The news media are full of warnings of default. The New York Times proclaims:
Wall Street is showing few signs so far that it is fearing the financial panic it has been predicting should the government default on its debt.
The fiscal impasse in Washington continued to weigh on stock prices on Monday, as the market’s “fear gauge,†the C.B.O.E. volatility index, jumped 15.95 percent to its highest level since June. Nonetheless, the market reaction to date has been muted compared with past crises.
“We all tell ourselves, ‘This is something that is not going to happen,’ †said David Coard, the head of fixed-income trading at the Williams Capital Group. “This would be like a black swan event — it’s not something that you would have thought that the U.S. could do in a million years.â€
But the relative calm on Wall Street is worrying some investors, who fear the markets will not signal to politicians the true danger of hitting the debt ceiling until it is too late.
“The markets are sending this complacent message, and I think the politicians are interpreting it incorrectly and they have no sense of urgency,†said Douglas Kass, the owner of the hedge fund firm Seabreeze Partners Management.
A lot of people are throwing the word “default” around. What does it mean?
In legal terms any omission or failure to do what is expected is a default. From that point of view the United States government is already in default since it’s not open for ordinary business, public employees aren’t being paid for work done after October 1, and other (what we used to regard as) normal, expected operations.
In financial terms default means the failure to make timely payment of interest or principal on a debt security or to otherwise comply with the provisions of a bond indenture. Under that understanding the United States can only default if income does not meet interest obligations which is tens or even hundreds of billions of dollars from the truth or it consciously decides not to make its interest payments on time. That is the case with Argentina, recounted here. Argentina has just refused to pay interest on its debts.
Yet another view of default is that even bringing up the subject is unhinged. The federal government can issue new credit to make any interest payments. Alternatively, the Federal Reserve can buy any new bonds the Treasury might issue that aren’t being bought by anybody else. It amounts to the same thing. Note that foreign governments or companies that obtain dollars in trade don’t have a lot they can do with them other than a) buy bonds, b) buy other U. S. assets, c) buy U. S. goods or d) sell their dollars to someone else.
IMO some of the hysteria surrounding the “debt ceiling” is caused by confusion among these various notions of default. Fiscal superhawks probably thought that the United States defaulted as soon as spending more than was taken in became commonplace. To federal employees what’s going on must now must certainly feel like default. However, technical financial default has not yet occurred and won’t as long as the federal government continues to make interest payments which it can easily do.
That’s not to say the federal government can’t voluntarily decide not to make its interest payments. It’s happened before: once in 1790 and again in 1933.
Wall Street is preparing to fleece the suckers. They know the US is going to pay the interest payments.
Additional borrowing may be halted, but as bonds mature, new replacement bonds should be issued.
Pricing changes would be a reflection of supply and demand. The supply will not increase, but an increasing demand will affect the price. This has nothing to do with “default”.
“Sequestration” was supposed to be “the end of the world as we know it”, and it quickly turned into a non-event. The government shutdown is getting a similar reception.
It will be Obama’s default, should it go that far, as he has the power to prioritize expenditures, as to what/who gets paid first, and what is further down the fiscal totem pole — circumventing a default scenario, altogether, until those mutual conversations Obama is promising have an opportuntiy to take place before a deal is struck.
Imagine that!
Tasty,
Sequestration was the Obama ‘poison pill’ negotiation tactic to arm-twist the republicans into compliance, during the last debt ceiling crisis. It failed. Sequestration went into effect. Like you said, the sky didn’t fall in. In fact the deficit decreased. And, of course Obama is now taking credit for said deficit decrease. Hubris, total political hubris, but he gets aways with it.
All this President does is posture, threaten one calmity after another if his demands aren’t met, throw aspersions out to his political enemies, and then put his arm around the confused public, saying he ‘feels their pain.’
There are actually many problems with that formulation but let’s just look at the most obvious. Working in approximate numbers
Defense spending $700 billion
Medicare and Medicaid $900 billion
Social Security $900 billion
Total of above $2.5 trillion
That’s just about equal to total federal revenues. Add interest on that debt and it is federal revenues. We’re not talking about a bit of belt-tightening.
I think I pointed out the interest payment/”default” issue. But I digress.
I have to say, and I say this with no snark and all sincerity, Obama seems off kilter. A bit weirded out. I heard a taped snippet of him saying raising the debt ceiling………….will not raise the debt. Rather, its just paying the bills.
In best Samuel L. Jackson “say what, Negro??” Try that with your credit card issuer, mortgage lender or anyone for that matter. Is Obama losing it? Or is he playing to the stupid or slobbering acolytes? “Raising the debt limit will not raise the debt.” Yikes.
I know ‘belt-tightening’ is not an end-all-be-all solution. But, less fear mongering, better money management, focusing on pulling out an apolitical formula addressing immediate issues, rendering maximum benefits to people, not agendas, is possible. And, this can occur even if the debt ceiling date expires before such an agreement can be reached, for at least a little while. That’s what was evidenced in the article posted above.
