View Full Version : What exactly would happen if the government does not raise the debt ceiling?
gimmethesimplelife
7-14-11, 8:22am
Just a quick question I'd like to throw out there.....What exactly would happen if the government does not raise the debt ceiling? I know I could google this and find out what economists have to say about this ad infinitum, but I am wondering what simple livers think about this? Tragic consequences, sky falling, or really not all the big a deal, or somewhere in between? Or does it depend more on if you have some food saved and some money saved and can ride out any instability? Just curious.....Rob
ApatheticNoMore
7-14-11, 11:28am
Well there are more things in the world than fiscal policy, the government can stop spending and you can still have the Federal Reserve backstopping the economy like crazy. Without government debt? Yea, actually they don't have to use that financial instrument, they can use other things.
The worst thing is the possibility of rising interest rates - even if we don't default - not only on new debt, but as we refinance all the old debt, Basically the scenario of "I could manage my credit card debt, but I missed a payment, they jacked up the rates and now I can't". Not only would we have to deal with massive cuts to programs, a lot of money would also be shifted away from programs and into interest payments on the debt.
Depends. There is much political hay to be made here.
Scenarios include stopping Medicare and SS payments (or drastically cutting), shutting down all but key federal jobs, stopping or drastically cutting military pay, military retirement pay, federal pensions, etc. Likely also an executive use and judicial test of the 14th amendment.
We'll likely also see treasuries downgraded which will cause at least some short-term shock to the bond market. This would typically also force an interest premium (on any other bond that was downgraded) but I'm not sure if we'd see much, if any, premium with the Fed so willing to step in and buy t-bills.
I predict more political wrangling by some on both sides and some scare tactics followed by a big-sounding-but-not-useful spending cut (smoke and mirrors future spending cut type stuff) and a "heroic 11th hour bipartisan agreement" where both sides are able to claim victory for their base.
Do you think for us savers, that an increase in the interest rates would be a good thing? What I mean is, say the government defaults, or does not raise the debt ceiling and Moody and S&P downgrade the Treasuries from the Aaa status. The government does not pay all of its bills starting on August 3rd. Do you think that on August 8th, when the 30 year bonds are to be sold, that there would be a large increase in the interest rate of those bonds?
Considering how most of us here are savers or are interested in reducing our debt and saving money, I would almost think it would be a good thing. But, unfortunately, if they do not pay, I would imaginethat we would also be in a government shut-down, which would mean that I would be out a job. All National Parks would close plus tons of other things as well. With this happening in the summer time, it would ruin lots of vacationers and those businesses that depend on the National Parks to remain open. I just hope that does not occur.
frugal-one
7-18-11, 1:15pm
The question too is what will happen to the stock market??? Many of us have retirement accounts there.
Well, considering his investment in ProShares Trust ultra short mutual fund, Eric Cantor stands to make a lot of money if we default. Sooo...somebody wins, don't they! :(
Well, considering his investment in ProShares Trust ultra short mutual fund, Eric Cantor stands to make a lot of money if we default. Sooo...somebody wins, don't they! :(
I googled this and it showed up in his 2009 disclosure statement. So he thinks there is a chance that we will have higher interest rates at some point. At the rate we are borrowing is this really hard to predict? I don't know how many investments he has or what percentage he has in the short fund. But many people hedge their investments with short positions as a form of insurance against a drop. Just smart investing.
The question too is what will happen to the stock market??? Many of us have retirement accounts there.
Well, the best answer is that a whole lot of rational and irrational investors have already priced the expected news into the stock. VIX (the S&P 500 volatility index) looks pretty darn stable (up a bit but not really by much). and the S&P 500 isn't dropping horribly. So, the world expects something to pass and the demagoguery to be put aside. Now, of course, we could all be surprised and I think we'd end up seeing a roller coaster at that point. I'm not smart enough to invest like that, though.
Personally, and I know this is horribly glib, I'm almost willing to lose what little I have in the market to see the whole thing blow up. It's not often one gets to be part of the end of a republic.
