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  #1  
Old 07-18-2011, 02:41 PM
chappachula chappachula is offline
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what will actually happens if the US economy goes into default?

I haven't paid much attention to the politicians fighting over the debt ceiling, because I just assume that it's all a big bluff, and at 5 minutes before midnight on the critical day, they will pass the new debt ceiling.

But suppose I'm wrong, and Congress actually does declare bankruptcy.
Now, everybody knows, with a feeling deep down in their gut, that America will not just shut down, and obviously within a few days the politicians will pass the new debt ceiling, so there's no need to panic.
But vast amounts of trading is done by computers which don't have feelings in their gut--they use mathematical formulas which presumably put a lot of weight on Moody's rating numbers.

So will the computers all go crazy,using strict mathematical logic instead of political logic? Will the computers actually think that America is the same as, say, Rhodesia? Or can human beings change the computer programs fast enough that the markets won't drop a zillion points?

Last edited by chappachula; 07-18-2011 at 02:41 PM..
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  #2  
Old 07-18-2011, 03:18 PM
leahcim leahcim is offline
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Originally Posted by chappachula View Post
So will the computers all go crazy,using strict mathematical logic instead of political logic? Will the computers actually think that America is the same as, say, Rhodesia? Or can human beings change the computer programs fast enough that the markets won't drop a zillion points?
As someone who has worked (albeit not that deeply) in the financial industry, I wouldn't be surprised if most of the trading algorithms make the assumption that US treasuries are the most safe investment in the world, and aren't equipped to deal with the possibility of them being the source of the problem. If that's the case, a lot of those algorithms would react to the world going to pot with a "sell everything and buy US Treasuries to wait it out" strategy .

"Mathematical logic" doesn't mean anything if you're starting on bad assumptions.
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  #3  
Old 07-18-2011, 03:26 PM
kaltkalt kaltkalt is offline
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The dollar will collapse and America will shut down. If democrats were talking about not raising the debt ceiling with a republican president in office (as republicans did for Bush 4 times without question or complaint), you'd hear talk of destruction, economic collapse, and charges of treason for those refusing to vote to raise the limit. And they'd be right. Republicans are going to destroy the dollar and collapse the government on the theory that it will hurt obama and make it easier to get him unelected. Talk about machiavellian. They're going to hasten the collapse of our government all out of spite against a black man. But you know what, I say we go ahead and destroy it... it's unfixable as it is, so we may as well get it over with sooner rather than later. Why let it fester another 5-10 years? Once it collapses we can think about starting over. The good news is we'll have 50 states, each with their own governments already operating (though some, like CA, are already bankrupt and will have to join other states... california can be West Texas or something).

People think the US is "too big to fail." NOTHING is too big to fail. We're already a failed state as it is... the only question is how it will wind itself down.
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Old 07-18-2011, 04:06 PM
anson2995 anson2995 is offline
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If we default on our debt, there will be a global economic crisis that makes the current mess look like a cupcake party.

The immediate impact, day one, will be that millions of people will not get paid: Government workers, companies that do business with the government, social security recipients, etc., will all suddenly have cash flow issues.

In the short term, global markets will come to a halt. Jamie Dimon, the CEO of JPMorgan Chase says short-term financing will dry up. Institutions that rely on US treasuries -- mostly insurance companies and pension funds -- may become insolvent. Conceivably, this will also leave millions of Americans cashless.

Over the next few months, there would likely be panic in the stock market as major investors reassess their holdings. Several analysts think it will cause a run on money market funds, and that many of them will fail. This will have a domino effect, like what we saw in 2008 only on a much larger scale.

And in the long term, the default will make it more difficult and more expensive for the US to raise money through bonds.

