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U.S. Debt Default Would Be Worse Than Lehman

25 points by chailatte 15y ago

walexander 15y ago
I'm fairly certain there is no crisis. They'll come to some last minute deal, as always, after they've done all the theatrics for MSNBC and Fox.
- philwelch 15y ago
  Even if they don't, it's not likely to matter much. US sovereign default is unconstitutional under the 14th amendment.
  - btilly 15y ago
    Nobody doubts that the money will eventually be paid in full. However a failure to pay it on time will result in financial catastrophe.
    - rkowalick 15y ago
      "Default" is typicially defined to be "Interest is not paid on time."
      - btilly 15y ago
        If the Constitution says that you are supposed to be paid in time but, at that time, the money is not in your bank account, then you still don't have anything in your bank account. We are headed towards a situation where we're in default, no matter what the Constitution says. If that happens our creditors will be in a position to go to the courts and get their money back. It will be a slam-dunk. They will win. But on the date that they are supposed to have their money, they still won't have money to spend. And that is a big problem. Incidentally the actual text of the 14th amendment doesn't say anything about "default". It says, The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. In other words if you've been told that we owe you money, we owe you money. Period. But it doesn't actually say when or how you'll get that money. Incidentally if we do default on some of it, we should, unlike what we did in 1979, pay it back with a generous penalty on top. That would do a lot to make lenders more comfortable that it isn't so bad to temporarily get paid late. For instance in 1979 the pre-emptive spending of, say, $40 million would have saved us billions over the next few years. Unfortunately nobody has the political will to consider that course of action, no matter how good it would be...
- btilly 15y ago
  I'm positive that that this is everyone's intention. But they've dug themselves into entrenched positions, and are running it down to the wire. In that situation, accidents can happen. See http://www.telegraph.co.uk/finance/economics/8639896/The-last-time-the-US-defaulted-and-blamed-the-printer.html http://www.telegraph.co.uk/finance/economics/8639896/The-las... for how a similar situation in 1979 caused us to accidentally pay $120 million slightly late, resulting in our paying several billion in additional interest.
- anonymoushn 15y ago
  Even if they don't raise the debt limit ever, there's no reason for us to default. Our tax revenues can pay for much more than our debt service.
  - walexander 15y ago
    Related to that, most of our debt is owed to the federal reserve, which just makes up money out of thin air for us anyway. Could the federal reserve theoretically give a forbearance on interest payments? The debt owed to the public and international financiers (China,Japan) is fairly insignificant compared to what's owed to the Federal Reserve, and could probably be paid. What happens if we pay everyone except ourselves?
- tomjen3 15y ago
  That seems to be the consensus, but I am not really sure. The problem is that the Tea party people can't afford to compromise their position at all and even many who are not members of it are still under their influence.
wccrawford 15y ago
I don't think anyone thinks we shouldn't pay. Instead, what everyone thinks is that we -have- to balance the budget, and this appears to be the only way to get politicians to do their jobs. They seem to be treating a balanced budget as if it isn't their problem. That someone else should be doing that. I'm starting to wonder if that's right. Maybe there should be another body that has oversight of our ridiculous spending.
- deleted 15y ago
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- deleted 15y ago
  [deleted]
- diolpah 15y ago
  Actually, lots of people think we shouldn't pay. More specifically, Millennials will need to decide at some point if they are willing to pay for the profligacies of their parents. Many of them rightly understand that they are shouldering a burden they neither asked for nor benefitted from.
- sethg 15y ago
  We have to balance the budget in the long run, but this is a hare-brained way to make it happen. If anything, a default will make it harder to balance the budget in the long run, because if the markets get spooked into higher interest rates on T-bills, a greater proportion of tax revenue will have to be spent on debt service.
pnathan 15y ago
My thoughts when reading these sorts of articles is that we are faced with essentially two choices: * Keep building the house of cards * Let it fall down I don't see any points of view that advocate slow unwinding of the issues that got us here, and that's troubling.
- jbooth 15y ago