Well, considering his investment in ProShares Trust ultra short mutual fund, Eric Cantor stands to make a lot of money if we default. Sooo...somebody wins, don't they! :(
I just bought some TBT myself. I have to much sitting in cash right now anyway. TBT has been a loser for the last few years with the artificially low interest rates. Maybe its time for a little pop. Thanks for the info.
loosechickens
7-18-11, 2:45pm
an overview here from CNN Money:
http://moremoney.blogs.money.cnn.com/2011/07/16/debt-ceiling-your-finances/?iid=HP_Highlight
excerpt: (Alan Blinder is a former VP of the Federal Reserve, and a professor at Princeton. Matt Slaughter is a professor at Dartmouth's Tuck School of Business) )
Interest rates are extremely likely to rise. That means higher rates for credit cards, home mortgages, auto loans, and student loans, among others. How much they go up depends on how panicked the market gets.
"Even if it doesn't turn out to be calamitous, almost surely it's going to raise Treasury interest rates," Slaughter says.
That would bring the borrowing capacity of families down, and could seriously slow down business investment — which means less hiring.
The worst-case scenario? "If the markets really go into a tizzy, we may get to a situation in some markets where the rates hardly matter at all because you just can't get credit," Blinder says.
If the impasse lasts for more than a few days, the economy will "almost certainly" be pushed back into a recession, Blinder says. That's because of an unprecedented cutback in government spending. Even if the government avoided default by paying off its debt, losing the ability to borrow would mean a 40 percent drop in government spending — about 10 to 11 percent of GDP.
The stock market is very likely to tank, as well, driven by a serious loss of confidence in the U.S. government.
"You will get the investing community, not just of the United States but of the entire world, thinking that we've lost our marbles over here," Blinder says. "And we will have — because [failing to raise the debt ceiling] is a completely crazy thing to do."
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The reason the markets have been remaining fairly steady is that people really don't believe that the Congress could be so stupid as to play Russian Roulette like this with the world's financial stability. But if they DON'T get it together, katy bar the door, because we could see a financial crunch that would make the 2008 crash look like child's play. Let us hope that the grownups manage to rest control from the ideologues, or we're in for a world of hurt. JMHO, as I watch a carefully diversified portfolio with really no safe haven to go to, so would do what we did in 2008....just try to ride it out.
It really doesn't matter what Cantor or any of our political heroes do with insider information. They are exempt from the laws that control the masses. A loophole "still exists which allows members of Congress and high-powered executive branch appointees to exploit 'insider' knowledge of the financial industry in order to turn personal profit."
When you buy and sell stocks based on secrets you learned at the office, it could be insider trading.
But when a United States Senator or Representative does it, it's probably perfectly legal.That's because the SEC has largely determined that trading stocks based on advance knowledge of action in Congress is not insider trading.
"It may be unethical, and it may be unseemly, but it's not illegal" - Phil "ET" Gramm (former Texas Senator before John "Cornbread" Cornyn)
Peace
I was feeling much like Benhyr -- the last-minute heroics scenario -- until I read this week's Economist. Now I'm not so sure:
http://www.economist.com/node/18958711
Not that there's anything any of US can do about all of this, once we've made our preferences clear to our legislator.
Nothing left for me to do but go pick some more strawberries and have a smoothie ;)
I think a major misgiving is the assumption that there is a scenario that will lead to a good (defined as anything that isn't disastrous) outcome. There may not be one.
Nothing left for me to do but go pick some more strawberries and have a smoothie ;)
Personally I'd recommend picking strawberries and making a strawberry margarita! That seems much more appropriate for alleviating the worry about what may happen. ;)
I was feeling much like Benhyr -- the last-minute heroics scenario -- until I read this week's Economist. Now I'm not so sure:
http://www.economist.com/node/18958711
Not that there's anything any of US can do about all of this, once we've made our preferences clear to our legislator.
Nothing left for me to do but go pick some more strawberries and have a smoothie ;)
Here's the one thing I'm really curious about... and the Economist article makes the claim along with just about every talking head and other article I've come across. Which probably means I'm missing something. And that's this... how does not raising the debt ceiling trigger a default?
There are several key components to this, as near as I can tell.
First, if we don't raise the debt ceiling, then we can't pay for everything. Things we can stop paying include SS, federal pay, military pay (possibly federal and military pensions too although I've never bothered to see if those are payed out of general funds), medicare, foreign aid, outstanding invoices to contractors, etc. I guess the implicit part of this is that we can also choose to stop paying on debt in order to help pay for some of these other things (not that our debt payments would be nearly enough to cover, say, an SS shortfall out of tax receipts)
So, not raising the debt ceiling means cutting programs until we are no longer in deficit (tax income matches tax outgo).
I think this event happening will have an impact on the market. And, it'll have a significant, largely negative, impact on large swaths of the population.
