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?
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 :smack:.
“Mathematical logic” doesn’t mean anything if you’re starting on bad assumptions.
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.
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.
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.
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:
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…
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%.
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.
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 [del]is[/del] 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.
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?)
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.
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.
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.
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.
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.
He can’t raise it on his own - he could only ignore it.
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.
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.