  Obama and Boehner had the outlines of a 10 year, 4 trillion deal that had some pain for everyone. For about 24 hours. Unfortunately, that would have been a victory for Obama (and the country, incidentally). So it's a no-go as far as the Tea Party is concerned, which meant Boehner had to back out. Nevermind that these are people who've been shrieking about the deficit since January 2009.
  - rbanffy 15y ago
    And that's the risk. The process looks like it's based on ideology. Ideology knows no compromise. It will be interesting to watch.
    - jbooth 15y ago
      It's not even ideology, it's fear, hatred and tribal identity. Ideological conservatives would have leaped at that deal Obama and Boehner hammered out.
      - Benjo 15y ago
        Agreed. It's not ideology, it's partisanship. It's the illusion that it's okay for the country to suffer now, because it will benefit my party and after the next election my party will make up for it with the great legislation we will be able to pass. I'm trying to think of the last time this actually happened. Civil War?
      - gnaritas 15y ago
        Not if their ideology includes never raising taxes as a fundamental principle.
ck2 15y ago
It's an engineered distraction. We (led by the media) far for it every time. Just like the nonsense about the "mosque at ground zero" - remember that? Notice how all the nonsense vanished? Remember the debt is stuff we've already "bought" it's not the future budget and has been raised dozens and dozens of times, under every kind of leadership or lack thereof. This is just a puppet show - one side makes the show and the other side sits memorized and doesn't look at what else is going on. Just imagine if we actually had this much effort by news outlets into health care reform (not the health insurance fiasco we got instead). We might have gotten an actual progressive solution.
- Estragon 15y ago
  An out-and-out default is extremely unlikely, but a massive devaluation in the US dollar would be just about the perfect treatment for America's economic woes. Devaluation of debt, and massive increase in export competitiveness...
  - ck2 15y ago
    So selling twice the number of $1 widgets at 50 cents fixes something? Or just makes us tread water faster? How exactly do we compete against nearly free labor in manufacturing from China and Vietnam and such? (answer: we cannot and should not try - we should tax imports and make selling to ourselves cheaper with domestic products vs imports - people will buy from overseas when their widgets are 50 cents and ours are $1 but not if there's is 90 cents and ours is still just $1)
  - kevin_morrill 15y ago
    I agree this is the likely outcoming, but couldn't disagree more about it being the "perfect treatment". What you had with the housing boom was effectively devaluation in a limited sector (along with oil). Inflation causes massive capital misallocations and screwed up pricing signals. Think about how many people who were working in construction and real estate needlessly that could have been working on things people truly need/want. Eventually all those lost man years of effort add up to lost lives in the aggregate.
ChuckMcM 15y ago
"It would be a totally self-inflicted cataclysm,” he said. “There’s no question the United States can meet its obligations. This idea that somehow that we cannot pay because we’re having a political fight over how to handle the spending and taxing” is “democracy functioning in the worst possible way,” he said." Yup the who thing is a self inflicted cluster-f*k. From the politicians who spend to much, to voters who don't think about who they are voting for, to media who would love nothing more than armeggedon so they could get a few more rating points. One thing I know for sure, is that there will be a chapter on this period in the US and the world in economics textbooks.
- randallsquared 15y ago
  In order to call it self-inflicted, you have to buy into the collection of people as an entity. It's not clear to me that this will continue to be viewed as the most useful abstraction.
vegas 15y ago
obvious headline is obvious.
espeed 15y ago
How much is owed to the Fed? If they don't raise the debt ceiling, just "default" to the Fed -- they still have the $4 trillion sitting there that hasn't been touched.
bwb 15y ago
Hah when I read the title of this post I was like Duh, no kidding it would be way worse.
adaml_623 15y ago
What a rubbish article. 1000 words to sum up something that most people probably know. With absolutely no analysis or details or links into anything interesting. Press release journalism at it's most boring. (Yes I know it's not technically a press release)
yason 15y ago
Right. Not exactly being able to pay one's debts will surely be corrected by taking more debt. And having more loaned money to spend will naturally just encourage tightening up one's expenses. If this financial situation wasn't about a nation but a private person, it would be obvious to everyone that his finances are simply fucked up.
- deleted 15y ago
  [deleted]