So, yeah, kind of a big deal.
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Old 07-18-2011, 04:21 PM
anson2995 anson2995 is offline
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Originally Posted by kaltkalt View Post
People think the US is "too big to fail." NOTHING is too big to fail. We're already a failed state as it is... the only question is how it will wind itself down.
Baloney. You're listening to too much political rhetoric. Your conclusion probably doesn't belong in GQ, but the fact remains that the US still has the strongest economy in the world *by far* We're three times as productive as China, the next biggest economy, and on a per capita basis we're 10x more productive than them. We account for 25% of the world's GDP.
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  #6  
Old 07-18-2011, 04:26 PM
Exapno Mapcase Exapno Mapcase is offline
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Why not read one of 500 current threads on this instead of starting a new one?
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  #7  
Old 07-18-2011, 08:06 PM
isaiahrobinson isaiahrobinson is offline
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You're right that it's all a bluff: it's entirely a political battle. Republicans are holding the debt ceiling hostage in exchange for policy concessions they wouldn't be able to squeeze out of the Democrats otherwise. For various political reasons, President Obama has been playing along and trying to make a deal. But both parties are heavily funded by Wall Street and the financial sector - which would lose a great deal if the debt ceiling wasn't raised - so it will almost certainly be raised in time. It's just a question of who wins or loses politically out of it. Everything that happens in the meantime is part of that political jockeying.

But if, hypothetically, Congress somehow contrived to not raise the debt ceiling, it wouldn't be quite as chaotic as you're imagining. It wouldn't be a case of the US "declaring bankruptcy" and "shutting down" overnight. What it would mean is that the US would have a range of payments to make each month, but not enough money to make them all, and they'd have to delay certain payments until the debt ceiling was raised. That in itself would probably be deemed a "default": the US's credit rating would be cut, meaning it would have to pay more interest on its debt for the next few years, which would worsen the deficit. Depending on what it prioritized, certain federal workers might not be paid, social security checks might not go out, etc. It could also potentially throw global markets into turmoil because US treasuries are considered the safest asset in the world, and if it suddenly turned out they weren't quite so safe investors would have a serious problem.

In terms of what would get paid and what wouldn't, this is an article outlining some of the options:

Quote:
What failure to raise the debt ceiling will look like

Ever wondered how many bills the federal government pays in a month? It’s not 100, or 1,000, or 10,000, or even 200,000. It’s 80 million. Every month. And according to a new analysis by the Bipartisan Policy Center, if the debt ceiling isn’t raised by Aug. 2, the Treasury Department is going to have to figure out which 30 million of those bills should go unpaid.

The BPC’s analysis was led by Jay Powell, who served as undersecretary of the Treasury in George H.W. Bush’s administration. It’s not pretty. Powell and his team estimate that if we don’t raise the debt ceiling, Treasury will only be able to pay 55-60% of the federal government’s bills in August.

The paper lays out a few scenarios for how that might go. In the “Protect Big Programs” scenario, Treasury pays bills related to interest on the debt, Medicare and Medicaid, Social Security, defense suppliers and unemployment insurance. That means it stops paying military salaries, gives up on the FBI and the Centers for Disease Control, cuts all funding for food stamps and education, shuts down air control, tells NASA to head home, freezes the paycheck of every federal employee, and much more. In another, the Treasury Department tries to protect the social safety net, but has to stop supplying the troops, sending out tax refunds, inspecting offshore oil rigs, etc.

This also leads to an extraordinary assertion of executive power. The executive branch carries out the laws enacted by Congress. Asking them to “prioritize” across different spending needs is asking them to selectively decide between different laws that Congress has passed.

Since the Treasury has never had to make these decisions before, no one quite knows how they’ll be made. The BPC estimates a 44 percent drop in federal spending, but can’t precisely estimate where that drop will happen. That means nobody else can, either. So as we get closer to doomsday, companies that contract with the federal government will start hoarding cash to tide them through a period in which they might stop being paid. Seniors and other Americans who rely on federal transfers would be wise to do the same. And then if we do pass the borrowing limit, the economy is going to have to absorb a sudden and sharp drop in federal spending, which will reverberate among businesses that don’t directly work with the government but sell to those who do.

But at least we’re leaving the bond market alone, right? Wrong. According to the BPC’s calculations, the federal government needs to roll over $500 billion of debt in August. If we’re in quasi-default, who will want to purchase that debt? What will they charge us when they do purchase that debt? A 10 percent premium would cost us $50 billion. A one percent premium would cost us $5 billion. And that’s only the direct cost. Because so many other kinds of debt benchmark against the rates the Treasury pays, you’ll see borrowing costs rising throughout the system. Mortgages, corporate borrowing, all of it. It won’t just be the federal government that pays. It’ll be the economy.

