Will the U.S. Default? - page 2
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Jim Grant Warns America's Default Is Inevitable
“There is precedent for a government shutdown,” Lloyd Blankfein, the chief executive officer of Goldman Sachs, remarked last week. “There’s no precedent for default.”
How wrong he is.
The U.S. government defaulted after the Revolutionary War, and it defaulted at intervals thereafter. Moreover, on the authority of the chairman of the Federal Reserve Board, the government means to keep right on shirking, dodging or trimming, if not legally defaulting.
Default means to not pay as promised, and politics may interrupt the timely service of the government’s debts. The consequences of such a disruption could — as everyone knows by now — set Wall Street on its ear. But after the various branches of government resume talking and investors have collected themselves, the Treasury will have no trouble finding the necessary billions with which to pay its bills. The Federal Reserve can materialize the scrip on a computer screen.
Things were very different when America owed the kind of dollars that couldn’t just be whistled into existence. By 1790, the new republic was in arrears on $11,710,000 in foreign debt. These were obligations payable in gold and silver. Alexander Hamilton, the first secretary of the Treasury, duly paid them. In doing so, he cured a default.
Hamilton’s dollar was defined as a little less than 1/20 of an ounce of gold. So were those of his successors, all the way up to the administration of Franklin D. Roosevelt. But in the whirlwind of the “first hundred days” of the New Deal, the dollar came in for redefinition. The country needed a cheaper and more abundant currency, FDR said. By and by, the dollar’s value was reduced to 1/35 of an ounce of gold.
By any fair definition, this was another default. Creditors both domestic and foreign had lent dollars weighing just what the Founders had said they should weigh. They expected to be repaid in identical money.
Language to this effect — a “gold clause” — was standard in debt contracts of the time, including instruments binding the Treasury. But Congress resolved to abrogate those contracts, and in 1935 the Supreme Court upheld Congress.
The “American default,” as this piece of domestic stimulus was known in foreign parts , provoked condemnation in the City of London. “One of the most egregious defaults in history,” judged the London Financial News. “For repudiation of the gold clause is nothing less than that. The plea that recent developments have created abnormal circumstances is wholly irrelevant. It was precisely against such circumstances that the gold clause was designed to safeguard bondholders.”
The lighter Roosevelt dollar did service until 1971, when President Richard M. Nixon lightened it again. In fact, Nixon allowed it to float. No longer was the value of the greenback defined in law as a particular weight of gold or silver. It became what it looked like: a piece of paper.
Yet the U.S. government continued to find trusting creditors. Since the Nixon default, the public’s holdings of the federal debt have climbed from $303 billion to $11.9 trillion.
If today’s political impasse leads to another default, it will be a kind of technicality. Sooner or later, the Obama Treasury will resume writing checks. The question is what those checks will buy.
“Less and less,” is the Federal Reserve’s announced goal. Under Chairman Ben Bernanke (with the full support of the presumptive chairman-to-be, Janet Yellen), the central bank has redefined price “stability” to mean a rate of inflation of 2 percent per annum. Any smaller rate of depreciation is an unsatisfactory showing to be met with a faster gait of money-printing, policymakers say.
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Peter Schiff On The Debt Ceiling Delusions
The popular take on the current debt ceiling stand-off is that the Tea Party wing of the Republican Party has a delusional belief that it can hit the brakes on new debt creation without bringing on an economic catastrophe. While Republicans are indeed kidding themselves if they believe that their actions will not unleash deep economic turmoil, there are much deeper and more significant delusions on the other side of the aisle. Democrats, and the President in particular, believe that continually taking on more debt to pay existing debt is a more responsible course of action. Even worse, they appear to believe that debt accumulation is the equivalent of economic growth.
If Republicans were to inexplicably prevail, and the federal government were to cut spending so that its expenditures matched its tax revenues (a truly radical idea) the country's financial mess would be laid bare. The government would have to weigh the relative costs and benefits of making interest payments on Treasury debt (primarily to foreign creditors) or to trim entitlements promised to U.S. citizens. But those are choices we will have to make sooner or later anyway. In fact we should have dealt with these issues years ago. But generations of mechanistic debt ceiling increases have allowed us to perpetually kick the can down the road. What could possibly be gained by doing it again, particularly if it is done with no commitment to change course?
