Permanent effects of defaulting?

Great Debates
1

OK, I’ll admit that there are many posters here who say we just don’t know what’ll happen when (and I think I’m safe in saying “when” at this point) the U.S. defaults, but I started this thread now because we’ll certainly need it in the coming weeks as the effects start to actually happen, and because I’m surprised this isn’t topic #1 — if we default, I’m not sure anything else we’re discussing in GD right now matters.

Well, there’s reason #3: to find that out. So: when the country defaults, what sort of permanent changes will arise? (I specify “permanent” because just saying that there’ll be an economic downturn, locally and internationally, doesn’t say a lot; it’ll be devastating to a lot of people, sure, but so was 2008, and we at least gave recovery a good shot.)

PS: 69% of self-described Tea Partiers think we can default without major consequence, reflecting many of their elected officials. If you think this is the case, feel free to answer that, obviously.

2

Prediction #1: We won’t default. There will be a last minute deal, even if it’s just to buy time.

#2 If there is a default, bond holders will be paid, even if it means the Fed steps in and buys every out every bond holder who’s willing to sell.

#3 Who knows? If some SS checks don’t go out, I think that will be the end of let’s-not-make a deal. That’s one constituency Pubs will not piss off.

3

The problem is there are different types of default. eg Technical defaults occurring for a day and b) longer defaults.

So far the effects of austerity have shave 1% off of GDP each year (total: 3%) and have made raised the unemployment rate by 1.4 percentage points. With that as background, consider the analysis by Macroeconomic Advisors, a professional forecasting company (free market! free market!): The Debt Ceiling: The paper considers two scenarios. The first assumes a brief, technical default that is quickly resolved, and the second assumes an extended, two-month stalemate.

  1. In scenario one, risk aversion rises, financing costs rise, prices of risk assets fall, and the economy enters a recession. Exacerbated by the Fed’s inability to lower short-term interest rates, growth only begins to rebound at end of 2014 and the unemployment rate rises to a peak of 8.5% before starting to decline. At its peak, 2.5 million jobs would be lost.

  2. Scenario two implies a longer and deeper recession than in the first scenario, but one characterized by extreme volatility. Annualized GDP growth fluctuates rapidly between plus and minus 8% until the oscillations diminish in 2015. Unemployment rises to a peak of 8.9% — equivalent to 3.1 million lost jobs — before trending down.

Remember all this could be avoided if Boehner would allow an up or down vote on a routine Continuing Resolution, one without threats to derail the economy if the Democrats don’t do X, Y or Z.
http://krugman.blogs.nytimes.com/2013/10/15/the-gop-tax/

4

at what point is the country considered “in default” - Thursday?

at some other time? or when something specific happens?

5

“Default” is when the government misses an interest payment. “Technical default” happens when it’s the equivalent of a computer snafu.

If the government stops sending social security checks because they can’t borrow money to make up the difference between taxes passed by the legislature and spending approved by the legislature, that’s something else.

Right now we have a “Shutdown”. A default could spark a financial crisis.

6

Okay, there are still ways this could all get turned sideways, but so far, I’ll admit I have egg on my face.

I was sure that Cruz would use procedural tactics to (threaten to) delay voting on any deal until after the default deadline passed. Barring that, I thought there was a chance (and there still is, albeit much smaller) that McConnell wouldn’t let the House vote on it.

I guess neither of them wanted to be THE GUY who caused the U.S. to default for the first time. I’m still surprised at Cruz, though.

7

Perhaps you should mark your beliefs to market. It seems that Cruz is a demagogue, not a true believer. Look closely, and you’ll see that he caused the most problems for those in the House. Unlike his Senate colleagues, it was more difficult for them to retaliate, though they did try.

The other clue is that Cruz utters complete howlers - and had a reputation for being whip-smart at Harvard law school (as well as a total asshole - that’s right: the US’s chief production center for assholes apparently thought Cruz crossed the line). Anyway, to misunderstand the meaning of Green Eggs and Ham takes a special kind of stupid - and I can only believe that Cruz knows his constituency. The man oozes insincerity, even by used-car salesman standards.