Last edited by isaiahrobinson; 07-18-2011 at 08:11 PM..
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Old 07-18-2011, 08:49 PM
Lord Feldon Lord Feldon is offline
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Originally Posted by leahcim View Post
As someone who has worked (albeit not that deeply) in the financial industry, I wouldn't be surprised if most of the trading algorithms make the assumption that US treasuries are the most safe investment in the world, and aren't equipped to deal with the possibility of them being the source of the problem. If that's the case, a lot of those algorithms would react to the world going to pot with a "sell everything and buy US Treasuries to wait it out" strategy .
Likewise, it might not be possible to program the Treasury Department's computers in time to actually stop any payments:

http://www.reuters.com/article/2011/...7660GE20110707

Quote:
If Treasury were to decide to delay payments, it would need to re-program government computers that generate automatic payments as they fall due -- a massive and difficult undertaking. Treasury makes about 3 million payments each day.
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  #9  
Old 07-18-2011, 09:00 PM
kaltkalt kaltkalt is offline
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It's an illusion that the US has a strong economy. If you have a room full of 100 people and 3 of them make a billion dollars a day and the other 97 people make $5 a week, that room does not have a strong economy, even if you add up the huge wealth of the 3 rich people and say "look that's a lot, combined there is a huge gross room product." The room has a shitty economy. That's my analogy for the US. And with the republicans holding it hostage, trying to kill it off to make obama look bad, things WILL collapse. No it won't happen overnight, but it will be the final nail in the coffin. The only reason we're still afloat is from investment in our government, mostly from China. With the default of our government that will all end, and a lot of debt will be called in. There is no international bankrutpcy court (it's not what the IMF does) and we will be screwed.

it is SO irresponsible to assume that america is so great, so big, and we're so rich and spoiled that we can never collapse. It's exactly how they felt about the Roman empire. Nothing is collapse-proof. People who think America can't collapse are most likely religious nuts who think god is on our side and because we stick "in god we trust" on our money nothing bad can happen to it. Fairytales beget fairytales...
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  #10  
Old 07-19-2011, 02:38 AM
Measure for Measure Measure for Measure is online now
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Originally Posted by chappachula View Post
I haven't paid much attention to the politicians fighting over the debt ceiling, because I just assume that it's all a big bluff, and at 5 minutes before midnight on the critical day, they will pass the new debt ceiling.

But suppose I'm wrong, and Congress actually does declare bankruptcy.
The debt ceiling was hit in May. Faced with this lack of borrowing authority by the Republican House, Obama's Treasury Department started borrowing from the Civil Service Retirement and the Disability Fund the Government Securities Investment Fund of the Federal Employees' Retirement System, which were not subject to such limits. That ruse reaches its end in early August.

After that, the government will still collect taxes and still be mandated to spend money. It's just that the laws of arithmetic will kick in. Expenditures will be prioritized: constitutionally judges' salaries and interest on the debt head the list. So the US won't go bankrupt. But it may not be able to send out social security checks.

After that we get a financial crisis. Except the Republicans will bend after the Dow drops 1000 points, before things get too bad I hope. But the Dow won't drop because they know that a deal will be cut. So the Republicans are holding the US economy hostage, and they won't blink until Wall Street does.

Only one Republican Presidential candidate expresses wishes that calmer heads will prevail, AFAIK, and his numbers are tracking at about 2%.