The Democrats' argument that America needs to pay its bills is just hollow rhetoric. Paying off one's Visa bill with a new and bigger MasterCard bill can't be considered a legitimate payment of debt. At best it is a transfer. But in the government's case, it doesn't even qualify as that. Treasury debt is primarily bought by the Fed, foreign central banks, and major financial institutions. None of that will change with a debt ceiling increase. We will just go to the same people for greater quantities. So it's like paying off your Visa card with a bigger Visa card.
According to modern economists, an elimination of deficit spending will immediately cause a dollar for dollar decrease in GDP. For example, if the government stopped sending food stamp payments to poor people, then grocery stores would lose business, employees would be laid off, and the economy would contract. But this one dimensional view fails to appreciate that the purchasing power of the food stamps had to come from somewhere. The government can't create something from nothing. Taxation transfers purchasing power from people living in the present to other people living in the present. In contrast, borrowing transfers purchasing power from people living in the future to people living in the present. The good news for politicians is that future people don't vote in current elections (and current voters don't seem to appreciate the cost to their future selves of current policy).
The Obama Administration has congratulated itself for turning around the contracting economy that it inherited from President Bush. But even if you take the obscenely low official inflation statistics at face value, we only grew at an anemic 1.075% annual pace from 2009 to 2012 (far below the between 3% and 4% that the U.S. averaged post World War II). Sadly, this growth pales in comparison to the accumulation of new debt that we are borrowing from the future.
U.S. GDP is measured at roughly $15 trillion per year. 2% growth means that each year the GDP is approximately $300 billion larger than the prior year. But in the less than five years since Obama took office, the federal government has added, on average, about $1.3 trillion per year in new debt, a pace that is four times higher than the growth. If the deficit were subtracted from GDP, America would be shown to be stuck in a severe recession that Washington can't acknowledge. But such a reality is more consistent with the dismal job prospects and stagnant incomes experienced by most Americans.
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Here's When The US Government Will Really Run Out Of Cash
Treasury Secretary Jack Lew has warned us that the U.S. would hit the debt ceiling on October 17 — the date at which Treasury will cease to issue debt.
However, many confuse this with the day the U.S. runs out of cash and the government defaults.
Here is Goldman Sachs' Alec Phillips explained earlier this month:
Since the Treasury usually aims to run a cash balance large enough to cover unexpected payment needs or a revenue shortfall, the Treasury expects to have $30bn on hand the day it exhausts its borrowing capacity. The Treasury views this $30bn as the minimum prudent balance in light of the significant uncertainty in daily cash flows, though there have been a few instances (unrelated to the debt limit) in which the cash balance has dipped below $15bn. Most external projections of the debt limit deadline focus on when this cash is depleted. Our own estimate implies that the Treasury could conceivably continue to make its scheduled payments until the end of October. However, the Treasury’s cash balance is likely to be so low after about October 25 that, depending on revenue fluctuations, the cash balance could be depleted on any day. At that point, it is possible that the Treasury would need to cease making payments in order to conserve the little remaining cash they would still have on hand.
This isn't to say markets wouldn't react on October 17, but it does mean the politicians have a few days of extra wiggle room to strike a seemingly inevitable deal.
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U.S. Risks Joining 1933 Germany in Pantheon of Deadbeat Defaults
Reneging on its debt obligations would make the U.S. the first major Western government to default since Nazi Germany 80 years ago.
Germany unilaterally ceased payments on long-term borrowings on May 6, 1933, three months after Adolf Hitler was installed as Chancellor. The default helped cement Hitler’s power base following years of political instability as the Weimar Republic struggled with its crushing debts.
“These are generally catastrophic economic events,” said Professor Eugene N. White, an economics historian at Rutgers University in New Brunswick, New Jersey. “There is no happy ending.”
The debt reparations piled onto Germany, which in 1913 was the world’s third-biggest economy, sparked the hyperinflation, borrowings and political deadlock that brought the Nazis to power, and the default. It shows how excessive debt has capricious results, such as the civil war and despotism that ravaged Florence after England’s Edward III refused to pay his obligations from the city-state’s banks in 1339, and the Revolution of 1789 that followed the French Crown’s defaults in 1770 and 1788.
