ceiling.

According to McBride, here's what's likely to happen should the Obama administration and Congress fail to agree on a plan to raise the debt ceiling and compromise on deficit reductions over the next 10 years. "It's not an uplifting conversation," McBride said.

Rapid repricing

First, there will be what McBride calls a "rapid repricing" of all financial assets, not just Treasuries. In other words, the value of your 401(k) plans, IRAs, 529 plans, gold and real estate will all collapse.

And the reason for that is this: What is fundamental to the pricing of financial assets is the notion that U.S. Treasuries are risk-free. All financial assets are priced based on this assumption (or hope). If Treasuries are no longer risk-free, then all financial assets have to be repriced against another a benchmark.

And this time, investors won't have a safe haven to which they can flock as they did during collapse of 2008. "There will be no place to hide," said McBride. "Treasuries will no longer be safe in the event of a default." Ditto real estate, gold, and farm land. In short, there will be no flight to safety because no asset will be safe. "Even cash might not be a safe haven."

Credit crunch redux

Should Uncle Sam renege on its promises, McBride predicts that interest rates on all forms of debt — mortgages, car loans, government — will spike, resulting in a renewed credit crunch. Borrowing will come to a halt. Business will come to a halt. And even more troubling is the possibility that a halt in the flow of credit will cause commercial paper markets to dry up and that will result in a run on money funds.

Only this time, there won't be a federal backstop like we had in 2008, said McBride. At the time, the Federal Reserve took action on several levels to support the money markets, and raised the insurance level on deposit accounts to $250,000 per person, per account category, per bank. But what if there was a run on banks? McBride said, "What good is FDIC insurance if the government is not paying its bills?"

If the scenario plays out, even in the case of a brief default, it will permanently tarnish the U.S.'s credit rating and usher in period of permanently higher interest rates. "There will forever be a risk premium attached to U.S. government debt," said McBride.

Unemployment will rise

According to McBride, Uncle Sam defaulting on its debt could also result in massive job losses as companies slash expenses to conserve cash. And therein lies yet one more reason why lawmakers should do all they can to resolved the debt-ceiling issue. The U.S., which reported last week that unemployment rose to 9.2%, can't afford any more bad news. "We're in a bind and we can't afford to raise the cost of borrowing," said McBride.

Call, email your representatives

According to McBride, there is no safe place to put your money should Uncle Sam default. And the only good investment move to make right now just might be U.S. postage stamps on envelopes addressed to your representatives in Congress. And inside those envelopes should be requests, no — urgent pleas — asking lawmakers to deal with the debt ceiling now or run the risk of forever changing the landscape of the U.S. as we know it.

To me, the idiocy of this whole discussion is that we're willing to throw away the huge premium we enjoy for being the Indispensible Nation based on something that doesn't need to happen.

[Teatownclown]

How can someone who is so intelligent as Obama be so damn stupid?
Every time he surrenders to the GOP, instead of working together, all they do is demand more. 

[RecycleMichael]

That is very scary stuff.

[Townsend]

I heard Boehner on NPR this morning saying he wants to raise the ceiling.

I'm not sure if that's an about face for him but it's sure a different tune I've been hearing on my crazy lefty liberal stations.

[ZYX]

That really is scary. It's truly sad that the lawmakers have not come together and found a solution by now. Raise taxes cut spending. Everybody will have to make sacrifices, but none of those will come close to the sacrifices everyone will have to make in the case of a U.S. default.

[carltonplace]

I don't think Boehner has the last say, I'd bet Cantor is the one stalling a deal. 

[Gaspar]

Thought this was a good walkthrough of what we can expect if the debt ceiling isn't raised. It certainly isn't encyclopedic, but it should be enough to scare the bejesus out of anyone.  Worth reading through the whole thing.


To me, the idiocy of this whole discussion is that we're willing to throw away the huge premium we enjoy for being the Indispensible Nation based on something that doesn't need to happen.

That is not correct.  That would only be correct if we opt to default (which of course we won't).  Both sides need the american people to think that the sky is falling for different reasons.  This is theater.

Reaching the debt limit is not the same as defaulting on the federal debt. No less an authority than a Treasury Department fact sheet claims, "If Congress fails to increase the debt limit, the government would default on its legal obligations." This is simply not true. The two things are distinct, and it's unnerving as hell (though hardly surprising) that the government department in charge of minding the books either is wilfully misleading people or just out to lunch. When the debt limit is reached, that doesn't mean that the U.S. will default on its debt payments. Unless it chooses to. There's a huge difference between reaching your limit and not paying your bills. Let's say you max out your credit cards. You may not be able to put any more purchases on plastic, but that doesn't mean your creditors are going to come after you. As long as you cough up your minimum payment amounts, you're OK. The same basic rule applies here. What's more, the government has a number of assets, ranging from cash on hand to gold reserves to TARP assets it could sell to cover all or part of its debt obligations through the end of the current fiscal year. It can also prioritize government payments to take care of debt-related bills first (indeed, it may be constitutionally required to).