Last edited by Measure for Measure; 07-19-2011 at 02:40 AM..
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Old 07-19-2011, 03:32 AM
UDS UDS is offline
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. . . So the US won't go bankrupt. But it may not be able to send out social security checks.
Not being able to meet your obligations as they fall due is pretty much the definition of bankruptcy, actually. What will be missing is an orderly legally-imposed procedure for regulating the competing claims of unpaid creditors. Panic among unpaid creditors will be limited as long as they remain confident that a political solution will be found, and that it will involve paying them all, in full, with interest or other compensation for the delay in payment. Obviously, the longer they remain unpaid after the due date the less confident they will be of this.
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Old 07-19-2011, 03:49 AM
septimus septimus is offline
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Originally Posted by leahcim View Post
... assumption that US treasuries are the most safe investment in the world, ... a lot of those algorithms would react to the world going to pot with a "sell everything and buy US Treasuries to wait it out" strategy .
I've noticed in the past that American financial trouble often leads, paradoxically, to a stronger dollar! I doubt that this is caused by irrational algorithms, rather it recognizes that the world depends on U.S. economy. Much of Asia is booming right now. Do you think that will continue with a U.S. collapse?

Much of America's success can be traced to good luck. Plentiful coal, iron ore and oil led our dominance 100 years ago; huge land resources and geographical isolation were important, etc. And the paradoxical fact that the same financial problems that would weaken another country's currency, instead strengthen ours is was wonderful. It is quite sad that this is being thrown away, perhaps permanently, because we elected a bunch of Congressmen who act like 8-year old brats.

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Originally Posted by anson2995 View Post
If we default on our debt, there will be a global economic crisis that makes the current mess look like a cupcake party.
In other threads, we ask why Americans aren't more politically active. I guess global economic crisis just isn't as worrisome as who's tweeting whom on Facebook or whatever it is.

BTW, the Federal Reserve Board, due to its "QE" programs, now owns some trillions of dollars of U.S. bonds, and these are subject to the ceiling, right? One possibility I saw on-line, though I don't understand the details, would be for the FRB to sacrifice itself and reduce U.S. debt by burning some of those bonds! Can anyone explain if/how this would work? (I realize the money that FRB creates is backed by those bonds; how many bonds could it burn before it goes past its statutory money-creation limit?)
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Old 07-19-2011, 04:04 AM
septimus septimus is offline
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In other threads, we ask why Americans aren't more politically active.
Sorry for the poor phrasing. Americans are wonderfully active politically. "You can have my Uzi when you pry it out of my dead fingers." "If we allow gay marriage, what's next? Marriage to farm animals?" blah blah blah ...

What I meant was politically active in a way that resembles intelligence.
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Old 07-19-2011, 11:05 AM
md2000 md2000 is offline
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The point is that the USA, unlike Greece or Portugal, is not in the situation where they might not pay their debts because they cannot. They are likely to default simply because for technical governmental procedural (really, for political) reasons, they are not allowed to proceed with business as usual. Once the parties resolve their political fight, there will be plenty of money to pay the debts.

It's like the difference between a couple who don't have enough money to pay their debts because they are unemployed and broke, vs. a couple who are late with payments because they are arguing and the wife hid the husband's chequebook. One couple's a much better bet to eventually pay than the other couple.

Last edited by md2000; 07-19-2011 at 11:06 AM..
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Old 07-19-2011, 11:24 AM
leahcim leahcim is offline
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I've noticed in the past that American financial trouble often leads, paradoxically, to a stronger dollar! I doubt that this is caused by irrational algorithms, rather it recognizes that the world depends on U.S. economy.
This is true, and reflects the US Dollar's status as the universal reserve currency. When people want a safe asset (for example, when all risky assets are going tits up, even if those assets are themselves US-based), they want US Treasuries, and to buy US Treasuries they need US dollars. Which is a perfectly reasonable thing to do so long as US Treasuries are thought of as the safest investment choice possible.

My point is, that because of this fact, the computer algorithms probably don't say, "if things are going wrong, sell everything, determine safest place available to park cash, and buy that". They probably do say "if things are going wrong, sell everything and buy US Treasuries". Which is the same heuristic for ever situation that has occurred in the last 60 years, but is a critically different if the underlying assumption that US Treasuries are the safest place to park money is wrong.
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Old 07-19-2011, 11:27 AM
Tom Tildrum Tom Tildrum is offline
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Originally Posted by md2000 View Post
The point is that the USA, unlike Greece or Portugal, is not in the situation where they might not pay their debts because they cannot. They are likely to default simply because for technical governmental procedural (really, for political) reasons, they are not allowed to proceed with business as usual. Once the parties resolve their political fight, there will be plenty of money to pay the debts.
This is my view as well. The impact on the market, it seems to me, will be considerably reduced by the confidence that any unpaid debts will sooner or later be made whole with interest. Same reason why federal employees aren't pulling their money out of the TSP's G fund even though it's not currently being invested.
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Old 07-19-2011, 11:28 AM
Whack-a-Mole Whack-a-Mole is offline
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It is possible the President will invoke the 14th Amendment and tell Congress to stuff it and raise the debt limit on his own (or at least ignore it).