Failure by the world’s biggest economy to pay its debt in an interconnected, globalized world risks an array of devastating consequences that could lay waste to stock markets from Brazil to Zurich and bring the $5 trillion market in Treasury-backed loans to a halt. Borrowing costs would soar, the dollar’s role as the world’s reserve currency would be in doubt and the U.S. and world economies would risk plunging into recession -- and potentially depression.
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President Obama to meet with Congressional leaders on debt limit
US President Barack Obama and Vice-President Joe Biden are scheduled to meet congressional leaders from both parties as the deadline to raise the nation's debt limit nears.
The bipartisan meeting will include leaders from both the House of Representatives and the Senate.
A shutdown of the US government, also a result of the political deadlock, has now entered its third week.
Officials warn of economic calamity should the US default on its debt.
"With only a few days until the government runs out of borrowing authority, the President will make clear the need for Congress to act to pay our bills, and reopen the government," the White House said in a statement ahead of Monday's meeting.
Expected to attend are Senate Democratic Majority Leader Harry Reid, Senate Republican Leader Mitch McConnell, Republican House Speaker John Boehner and House Democratic Minority Leader Nancy Pelosi.
Weekend negotiations between US congressional leaders failed to reach a breakthrough to raise the nation's debt limit ahead of Thursday's deadline.
Negotiations between Republican and Democrat Senate leaders continued on Sunday, with both sides reportedly awaiting the Monday opening of US financial markets to reassess their negotiating positions.
Mr Reid described a phone call with Mr McConnell as "productive", but the two did not reach a solution to raise the nation's $16.7 trillion (£10.5 trillion) borrowing limit as Thursday's deadline nears.
Republican Senator Susan Collins acknowledged the Senate did not have a finished agreement, but said senators were "making very good progress".
A separate bipartisan group led by Ms Collins also met for several hours earlier in the day to discuss possible solutions, the Associated Press news agency reported.
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US will not default - simply because they defaulted a long time ago. Only the money printing machine (the FED) is keeping alive an illusion that it is not so
Central Banks Gaming Out U.S. Default as Deadline Nears
Central banks have begun making contingency plans on how they would keep financial markets working if the U.S. defaults on the world’s benchmark debt.
Policy makers discussed possible responses when they met at the International Monetary Fund’s annual meetings in Washington over the weekend, said officials who spoke on condition of anonymity because the talks were confidential. The discussions continued as policy makers headed home.
“Because in the past it’s always been sorted out is absolutely not a reason to fail to do the contingency planning,” Jon Cunliffe, who joins the Bank of England as deputy governor for financial stability next month, told U.K. lawmakers yesterday. “I would expect the Bank of England to be planning for it. I’d expect private-sector actors to be doing that, and in other countries as well.”
The initial response from the world’s central banks would likely echo their actions after the collapse of Lehman Brothers Holdings Inc. in 2008. Back then, policy makers pledged they would provide ample liquidity, eased the collateral they lent against and boosted dollar swap lines with each other to ensure supply of the currency.
The $12 trillion of outstanding U.S. government debt is 23 times the $517 billion Lehman owed when it filed for bankruptcy on Sept. 15, 2008.
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US Senate leaders upbeat on debt deal
US Senate leaders have expressed optimism after a flurry of negotiations on raising the federal debt ceiling to avert a potentially disastrous default.
They were also nearing a deal to end a partial government shutdown, now in its third week, congressional sources said.
A budget bill would also need to pass the House of Representatives, where a faction of conservative Republicans brought on the deadlock two weeks ago.
The US must raise its $16.7tn (£10.5tn) borrowing limit by Thursday.
As he toured a soup kitchen for the poor in Washington DC on Monday, President Barack Obama warned that "defaulting would have a potentially devastating effect on our economy".
He had been due to hold talks at the White House with congressional leaders that afternoon, but the meeting was postponed to allow the parties more time to cobble together an agreement.
'Tremendous progress'
According to US media, the deal currently under discussion would fund the government until 15 January while raising the debt ceiling until early to mid-February.
Senate Democratic Majority Leader Harry Reid told the chamber on Monday evening: "We've made tremendous progress.
"We hope with good fortune... perhaps tomorrow will be a bright day. We're not there yet."
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If someone doubted that they will wait the last minute of the last day to "agree" (that they will do the same) then he was wrong. They are going to do exactly the same as last time
Even with a temporary increase to the debt ceiling, we risk going through this crisis all over again quite soon.