Let me say it another way. There is no way to cut enough for the federal government to continue solely based on revenues without making substantial cuts in defense spending, Medicare, and Social Security. Since the Congressional Republicans have ruled those out, it’s an impossible situation.
I don’t think any of those areas of cutting expenditures have been ruled out by congressional republicans. For instance, just heard Rand Paul agreeing to looking at Pentagon cuts. Coburn has been a high profile advocate for cutting any and all government waste. SS and medicare have been cited as needing reform for years. But, like the dems the R’s haven’t demonstrated much assertiveness in actively pursuing any written legislation in these areas. Only GWB laid out some ideas for SS reform which were promptly discredited.
Jan,
The empirical fact is that Congress has little interest in cutting spending because controlling the money is power and all but a few true believers don’t want to lose that power. Thus the partisan arguments are about who gets the lucre more than anything else. Neither party, when given the opportunity, chose to actually reduce spending. “Talk” about cutting expenditures, is just that – talk.
Andy,
Oh come on, cutting spending means cutting the two big entitlements–SS and Medicare. These may be screwed up; they may need to be cut. But the idea that there’s major buy-off bling being distributed to octogenarians via SS checks and Medicare is just wrong.
Prime example being the Tea Party–filled with libertarians and anti-government people who rose up at the thought of their Medicare being affected by Obamacare. In the GOP’s mental incarnation, this was nothing more than a cursory flicker, but it reflects the truth: what government spends a huge amount of money on is necessary, non-coercive and acceptable to 99% of the populace.
Dave Schuler: In financial terms default means the failure to make timely payment of interest or principal on a debt security or to otherwise comply with the provisions of a bond indenture.
Even if you pay the mortgage, if you stiff the plumber, you have defaulted on a valid debt. By law, the U.S. has many other obligations other than interest payments.
jan: It will be Obama’s default, should it go that far, as he has the power to prioritize expenditures, as to what/who gets paid first
No. The president does not have that legal authority. The president will certainly improvise in the event of default, but it will still be default.
As for the 14th Amendment argument, you are essentially arguing that the debt limit is unconstitutional. Even if the administration took this line of reasoning, investors would consider new bonds as junk of questionable value, as they would be subject to litigation.
Red Barchetta: raising the debt ceiling………….will not raise the debt.
That is correct. The increase in debt comes from spending more than you take in. Saying you shall not owe more than such-and-such dollars while spending and spending is meaningless blather.
Red Barchetta: Try that with your credit card issuer, mortgage lender or anyone for that matter.
Precisely. Just because you say you have a limit, you still owe the money if you keep racking up the debts.
….but it reflects the truth: what government spends a huge amount of money on is necessary, non-coercive and acceptable to 99% of the populace.
This just feeds into the ‘heroin drip’ analogy projecting how people will become addicted to the ACA, not necessarily because its a fairly constructed, unflawed program, but just because people get used to it. The same holds true for rent control. Once it becomes firmly entrenched in a community, you can rarely unhook people from their rental subsidies, whether or not they are equitable, fairly administrated or even beneficial for the city in general. SS disability, SS, medicare, medicaid, food stamps–they all become more like ‘rights’ than programs, causing people to rise up should anyone want to modify, update or phase out when not working. That’s how a government gets clogged, becoming inefficient, straining the best of efforts to remain even sustainable.
It all then becomes a matter of personal pocketbook politics, not what is best for the country as a whole, or for future generations specifically, just what is advantageous for people in the here and now. This kind of self serving thinking cuts across the entire spectrum of party ideology — from the most idealistic liberal to the greatest freedom-loving libertarian.
No. The president does not have that legal authority. The president will certainly improvise in the event of default, but it will still be default.
Zachriel,
Saying it isn’t so doesn’t make it so. The president has used discretionary presidential powers in all kinds of instances — tweaking the Welfare Reform Act, giving a semi-Dream act status to immigrants sans Congressional input or approval, changing his ACA legislation, without Congressional approval as well, which some say is unconstitutional.
Furthermore, his administrative minions have prioritized what closes down and what doesn’t during the wrangling going on between feuding political parties over the CR. Should the debt ceiling deadlines not be met, he will have the same kind of discretionary power to pay what bills when — including the interest on our debt (non-payment creating a default scenario), SS checks, medicare/medicaid, military etc.. It all depends, though, on what he deems the most important, less damaging sequence to implement said payments in order to avoid a financial crash of the markets/economy (domestically and globally), security breaches to the U.S., or deter inconvenience to the neediest of peoples in this country. Hopefully, the prioritization list created because of this CR stall will not be indicative of what he might do in a debt ceiling crisis. For, what we are experiencing now, is nothing less than an avoidable, ugly, vindictive display of leadership, more becoming and expected of a community organizer than a POTUS .
Modulo,
I don’t understand your response to my comment. It was analysis, not advocacy. In short, despite the partisan rhetoric, neither party, based on the historical record, wants to actually cut the deficit, spending, or entitlements.
As for the 14th Amendment argument, you are essentially arguing that the debt limit is unconstitutional. Even if the administration took this line of reasoning, investors would consider new bonds as junk of questionable value, as they would be subject to litigation.