This is a questionable legal action and certainly not one he'd do unless up against the wall (if even then). It would precipitate a constitutional crisis but one I suspect the president would win.

I am not saying the president would do this but it is a possibility. If the president does that then no debt crisis. The government keeps paying its bills.
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Old 07-19-2011, 12:18 PM
isaiahrobinson isaiahrobinson is offline
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Originally Posted by Whack-a-Mole View Post
It is possible the President will invoke the 14th Amendment and tell Congress to stuff it and raise the debt limit on his own (or at least ignore it).
He can't raise it on his own - he could only ignore it.

Quote:
This is a questionable legal action and certainly not one he'd do unless up against the wall (if even then). It would precipitate a constitutional crisis but one I suspect the president would win.

I am not saying the president would do this but it is a possibility. If the president does that then no debt crisis. The government keeps paying its bills.
There could well still be a debt crisis. The court system would have to get involved to determine whether his action was constitutional. If they found that it wasn't, that would instantly create a debt crisis. And how secure do you think the market is going to feel while the court is weighing up that decision, with no precedents to work from? Plus the Republicans would probably try and bring impeachment hearings against Obama for it. It would probably cause an absolute storm, both economically and politically. Not that it's going to happen.
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Old 07-19-2011, 12:25 PM
SmartAlecCat SmartAlecCat is online now
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The court system would have to get involved to determine whether his action was constitutional.
Who would have standing to initiate that? Do you think both houses of congress would pass a measure asking for it?
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Old 07-19-2011, 12:41 PM
Tom Tildrum Tom Tildrum is offline
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Who would have standing to initiate that? Do you think both houses of congress would pass a measure asking for it?
There could be litigation between buyers and sellers of such bonds as to whether they constituted valid Treasury obligations. Or customers of a mutual fund (that inivests in T-bills) vs. the fund managers.
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Old 07-19-2011, 01:11 PM
Whack-a-Mole Whack-a-Mole is offline
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There could well still be a debt crisis. The court system would have to get involved to determine whether his action was constitutional. If they found that it wasn't, that would instantly create a debt crisis. And how secure do you think the market is going to feel while the court is weighing up that decision, with no precedents to work from? Plus the Republicans would probably try and bring impeachment hearings against Obama for it. It would probably cause an absolute storm, both economically and politically. Not that it's going to happen.
The markets would certainly be rocked but the president would be paying debts as usual till a court could hear the case.

I suspect such a case would get extremely expedited treatment and would likely go straight to the Supreme Court (the court heard Bush v. Gore in very quick fashion so they can do it obviously).

The supreme court in recent years has been pretty generous in determining presidential powers. I also cannot see the court saying the president cannot do it which would immediately pull the plug on the economy and simultaneously see Obama facing impeachment.

While it is an open question legally there are good arguments to be made for and against this option so the court need not just make something up. They could manage a legal rationale for it.

I suspect Congress overall would really not like to see this happen so, in this game of chicken, I think congress is more likely to blink first.

Last edited by Whack-a-Mole; 07-19-2011 at 01:12 PM..
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Old 07-19-2011, 01:21 PM
md2000 md2000 is offline
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Remember its as much politics as economics or law. The more radical Republicans want to portray Obama as the guy throwing away your hard-earned money and bankrupting the country, while Obama tries to show he's being reasonable and the Republicans instead are being obstinate and refusing to do what they've done for decades and for every other president.

