What would happen if the debt ceiling isn't raised

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    Jun 25, 2011 9:40 PM GMT
    The Economist basically says that a default "would convulse markets". Even if it was rectified quickly, it's going to cost major bucks based on the only known instance of "outright default" by the USA:
    http://www.economist.com/node/18866851Some market participants argue such a default would be quickly “cured” and be therefore merely technical. Yet history suggests that even a technical default can be costly. America’s only known instance of outright default (other than refusing to repay debts in gold in 1933) occurred in 1979 when the Treasury failed to redeem $122m of Treasury bills on time. It blamed unprecedentedly high interest from small investors, a delay in raising the debt ceiling and a word-processing-equipment failure. Although it repaid the money and a penalty to boot, a later study by Terry Zivney, now of Ball State University, and Richard Marcus of the University of Wisconsin-Milwaukee found it caused a 60-basis-point interest-rate premium on some federal debt. Today that would cost $86 billion a year or 0.6% of GDP, a hefty penalty for something so avoidable.


    Online, they have a slightly less doomsday prediction, but one that Republicans should take note of:

    http://www.economist.com/blogs/democracyinamerica/2011/04/debt_ceilingSo I don't entirely understand the pessimistic analysis here. But I am not a bond trader. And what I keep hearing is that the bond markets are getting antsy, and are likely to have a very negative response if the government hits its debt ceiling. Maybe this is nonsense; for all their rumoured crankiness, bond markets keep sucking up American bonds at historically low yields. But even a small hike in yields will have a noticeable impact on America's finances, which is to say, it will cost American taxpayers money. The Treasury issued $231 billion in bonds, notes and bills in March of this year. If hitting the debt ceiling raises the treasury yields investors demand by an average of 25 basis points, that could cost taxpayers $500m a month. When tea-party Republicans threaten that if Democrats refuse to accede to their demands they'll refuse to raise the debt ceiling, they're essentially threatening to cost American taxpayers billions of dollars in interest payments. It's a credible threat, but it would be a lot less credible if American taxpayers understood exactly what's being threatened here.


    Penny wise, pound foolish.
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    Jun 25, 2011 9:50 PM GMT
    southbeach1500 saidThe Federal government brings in far more in revenue each month than it needs to pay out to service the debt.

    What would happen is... the debt would continue to be serviced and - gasp - some government programs would have to be cut back.


    What about getting out of debt?

    You realize, of course, that should Congress fail to act Geitner has the sole authority to decide what gets paid. icon_lol.gif
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    Jun 25, 2011 10:31 PM GMT
    I'm just saying, their efforts at cutting back things like NPR and Planned Parenthood are rather ill-justified, since inaction on raising the debt limit is going to make PP/NPR and a whole bunch of other government programs look like chump change.
    $500 million x 12 = $6 billion
    Add to that the approximately $86 billion from a technical default that's quickly corrected (once Congress comes to its senses shortly after the markets crash), assuming that the 1979 scenario holds...on just $122 million of Treasuries not redeemed in time.

    That's like, um, almost 1/6 of the entire military budget...all gone in interest.

    Aren't Republicans supposed to save us money?
  • Webster666

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    Jun 25, 2011 10:45 PM GMT
    Here are six consequences if the Treasury is forced to choose one of those options:

    -----Cut $125 Billion Per Month - Right now, the federal government must borrow an additional $125 billion each month to finance all of its commitments. If the Treasury chooses to continue to pay creditors but stop all other federal spending, the government will have to begin reducing its spending by $125 billion every 30 days--mmediately. These cuts could affect everything from NASA and the FBI to congressional salaries and White House operating expenses.

    -----Treasury Bonds Collapse - If the government defaults on its debt, economists say that prices for Treasury bonds would collapse and interest rates would probably soar to record highs. The centrist Democratic think tank Third Way estimates that the bond rate increases alone would eliminate nearly 650,000 jobs in the United States.

    -----Cut Medicare and Social Security - To reduce spending by $125 billion a month, the government would have to make deep cuts to the two giant entitlement programs for the elderly, Medicare and Social Security.

    -----Stock Market Plunge - Wall Street generally agrees with Geithner that it would be a disaster if the U.S. defaulted on its debt. In addition to damaging the nation's creditworthiness in global markets, most experts agree it would torpedo the stock market and very possibly trigger a double-dip recession.

    -----Government Furloughs or Mass Layoffs - The federal government would most likely turn to furloughs or mass layoffs to immediately cut spending, possibly including the salaries earned by the approximately 2,000 people who work at the Bureau of Public Debt, the department that borrows the money to keep the federal government running. This could drain even more money from local economies and the states' tax bases.