Most estimates for total federal revenues in fiscal 2011 have about $2.2 trillion flowing in versus about $3.77 trillion flowing out. In the out-flow figure is about $200 billion in interest payments (which represent the absolute minimum amount that would need to be paid to avoid a technical default). Given that we're in the final quarter of fiscal 2011, let's assume that we've got about $50 billion left in debt payments to go for this year (I'm guessing here, as the schedule of payments could vary considerably). That seems to be well within the government's ability to pay one way or another, at the very least to buy some time to sort through things.

--Nick Gillespie, Reason Magazine

In fact, if we were to preserve the debt ceiling at it's current level, and then show real action in reducing spending to bring our excess down, this would signal to national and international markets that we are willing to be responsible.  

We are however, in no way willing to be responsible from either the Democrat or Republican side, so we will get an increase before the 2nd.  Part of this will be in the form of changing the way we calculate debt (basically changing the rules), and part will be the $2 trillion that Bohener is pushing.

We will then have this debate again before the election in 2012.

[Townsend]

I don't think Boehner has the last say, I'd bet Cantor is the one stalling a deal. 

Time agrees with you.

http://news.yahoo.com/gops-hardliner-eric-cantor-thwarted-obama-boehner-debt-081407212.html

During the high-stakes summit at the White House on Sunday evening, Eric Cantor was the primary voice speaking on behalf of Republicans interests, according to several accounts of the meeting. A senior Democratic aide briefed on Monday's talks told TIME that Cantor again "dominated" much of the negotiations on the Republican side, while Boehner "hardly spoke."

Cantor's stated resistance to a grand bargain freighted with revenue increases - and the perception that his position reflected the pulse of the GOP conference - likely influenced Boehner's decision to scuttle his pursuit of a "big deal" with Obama. Weeks earlier, Cantor's abandonment of the Biden-led negotiations were the death knell for those talks. Speculation about palace intrigue is a Washington tradition, but the rumored frost between the top two Republicans in the House could have significant impact on whether the two parties can craft an agreement to raise the debt-limit by August 2. That's particularly true if personal ambition leads either lawmaker to elevate political calculations over policy imperatives.

[Gaspar]

Now, if anything you hear from the president resonates with you, let it be what he just announced on CBS:

"I cannot guarantee Social Security checks go out on August 3rd if we haven't resolved this issue. Because there may simply not be the money in the coffers to do it."

Mr. Obama told Pelley "this is not just a matter of Social Security checks. These are veterans checks, these are folks on disability and their checks. There are about 70 million checks that go out."

He is willing to prey on the emotions of the weakest among you.  Debts associated with CURRENT Social Security, Medicare, and Interest payments will not be affected, and he knows it.  This is the most disrespectful thing I think he has ever done.  He assumes you don't know any better, and for the majority of the public he is probably right.

http://www.cbsnews.com/8301-503544_162-20078789-503544.html

Are you angry yet?

[Teatownclown]

Are you angry yet?

Yes. Over Eric the Schmoe and Odumba strategy!

[Gaspar]

Yes. Over Eric the Schmoe and Odumba strategy!

Apparently he's off prompter.  Everyone is rushing in to clarify now. . .he said "I cannot guarantee". . .

Well, he cant guarantee the world won't end tomorrow, but it would be rather irresponsible for him to announce that!

This was a really stupid thing to say.  I don't think it's going to have the effect he hoped it would.

[guido911]

That is very scary stuff.

I know it's scary. Here's a pic I snapped of myself:



I wish everyone would seriously calm down and focus on what's really important. Like maybe 9.2%, trade deficits, or U.S. women soccer.

[Teatownclown]

I know it's scary. Here's a pic I snapped of myself:



I wish everyone would seriously calm down and focus on what's really important. Like maybe 9.2% unemployment or U.S. women soccer.

The unknown idiot? One of too many.....

[guido911]

That really is scary. It's truly sad that the lawmakers have not come together and found a solution by now. Raise taxes cut spending. Everybody will have to make sacrifices, but none of those will come close to the sacrifices everyone will have to make in the case of a U.S. default.

Seriously, what sacrifices will you be making? 

[guido911]

Apparently he's off prompter.  Everyone is rushing in to clarify now. . .he said "I cannot guarantee". . .

Well, he cant guarantee the world won't end tomorrow, but it would be rather irresponsible for him to announce that!

This was a really stupid thing to say.  I don't think it's going to have the effect he hoped it would.

Really. What was the point of that, I mean other than to scare retired people.