Suddenly discovering or granting yourself new powers to bypass congress and spend even more does not get the same PR value as stopping the social security cheques, soldiers' paycheques and contractors' bills and then saying "...because congress made me do it."
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Old 07-19-2011, 01:25 PM
Machine Elf Machine Elf is offline
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Originally Posted by md2000 View Post
The point is that the USA, unlike Greece or Portugal, is not in the situation where they might not pay their debts because they cannot. They are likely to default simply because for technical governmental procedural (really, for political) reasons, they are not allowed to proceed with business as usual. Once the parties resolve their political fight, there will be plenty of money to pay the debts.

It's like the difference between a couple who don't have enough money to pay their debts because they are unemployed and broke, vs. a couple who are late with payments because they are arguing and the wife hid the husband's chequebook. One couple's a much better bet to eventually pay than the other couple.
Your analogy is flawed. The wife didn't hide the husband's checkbook, she hid the credit card.
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Old 07-19-2011, 06:30 PM
penultima thule penultima thule is offline
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I've noticed in the past that American financial trouble often leads, paradoxically, to a stronger dollar! I doubt that this is caused by irrational algorithms, rather it recognizes that the world depends on U.S. economy.
Not a paradox, supply and demand.

Most recently during the GFC US institutions needed USD to staunch the losses stateside, so by necessity they sold their holdings in non-USD denominated securities and bought the USD they needed, which pushes the price (exchange rate) of USD.
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Old 07-19-2011, 08:13 PM
Measure for Measure Measure for Measure is online now
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Not being able to meet your obligations as they fall due is pretty much the definition of bankruptcy, actually. What will be missing is an orderly legally-imposed procedure for regulating the competing claims of unpaid creditors. Panic among unpaid creditors will be limited as long as they remain confident that a political solution will be found, and that it will involve paying them all, in full, with interest or other compensation for the delay in payment. Obviously, the longer they remain unpaid after the due date the less confident they will be of this.
Hm. I'm not sure social security checks count as obligations. But arguably, payments to contractors do. If the government puts employees on furlough, that may or may not be comparable to bankruptcy, depending upon the employment contract. Nice point though.

I'm guessing the financial crisis will be pretty short-lived, though it could have costs in the billions of dollars. If it's not though, the economist Simon Johnson sketches the scenario. The man knows about this: he used to design austerity packages for the IMF. And there's at least a 50% chance of a last-minute deal.
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Old 07-19-2011, 10:33 PM
Leo Bloom Leo Bloom is offline
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Originally Posted by septimus View Post
Sorry for the poor phrasing. Americans are wonderfully active politically. "You can have my Uzi when you pry it out of my dead fingers." "If we allow gay marriage, what's next? Marriage to farm animals?" blah blah blah ...

What I meant was politically active in a way that resembles intelligence.
Septimus,
Please keep political posturing asinine satire off GQ.
Mod: I do not believe this comment is strictly ad hominem. It is responding to a type of noxiousness that pops up way too much, I believe.

Last edited by Leo Bloom; 07-19-2011 at 10:34 PM..
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  #27  
Old 07-19-2011, 11:01 PM
Whack-a-Mole Whack-a-Mole is offline
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Remember its as much politics as economics or law. The more radical Republicans want to portray Obama as the guy throwing away your hard-earned money and bankrupting the country, while Obama tries to show he's being reasonable and the Republicans instead are being obstinate and refusing to do what they've done for decades and for every other president.

Suddenly discovering or granting yourself new powers to bypass congress and spend even more does not get the same PR value as stopping the social security cheques, soldiers' paycheques and contractors' bills and then saying "...because congress made me do it."
Ok, pretend you are the president and you are faced with the situation that the debt limit is reached. What do you do? Your options are conveniently small:

1) The government stops writing checks completely.

2) You decide which bills to pay and which not to pay.

3) You ignore the debt limit and keep writing checks.

That's it. Those are your choices.

YOU are the president. What do you do?

#1 will collapse the global economy overnight. It'll make the Great Depression look like peanuts. At least you are not "granting yourself new powers" though so I suppose you can take some small comfort in that.