We have banks which are required by law to purchase government securities and create a market. The Fed is the master and the bond market its tool, nothing more.
jan: The president has used discretionary presidential powers in all kinds of instances — tweaking the Welfare Reform Act, giving a semi-Dream act status to immigrants sans Congressional input or approval, changing his ACA legislation, without Congressional approval as well, which some say is unconstitutional.
All regulatory laws grant a great deal of discretion to the executive, including the ACA. The president is accountable to the courts when he exceeds his authority.
jan: Should the debt ceiling deadlines not be met, he will have the same kind of discretionary power to pay what bills when — including the interest on our debt (non-payment creating a default scenario), SS checks, medicare/medicaid, military etc.
There is no such authority in law, but the president will be forced to make such decisions if Congress abrogates their responsibility. The questionable legality of such actions will only add to the chaos.
Ben Wolf: We have banks which are required by law to purchase government securities and create a market. The Fed is the master and the bond market its tool, nothing more.
Have no idea your intended meaning. If non-governmental buyers don’t want what you have, they won’t buy them. The market in U.S. bonds, which undergirds the entire global economic systems, will collapse.
“All regulatory laws grant a great deal of discretion to the executive, including the ACA. The president is accountable to the courts when he exceeds his authority. “
Reasonable discretionary changes are subject to measuring how much power is benign or even acceptable, when a leader totally disregards the oversight criticism of another co-power. The PPACA changes were analogous to a prison warden dividing a room full of prisoners into several groups, giving himself the sole authority to set one group free while the other had to fulfill their mandatory sentences. That’s what Obama has literally done, by giving various sets of people waivers, subsidy reductions and delays to their Obamacare obligations, while holding individual citizens hostage to the mandate demands, or suffer financial penalties if refusal is their course of action.
BTW, a new AP poll says that only 7% think that the Obamacare roll-out has gone well. Michael must be in that small approval group.
“There is no such authority in law, but the president will be forced to make such decisions if Congress abrogates their responsibility”
Have you ever heard the phrase, “The buck stops here.” Well, that includes presidential responsibility to make nice, be diplomatic, take all people into consideration in the decision-making process, and ultimately try to do no harm, let alone be vindictively harsh if your expectations aren’t met by dissenting opinion in the country. I really don’t see where you can say Congress is necessarily abrogating their responsibility, unless it is the Senate, where they don’t even get involved with appropriation bills that have been sent to them.
jan: The PPACA changes were analogous to a prison warden dividing a room full of prisoners into several groups, giving himself the sole authority to set one group free while the other had to fulfill their mandatory sentences.
The administration’s actions are well within his executive prerogative. However, the courts are available in case there is a dispute.
jan: I really don’t see where you can say Congress is necessarily abrogating their responsibility, unless it is the Senate, where they don’t even get involved with appropriation bills that have been sent to them.
If the Congress doesn’t raise the debt-ceiling, and the president is left with trying to make decisions about who to pay and how much, then Congress has not only allowed the country to default, but is ceding the power to the presidency to make decisions, legally questionable decisions, about draconian spending cuts.
@Zachriel
Have no idea your intended meaning. …
I believe @Ben Wolf is referring to bank reserve requirements.
If non-governmental buyers don’t want what you have, they won’t buy them. …
Demand for US bonds will not decrease. US bonds are the safest investment vehicle, and the US will pay its debts.
The market in U.S. bonds, which undergirds the entire global economic systems, …
US bonds are used to soak up excess US dollars. There are few outlets for dollars outside the US.
… will collapse.
There might be a few days of gyrations, but once the suckers are fleeced, things will return to normal. There is no substitute for US bonds.
TastyBits: Demand for US bonds will not decrease. US bonds are the safest investment vehicle, and the US will pay its debts.
Most investors have confidence that the U.S. will resolve its debt ceiling crisis. However, nearly all analysts believe that rates would rise precipitously, if the debt ceiling were not increased.
TastyBits: There might be a few days of gyrations, but once the suckers are fleeced, things will return to normal.
Sure. And U.S. mortgage-backed securities are supported by the value of U.S. real estate. What could possibly go wrong? A few days of gyrations, but once the suckers are fleeced, things will return to normal.
@
I stopped believing what the “experts” say a long time ago. They are very rarely correct, and that is usually due to luck. The “experts” were wrong about:
2006/2007 – Pending Housing Crisis Predictions
2007/2008 – Pending Financial Crisis Predictions
2007/2008 – Pending Recession Predictions
2011 – US Credit Rating Downgrade Outcome
2013 – US Sequestration Outcome
This is just a few recent events, and it does not include the events the CIA has missed. What about the Y2K catastrophe?
Presently, there are bubbles with Student Loans, the Stock Market, and US Government Spending, but few of the “experts” see any problems.
If you are comparing US bonds with MBS, they are totally different.
The Housing Crisis was a relatively small event. The problem was that the MBS’s were leveraged to create a CDS “house of cards”. This created the Financial Crisis which is still being felt. I have been over this multiple times.
Nobody buying US bonds is going to start buying Greek bonds, and anybody with excess dollars (US) have very little options.