25 points by chailatte 15y ago

I'm fairly certain there is no crisis. They'll come to some last minute deal, as always, after they've done all the theatrics for MSNBC and Fox.

philwelch 15y ago
Even if they don't, it's not likely to matter much. US sovereign default is unconstitutional under the 14th amendment.
- btilly 15y ago
  Nobody doubts that the money will eventually be paid in full. However a failure to pay it on time will result in financial catastrophe.
  - rkowalick 15y ago
    "Default" is typicially defined to be "Interest is not paid on time."
    - btilly 15y ago
      If the Constitution says that you are supposed to be paid in time but, at that time, the money is not in your bank account, then you still don't have anything in your bank account. We are headed towards a situation where we're in default, no matter what the Constitution says. If that happens our creditors will be in a position to go to the courts and get their money back. It will be a slam-dunk. They will win. But on the date that they are supposed to have their money, they still won't have money to spend. And that is a big problem. Incidentally the actual text of the 14th amendment doesn't say anything about "default". It says, The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. In other words if you've been told that we owe you money, we owe you money. Period. But it doesn't actually say when or how you'll get that money. Incidentally if we do default on some of it, we should, unlike what we did in 1979, pay it back with a generous penalty on top. That would do a lot to make lenders more comfortable that it isn't so bad to temporarily get paid late. For instance in 1979 the pre-emptive spending of, say, $40 million would have saved us billions over the next few years. Unfortunately nobody has the political will to consider that course of action, no matter how good it would be...
btilly 15y ago
I'm positive that that this is everyone's intention. But they've dug themselves into entrenched positions, and are running it down to the wire. In that situation, accidents can happen. See http://www.telegraph.co.uk/finance/economics/8639896/The-last-time-the-US-defaulted-and-blamed-the-printer.html http://www.telegraph.co.uk/finance/economics/8639896/The-las... for how a similar situation in 1979 caused us to accidentally pay $120 million slightly late, resulting in our paying several billion in additional interest.
anonymoushn 15y ago
Even if they don't raise the debt limit ever, there's no reason for us to default. Our tax revenues can pay for much more than our debt service.
- walexander 15y ago
  Related to that, most of our debt is owed to the federal reserve, which just makes up money out of thin air for us anyway. Could the federal reserve theoretically give a forbearance on interest payments? The debt owed to the public and international financiers (China,Japan) is fairly insignificant compared to what's owed to the Federal Reserve, and could probably be paid. What happens if we pay everyone except ourselves?
tomjen3 15y ago
That seems to be the consensus, but I am not really sure. The problem is that the Tea party people can't afford to compromise their position at all and even many who are not members of it are still under their influence.

wccrawford 15y ago

I don't think anyone thinks we shouldn't pay. Instead, what everyone thinks is that we -have- to balance the budget, and this appears to be the only way to get politicians to do their jobs. They seem to be treating a balanced budget as if it isn't their problem. That someone else should be doing that. I'm starting to wonder if that's right. Maybe there should be another body that has oversight of our ridiculous spending.

deleted 15y ago
[deleted]
deleted 15y ago
[deleted]
diolpah 15y ago
Actually, lots of people think we shouldn't pay. More specifically, Millennials will need to decide at some point if they are willing to pay for the profligacies of their parents. Many of them rightly understand that they are shouldering a burden they neither asked for nor benefitted from.
sethg 15y ago
We have to balance the budget in the long run, but this is a hare-brained way to make it happen. If anything, a default will make it harder to balance the budget in the long run, because if the markets get spooked into higher interest rates on T-bills, a greater proportion of tax revenue will have to be spent on debt service.

pnathan 15y ago

My thoughts when reading these sorts of articles is that we are faced with essentially two choices: * Keep building the house of cards * Let it fall down I don't see any points of view that advocate slow unwinding of the issues that got us here, and that's troubling.