    -----Sky-High Mortgage and Interest Rates - If the government defaults, interest rates on mortgages would shoot up and homebuyers and small businesses would have trouble getting loans even if they could afford the higher interest.
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    Jun 25, 2011 10:48 PM GMT
    Even the Economist can have a bias, which is evident in their wording and point of view:

    When tea-party Republicans threaten that if Democrats refuse to accede to their demands they'll refuse to raise the debt ceiling, they're essentially threatening to cost American taxpayers billions of dollars in interest payments.

    Point 1: Being against raising taxes during a recession is a mainstream Republican position. The most visible spokesmen on this in recent days are Kyl, Cantor, and Boehner. To use the term "tea-party" is nothing but an obvious attempt to marginalize their positions as extreme and outside the mainstream.

    Point 2: The Democrats and Republican have different positions, obviously. The above excerpt illustrates a pro-Democrat bias. The following is it restated with a pro-Republican bias.

    When tax and spend Democrats threaten that if Republicans refuse to accede to their demands they'll refuse to raise the debt ceiling, they're essentially threatening to cost American taxpayers billions of dollars in interest payments.

    Now let's try the same thing with a neutral position without bias, as it should be worded in a supposedly respectable publication:

    If the Democrats, who favor specific tax increases, and the Republicans, who oppose these increases, cannot come to an agreement and a credit default occurs, they're essentially threatening to cost American taxpayers billions of dollars in interest payments.

    Too bad so much of the media demonstrates so much bias.
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    Jun 25, 2011 10:57 PM GMT
    socalfitness said...Now let's try the same thing with a neutral position without bias, as it should be worded in a supposedly respectable publication:

    If the Democrats, who favor specific tax increases, and the Republicans, who oppose these increases, cannot come to an agreement and a credit default occurs, they're essentially threatening to cost American taxpayers billions of dollars in interest payments.

    Too bad so much of the media demonstrates so much bias.


    QFT.
  • Posted by a hidden member.
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    Jun 25, 2011 11:43 PM GMT
    "If the Democrats, who favor specific tax increases, and the Republicans, who oppose these increases, cannot come to an agreement and a credit default occurs, they're essentially threatening to cost American taxpayers billions of dollars in interest payments."

    If the Democrats, who oppose specific cuts, and the Republicans, who favor these cuts, cannot come to an agreement and a credit default occurs, they're essentially threatening to cost American taxpayers billions of dollars in interest payments.

    Most unbiased publications agree that a combination of tax increases and long term cuts have to be made. The Economist is one of them.

    All my thread is trying to point out is that, for the party that favors the cuts to save money, it would save a lot more money if they were not so intransigent in their negotiation tactics. I'm not even talking about generating more revenue here (which is linked to the deficit negotiations, sure, but not directly related to the issue at hand, which is saving money).
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    Jun 26, 2011 12:02 AM GMT
    q1w2e3 said"If the Democrats, who favor specific tax increases, and the Republicans, who oppose these increases, cannot come to an agreement and a credit default occurs, they're essentially threatening to cost American taxpayers billions of dollars in interest payments."

    If the Democrats, who oppose specific cuts, and the Republicans, who favor these cuts, cannot come to an agreement and a credit default occurs, they're essentially threatening to cost American taxpayers billions of dollars in interest payments.

    Most unbiased publications agree that a combination of tax increases and long term cuts have to be made. The Economist is one of them.

    All my thread is trying to point out is that, for the party that favors the cuts to save money, it would save a lot more money if they were not so intransigent in their negotiation tactics. I'm not even talking about generating more revenue here (which is linked to the deficit negotiations, sure, but not directly related to the issue at hand, which is saving money).

    I agree that the second paragraph that you added provides additional information, also unbiased. As far as "most unbiased publications" are concerned, that point is debatable, especially concerning tax increases in a recession. But one thing is clear, as far as politics associated with this issue is concerned. That is, The Economist is not one of the unbiased publications, as the excerpt clearly shows.

    As far as intransigence, it cuts both ways. The Democratic budget proposal put out by Obama ignored the recommendations of his own debt commission. It seems to many that the Democrats are intending on playing chicken, hoping to threaten or actually cut off social security payments to granny and blaming the Republicans.
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    Jun 26, 2011 12:25 AM GMT
    If you read both articles in full, you'll realize it's written with the viewpoint of a financial person looking from the outside into the fishbowl of US politics.

    The Economist is an international publication. In its articles it routinely introduces the local characters to its audience. People like Kyl and Cantor may mean nothing to its readers in, say, Germany or China.