Second, on paying for our debt... our debt is in US dollars. We can print more of those any time we want (using the term print loosely here to mean 'manufacture out of thin air'). Of course, this will drive inflation up, and getting carried away will bring around hyperinflation. We might see higher treasury prices and potentially downgrading (although I'm not sold on that and I'm not positive of the impact). However, I can't really understand how it's possible for a sovereign nation with debt denominated in its own currency to ever default on its debt (paperwork glitch a few decades ago aside)
So... congress doesn't reach a compromise, the treasury steps in and works with the Fed to continue to service our existing debt. No default. Massive repercussions of not compromising.
Of course, this might be all political grandstanding to cover up QE3 ;)
All you listed SS and such come out of the general fund because the SS trust fund was borrowed by the general fund totally. So general fund money must be used to pay SS.
benhyr, I guess I'm just dense, or maybe I missed it, but you keep referring to QE3. What the heck is that, besides a really large boat?
benhyr, I guess I'm just dense, or maybe I missed it, but you keep referring to QE3. What the heck is that, besides a really large boat?
Quantitative Easing round 3. We either just finished up or are still in the middle of Quantitative Easing round 2 and it's failure would be a major blow to the Fed.
ApatheticNoMore
7-20-11, 7:41pm
Quantitative Easing round 3. We either just finished up or are still in the middle of Quantitative Easing round 2 and it's failure would be a major blow to the Fed.
Yes the whole economy seems to sustained (such as it is, and hey it's not great), by FED money printing. Can this really end well?
Personally I'd recommend picking strawberries and making a strawberry margarita! That seems much more appropriate for alleviating the worry about what may happen.
In moderation. If you start drinking it every time something is majorly wrong with the world today, well then you have to start attending AA meetings to boot! :laff:
Mangano's Gold
7-20-11, 11:13pm
The Federal Reserve could just use the Treasuries it owns as campfire fodder. Say to the government "That's okay, you don't have to pay it back." That's about $2 trillion and would buy some time before we ran up against the debt limit again. That's probably a better solution than some of the ideas floating around.
We need a little inflation, anyway. In fact, we need more than a little if it could be engineered in a way that wages keep pace. The rub, of course, is like the old martini joke: They are like breasts - one is too few but three are too many.
The reason the markets have been remaining fairly steady is that people really don't believe that the Congress could be so stupid as to play Russian Roulette like this with the world's financial stability. But if they DON'T get it together, katy bar the door, because we could see a financial crunch that would make the 2008 crash look like child's play. Let us hope that the grownups manage to rest control from the ideologues, or we're in for a world of hurt. JMHO, as I watch a carefully diversified portfolio with really no safe haven to go to, so would do what we did in 2008....just try to ride it out.
I think you've got a pretty clear picture here LC. At least its about the same pic I have. The thought of a safe haven is interesting when we're looking for ways to hedge against something like a global recession. We can talk about gold or guns vs. butter all day, but when you get right down to it the philosophy trumpeted by most on these boards is one of the best ways to hedge there is. I don't mind debt as long as I can lock it in at today's rates (paying it back with tomorrow's dollars is likely going to be ridiculously cheap), but there isn't much reason to borrow if you can't find a suitable investment. I'm not in the gloom and doom camp, but if Congress doesn't get their act together and raise the debt ceiling a vegetable garden may be one of the best investments we can make.
gimmethesimplelife
7-22-11, 3:31pm
Do you think for us savers, that an increase in the interest rates would be a good thing? What I mean is, say the government defaults, or does not raise the debt ceiling and Moody and S&P downgrade the Treasuries from the Aaa status. The government does not pay all of its bills starting on August 3rd. Do you think that on August 8th, when the 30 year bonds are to be sold, that there would be a large increase in the interest rate of those bonds?
Considering how most of us here are savers or are interested in reducing our debt and saving money, I would almost think it would be a good thing. But, unfortunately, if they do not pay, I would imaginethat we would also be in a government shut-down, which would mean that I would be out a job. All National Parks would close plus tons of other things as well. With this happening in the summer time, it would ruin lots of vacationers and those businesses that depend on the National Parks to remain open. I just hope that does not occur.Laura, color me a total fool in a way, I work in a national park, too, and I did not even think of that! Of course the national parks would close first, this is something that could be closed with minimal overall pain to society.....No wonder why my job and the management staff here has become so surreal and bizarre lately.....Rob
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