More on the default
Hat tip reader rjs and then lifted from The Global Glass Onion from a long list of links pn the default question:
Here are a few lifted from the not including ones from the FED:
Democrats and Republicans Pedal to the Metal in Debt Ceiling/Shutdown Game of Chicken – Yves Smith – Watching the shutdown/debt ceiling impasse is increasingly like living next door to an abusive couple.
You hear the screaming through the wall, and you pick up enough snippets that you think you know what the fight is about, but you aren’t hearing enough to be sure. So on the one hand, Norquist has been making the rounds trying to give everyone, meaning those Democrats who need to get the message that they need to whack all sorts of spending, especially Medicare and Social Security, the outlines of where Republicans think a budget deal lies. This is supposed to be a sane-looking Republican ask. On the other, the Republicans are looking increasingly in disarray, hence the concern about the screaming through the wall. House Speaker Boenher’s stance appears to have changed since Friday, or it may simply be that he’s been required to posture harder. The New York Times reported Friday that Boehner told party members privately that he wouldn’t let the US default. Even though a majority of Republicans in the House are against passing a continuing resolution (ending the shutdown while the two sides work out a bigger budget deal) and putting the debt ceiling on hold, Boehner is widely believed to have enough votes to join with Democrats and vote through agreements that would provide for a longer negotiating runway.
Hitting the Ceiling: Disastrous or Utterly Disastrous? – Paul Krugman – Obama won’t, can’t negotiate over the debt ceiling, and Republicans still haven’t figured that out. So you have to say that it’s pretty likely that we will indeed hit the ceiling. Suppose that Obama’s lawyers tell him that extraordinary measures like just ignoring the ceiling or minting the coin are out. Then what? Well, Goldman Sachs has a short paper (not online) arguing that the government probably could prioritize payments on Treasury bills, avoiding the breakdown of markets that would come from putting the world’s key safe asset into default. They don’t sound too confident. But even if they’re right, the government would still go into arrears on many other payments, from contractor bills to medical bills. And it would be forced into savage spending cuts, around 4 percent of GDP, that wouldn’t just cause hardship (Surprise! No Social Security for you this month!) but amount to a severely contractionary fiscal policy, sending us into recession if it lasted any length of time. I think this is important. Lots of people have been focusing on the possibility of a mega-Lehman event, but even if we somehow avoid that, this will be a catastrophe.
Hitting the Debt Ceiling: An Anti-Stimulus at Least Twice as Large as the Stimulus in the Recovery Act – Paul Krugman makes a good point—while it’s really hard to be precise about how much it would hurt to slam into the constraint of the debt ceiling, we do know clearly that it would indeed hurt. Say that Treasury decided to prioritize debt payments (and even say that interest on the debt doesn’t increase at all, which is unlikely), and cutback on other spending to levels that can be supported by incoming revenues rather than borrowing. This would by itself lead to a shock to GDP of well over 5 percent of GDP (annualized) when accounting for both the decline in spending (about 4 percent of GDP) and a modest multiplier. To put this in some perspective, this negative shock is twice as large as the positive boost given the economy during the absolute peak year of the Recovery Act (ARRA’s addition to the deficit was just over 2.5 percent of GDP in 2010). So, just the purely mechanical fiscal drag of being constrained by the debt ceiling would be equivalent to an anti-stimulus that was twice as large as the biggest stimulus package ever passed. And, of course, the non-mechanical impacts of hitting the debt ceiling that would result from chaos in financial markets make this a very conservative lower-bound estimate of what could happen.
Raise your hand if you know how the Treasury’s payment systems work… Anyone? – Begin with a snippet from the rates crew at Credit Suisse: As we understand it, there are three main systems – the Department of Defense Disbursing Offices, the Bureau of the Fiscal Service (which deals with Treasury security related payments), and the Financial Management Service (which makes all other payments). The way that they are set up, they can either be set to “on” or “off” – i.e., a system either makes all of its payments or it doesn’t make any at all. There is a clear unwillingness to prioritize payments, and doing so would be politically messy, but if push comes to shove and Congress cannot strike a deal in time, the ability to pick and choose who gets paid does exist, if only on a broad basis. In 2011, the press reported that there was some contingency planning going on, but the details of those plans were unknown. The idea is that the Treasury would keep on the Fiscal Service and maybe the Department of Defense systems while shutting down the system that pays everything else. Default would be avoided, while pressure for a resolution to the standoff would quickly build — especially after the nation’s grandparents respond to their canceled retirement checks by knife-sharpening the tips of their walkers and thrusting them like lances at the nearest members of Congress. But I’m not yet convinced that “if push comes to shove and Congress cannot strike a deal in time, the ability to pick and choose who gets paid does exist, if only on a broad basis”. Strategists and other observers have given conflicting accounts over whether prioritising interest and principal payments on Treasuries is possible.
Why doe you say an abusive couple, suggesting that “both sides do it” ? There’s an abusive spouse in that couple but it’s not an abusive couple.
Speaking of debt, guess what barely increased at all during Q3?
Some evil socialist commie president has nearly balanced the budget
Have any of these speculations addressed the fact that FICA revenues cannot legally be used for any purpose other than making Social Security benefit payments? And which of the three categories outlined by the Credit Suisse group, “– the Department of Defense Disbursing Offices, the Bureau of the Fiscal Service (which deals with Treasury security related payments), and the Financial Management Service (which makes all other payments)” draws funds from the Trust Fund in order to close any short fall in benefit payments resulting from FICA revenue inadequacy? It would seem that utilizing the assets of the Trust Fund falls under the description, “which deals with Treasury security related payments.”
Just why Social Security benefits keep coming up as an issue in discussions of the general budget’s deficiency is a mystery given that the Social Security payments are a legally separate budget. Granted that laws can be changed, but it would seem to only complicated the legislative logjam even more so to start to do so. And the Treasury is legislatively bound to treat the two revenue streams as totally separate and apart from one another, joined only when one budget lends money to the other.
Default isn’t the issue. Being the worlds economic driver with the dollar standard is important.
I see 2 possibilities if they don’t fall on the sword:
1.US creditors wipe out debt and thus, no default
2.US creditors decide to bail on US securities. This would lead to a major run on the dollar and collapse the US economy. Massive yield inversion in this case. All currency would collapse and not exist. All capital would be dead.
The latter was the fear with the 2008 “financial crisis” and the real reason the “bailout” happened. I don’t know what would happen politically. I could see some states try and issue their own currency to attract buyers, but the end result would be chaos and potential state liquidation. A real threat of demi-gods start rising and building up armies and seizing part of the current day United States. I could build a great empire out of Ohio,Michigan and Indiana’s remains.
If the world money people decide to cash out treasuries, where are they going to put their money if as John suggest any path leads to world currency collapse?
Put it in another nations debts? China who’s tied to the US buying it’s stuff? Another nation’s currency…also tied to the dollar? Put it in a bank? Their mattress? And, who’s currency are the going to cash out to, so it can go in the mattress? Gold? Now wouldn’t that be a run to beat the run on bulls!
How unconnected is South America or Australia to the world?
Let’s hope the money people are smart enough to sit tight until the US gets it’s act together. It’s a freak’n game for these other side of the isle US congress critters.
Thanks for the links, Dan!