    So, yeah, the term "tea-party Republicans" is unfortunate, but captures the gist of the impression regarding the Tea Party with cost cutting. At least it wasn't "Tea Party Republicans." (Is there even a single Tea Party or just a whole bunch of tea parties?)

    http://www.washingtonpost.com/blogs/ezra-kleinSometimes we can dive so deep into these legislative debates that we lose sight of the bigger picture. So I want to quote my friend Ben Adler, who tweets, “I want to meet an economist who thinks it would be better for US to default on debt than to cut tax credits, if one exists.”

    Anyone? Anyone? Bueller?
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    Jun 26, 2011 12:31 AM GMT
    A default would not only raise the interest that we must pay on the debt, but it would raise borrowing costs for private companies. Since Republicans are, ostensibly, the party of business, they should know that companies are less likely to engage in investment if their cost of capital is higher.
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    Jun 26, 2011 12:34 AM GMT
    swimguychicago saidA default would not only raise the interest that we must pay on the debt, but it would raise borrowing costs for private companies. Since Republicans are, ostensibly, the party of business, they should know that companies are less likely to engage in investment if their cost of capital is higher.


    The 1st article covers that too:

    OPDomestic banks would not have to classify their sizeable holdings of Treasuries as non-performing if they thought the default short-lived. But they would suffer nonetheless. Currently Treasuries represent roughly 30% of the collateral that financial institutions such as investment banks use to borrow in the $4 trillion repurchase (“repo”) market. They represent another 4-5% of the $1 trillion in collateral used in the derivatives market. A default could trigger demands by lenders like money-market funds for more or different collateral.

    Matthew Zames of JPMorgan Chase, writing on behalf of the securities industry in April, gave warning that this could “lead to deleveraging and a sharp drop in lending”. Money-market funds themselves hold another $338 billion of Treasuries. In the event of a default at least one would probably “break the buck” (ie, fail to give the principal back to investors), threatening “a broader run on money funds”, Mr Zames said.
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    Jun 26, 2011 12:42 AM GMT
    Webster666 saidHere are six consequences if the Treasury is forced to choose one of those options:

    -----Cut $125 Billion Per Month - Right now, the federal government must borrow an additional $125 billion each month to finance all of its commitments. If the Treasury chooses to continue to pay creditors but stop all other federal spending, the government will have to begin reducing its spending by $125 billion every 30 days--mmediately. These cuts could affect everything from NASA and the FBI to congressional salaries and White House operating expenses.



    I read an interesting fact from the 2010 budget

    NASA budget(entirity) => 19 bil
    US Military (subdivison -air conditioning units, fuel, maintanince and transport there of) => 20bil
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    Jun 26, 2011 12:47 AM GMT
    I read somewhere that in Washington, things don't happen until the very possible last moment. (Remember the April averted government shutdown?)

    So there'll be more (bi)partisan posturing and wrangling until August, or even before that, when the market suddenly decides that US debt is no longer reliable.icon_eek.gif
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    Jun 26, 2011 4:16 AM GMT
    southbeach1500 saidJust to put this in bite size statements that even the most leftist of liberals can understand:

    1) There will be no default if the Democrats and Republicans are unable to come to an agreement by August 2nd.

    2) The Republicans are trying to get the Democrats to agree to:

    a) Cap the Federal budget at a specific percentage of GDP

    b) Require a supermajority of votes to pass any tax increases

    The time for spending "cuts" has come and gone. Congress has shown that they just can't do it. What is now on the table are spending "curbs."


    And the Democrats are right not agreeing to any such thing...
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    Jun 26, 2011 10:12 AM GMT
    If Geitner is the Dictator of the Dollar, maybe he can start by imitating the example of California Comptroller John Chiang and withholding the pay and benefits of the Congress and the POTUS and the Cabinet until a balanced budget that regards a spending cap so as not to increase the debt ...?

    Wishful thinking, of course.
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    Jun 26, 2011 10:38 AM GMT
    It's more of a psychological problem for the markets. But a problem is a problem.

    As for Geitner, he is a strange one. He doesn't seem to know what he's talking about. I'd say he's a moron, but he can't be that stupid. But then, maybe he can.
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    Jun 26, 2011 11:58 AM GMT
    The US would likely lose its triple A rating, which would cost all of us a great deal of money on servicing existing debt.

    As to the Economists bias, it is that of a well educated fiscal hawk.

    In any case, I'm set to make a killing on all my CDSs against the US government icon_biggrin.gif
  • GQjock

    Posts: 11649

    Jun 26, 2011 1:00 PM GMT
    southbeach1500 saidThe Federal government brings in far more in revenue each month than it needs to pay out to service the debt.

    What would happen is... the debt would continue to be serviced and - gasp - some government programs would have to be cut back.


    Like maybe the oil subsidies and corporate welfare ... Ya think?