jbooth 15y ago
Obama and Boehner had the outlines of a 10 year, 4 trillion deal that had some pain for everyone. For about 24 hours. Unfortunately, that would have been a victory for Obama (and the country, incidentally). So it's a no-go as far as the Tea Party is concerned, which meant Boehner had to back out. Nevermind that these are people who've been shrieking about the deficit since January 2009.
- rbanffy 15y ago
  And that's the risk. The process looks like it's based on ideology. Ideology knows no compromise. It will be interesting to watch.
  - jbooth 15y ago
    It's not even ideology, it's fear, hatred and tribal identity. Ideological conservatives would have leaped at that deal Obama and Boehner hammered out.
    - Benjo 15y ago
      Agreed. It's not ideology, it's partisanship. It's the illusion that it's okay for the country to suffer now, because it will benefit my party and after the next election my party will make up for it with the great legislation we will be able to pass. I'm trying to think of the last time this actually happened. Civil War?
    - gnaritas 15y ago
      Not if their ideology includes never raising taxes as a fundamental principle.

ck2 15y ago

It's an engineered distraction. We (led by the media) far for it every time. Just like the nonsense about the "mosque at ground zero" - remember that? Notice how all the nonsense vanished? Remember the debt is stuff we've already "bought" it's not the future budget and has been raised dozens and dozens of times, under every kind of leadership or lack thereof. This is just a puppet show - one side makes the show and the other side sits memorized and doesn't look at what else is going on. Just imagine if we actually had this much effort by news outlets into health care reform (not the health insurance fiasco we got instead). We might have gotten an actual progressive solution.

Estragon 15y ago
An out-and-out default is extremely unlikely, but a massive devaluation in the US dollar would be just about the perfect treatment for America's economic woes. Devaluation of debt, and massive increase in export competitiveness...
- ck2 15y ago
  So selling twice the number of $1 widgets at 50 cents fixes something? Or just makes us tread water faster? How exactly do we compete against nearly free labor in manufacturing from China and Vietnam and such? (answer: we cannot and should not try - we should tax imports and make selling to ourselves cheaper with domestic products vs imports - people will buy from overseas when their widgets are 50 cents and ours are $1 but not if there's is 90 cents and ours is still just $1)
- kevin_morrill 15y ago
  I agree this is the likely outcoming, but couldn't disagree more about it being the "perfect treatment". What you had with the housing boom was effectively devaluation in a limited sector (along with oil). Inflation causes massive capital misallocations and screwed up pricing signals. Think about how many people who were working in construction and real estate needlessly that could have been working on things people truly need/want. Eventually all those lost man years of effort add up to lost lives in the aggregate.

ChuckMcM 15y ago

"It would be a totally self-inflicted cataclysm,” he said. “There’s no question the United States can meet its obligations. This idea that somehow that we cannot pay because we’re having a political fight over how to handle the spending and taxing” is “democracy functioning in the worst possible way,” he said." Yup the who thing is a self inflicted cluster-f*k. From the politicians who spend to much, to voters who don't think about who they are voting for, to media who would love nothing more than armeggedon so they could get a few more rating points. One thing I know for sure, is that there will be a chapter on this period in the US and the world in economics textbooks.

randallsquared 15y ago
In order to call it self-inflicted, you have to buy into the collection of people as an entity. It's not clear to me that this will continue to be viewed as the most useful abstraction.

vegas 15y ago

obvious headline is obvious.

espeed 15y ago

How much is owed to the Fed? If they don't raise the debt ceiling, just "default" to the Fed -- they still have the $4 trillion sitting there that hasn't been touched.

bwb 15y ago

Hah when I read the title of this post I was like Duh, no kidding it would be way worse.

adaml_623 15y ago

What a rubbish article. 1000 words to sum up something that most people probably know. With absolutely no analysis or details or links into anything interesting. Press release journalism at it's most boring. (Yes I know it's not technically a press release)

yason 15y ago

Right. Not exactly being able to pay one's debts will surely be corrected by taking more debt. And having more loaned money to spend will naturally just encourage tightening up one's expenses. If this financial situation wasn't about a nation but a private person, it would be obvious to everyone that his finances are simply fucked up.

deleted 15y ago
[deleted]