#2 you start to decide who gets paid and who doesn't. Unfortunately here you have granted yourself new powers. Congress told you to spend money on X, Y and Z except you do not have the money to spend on all those. It is impossible to do so. So, YOU have to start making decisions on what checks to write. Congress can direct you in this...if they get their shit together. Don't hold your breath on that. In the meantime someone needs to say who gets paid. That someone is you (if not you then who else?).

Congratulations, you just granted yourself new powers.

Also, this route will at least collapse the US economy overnight and may well take the world with it.

#3 you invoke the 14th amendment and tell congress the debt limit is bullshit and continue to write checks and direct the Treasury to issue new bonds.

You are granting yourself new powers here but arguably under the cover of the 14th amendment (so not really granting yourself power...merely executing the constitution you took an oath to uphold).

The economy will probably wobble from the shit storm this creates but of the three choices is the least damaging to the economy.

So, what do you choose Mr. President?
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Old 07-19-2011, 11:16 PM
Duckster Duckster is offline
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So, what do you choose Mr. President?
The choice isn't up to the president. Existing laws determine priorities the president is required to invoke. The president have may some discretionary authority in some areas, but still be guided by conventional practice.

The president takes the public political hit, even if the president is merely following directions required by law previously passed by Congress.
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  #29  
Old 07-19-2011, 11:19 PM
UDS UDS is offline
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Originally Posted by Measure for Measure View Post
Hm. I'm not sure social security checks count as obligations.
They certainly do. The social security program is legally established. If you qualify for a social security payment, then you have a legal entitlement to it. It’s an obligation of the government.

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Originally Posted by Measure for Measure View Post
But arguably, payments to contractors do.
There’s no “arguably” about it.

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Originally Posted by Measure for Measure View Post
If the government puts employees on furlough, that may or may not be comparable to bankruptcy, depending upon the employment contract. Nice point though.
Suspending or firing someone to avoid incurring an obligation to pay him for services rendered in the future is not an act of bankruptcy (though it may, as you point out, be a breach of other legal obligations, e.g. his employment contract). But if he doesn’t get the paycheck for services which he has already rendered, or is allowed/encouraged to render in the future, that is.
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  #30  
Old 07-19-2011, 11:29 PM
Whack-a-Mole Whack-a-Mole is offline
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The choice isn't up to the president. Existing laws determine priorities the president is required to invoke. The president have may some discretionary authority in some areas, but still be guided by conventional practice.

The president takes the public political hit, even if the president is merely following directions required by law previously passed by Congress.
This is unprecedented (if it happens).

What existing laws cover this? The laws in place demand the impossible in this case. The president is mandated to spend "X" but he only has "Y" dollars and Y < X.

If I have a contract with you that stipulates you send me $1000/month but you only have $500 this month that's that. All the law in the world does not change the reality that you cannot pay.

If there is any law at all to guide the president here it is the 14th amendment and the president ignores the debt limit.

When your choice is that or complete default and economic catastrophe what would you choose?

Last edited by Whack-a-Mole; 07-19-2011 at 11:30 PM..
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  #31  
Old 07-20-2011, 12:11 AM
waterj2 waterj2 is offline
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It's my understanding that the US did in fact default briefly during a debt limit fight like this back in 1979. The result was an increase in the interest rate on US bonds of 55 basis points (0.55%) that lasted for years. With world financial markets as shaky as they are now, that would probably be getting off very easy if we were to repeat it now. Basically, it would increase our borrowing costs by at least hundreds of billions of dollars overnight. And the thousands of other bonds whose ratings are dependent on the rating of US Treasury bonds would take a huge hit as well.
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  #32  
Old 07-20-2011, 01:32 AM
Measure for Measure Measure for Measure is online now
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Originally Posted by UDS View Post
They certainly do. The social security program is legally established. If you qualify for a social security payment, then you have a legal entitlement to it. It’s an obligation of the government.
C'mon. Yes social security payments are obligations, but they are not obligations for the purposes of the bankruptcy analogy. But arguably payments to contractors are such obligations, which I thought was a good point. Ok, more than arguably.


I trust the Treasury has gamed some of this out, as they did in 1995. In my view, the worst that is likely to happen is that faith in US credit is shaken, to tune of $50 - $100 billion a year for several years -- that's what 55 basis points could do. The country can survive that, though it's the financial equivalent of a small war. And I am assuming here that the August crisis (which may not happen) is a short one.

I admit that I'm biased in that I don't like to see US finances run like those of a banana republic.
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  #33  
Old 07-20-2011, 02:29 AM
UDS UDS is offline
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C'mon. Yes social security payments are obligations, but they are not obligations for the purposes of the bankruptcy analogy.
I don't see why not. As far as bankruptcy legisliation is concerned, you either owe money or you don't, and if you do owe it you can either pay it when it's due or you can't, and if you can't that's an act of bankruptcy. The history of how you came to owe the money might have some bearing on the relative priority that the debt will enjoy in the bankruptcy proceedings, but it's irrelevant to the question of whether you are bankrupt.
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  #34  
Old 07-20-2011, 02:42 AM
Whack-a-Mole Whack-a-Mole is offline
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I don't see why not. As far as bankruptcy legisliation is concerned, you either owe money or you don't, and if you do owe it you can either pay it when it's due or you can't, and if you can't that's an act of bankruptcy. The history of how you came to owe the money might have some bearing on the relative priority that the debt will enjoy in the bankruptcy proceedings, but it's irrelevant to the question of whether you are bankrupt.
You think bankruptcy legislation has any bearing whatsoever if the US is the thing going bankrupt?

Although to be fair defaulting on the debt is not the same as bankruptcy.

Defaulting on the debt presumes the US just cannot pay today but may pay tomorrow.

Bankruptcy is an outright confession that that you cannot pay and are dissolving all debts. You may still pay people off but at dimes on the dollar if they are lucky.

The US defaulting on the debt would be catastrophic by itself. The US announcing that it will not ever honor its debts...well...doesn't bear thinking about.
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  #35  
Old 07-20-2011, 03:37 AM
UDS UDS is offline
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You think bankruptcy legislation has any bearing whatsoever if the US is the thing going bankrupt?

Although to be fair defaulting on the debt is not the same as bankruptcy.

Defaulting on the debt presumes the US just cannot pay today but may pay tomorrow.

Bankruptcy is an outright confession that that you cannot pay and are dissolving all debts. You may still pay people off but at dimes on the dollar if they are lucky.

The US defaulting on the debt would be catastrophic by itself. The US announcing that it will not ever honor its debts...well...doesn't bear thinking about.
Failure to pay is an act of bankruptcy. As in, you don't pay me the money you owe when you owe it, I have a range of enforcement mechanisms open to me, and one of these is to petition for your bankruptcy. (And it's the one I'll take, if the amount you owe me is large, and I don't hold a security over some asset that I can seize.)

Of course, if in fact you can pay me, you would be very foolish to let the petition go through and find yourself adjudicated a bankrupt. But that's up to you; I don't have to show that you can't pay me the money, just that you haven't paid it.

In this case, if the United States doesn;t pay me the money it owes me because it doesn't have the money and can't raise it (because it is legally constrained from borrowing) then by any standard understanding the United States is bankrupt. The issue of whether it owes me the money as a social security payment or as a coupon on a bond is irrelevant; it is enough that it owes me the money. The hypothesis that it will be able to borrow the money at some point in the future if the law is changed does not save it from being bankrupt now, any more than I can avoid bankruptcy today by saying that I can probably earn/borrow/inherit money next year/month/week.
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  #36  
Old 07-20-2011, 10:25 AM
Nica Nica is offline
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What we need is a good ol' fashioned war to make us some money! Saves us every time, right?? WWIII: don't be surprised.
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  #37  
Old 07-20-2011, 11:12 AM
isaiahrobinson isaiahrobinson is offline
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Originally Posted by Duckster View Post
The choice isn't up to the president. Existing laws determine priorities the president is required to invoke. The president have may some discretionary authority in some areas, but still be guided by conventional practice.

The president takes the public political hit, even if the president is merely following directions required by law previously passed by Congress.
What? What existing laws determine the priorities? As far as I'm aware there aren't any. On most issues the executive branch simply makes a choice. There's certainly no "conventional practice" because the government has never deliberately failed to raise the debt ceiling before.
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