7/18/2011 8:22 PM ET|
Would a US default mean disaster?
Failure to raise the debt ceiling would inflict immediate pain on many Americans and long-term damage to the nation's finances. But there's a chance the fallout could be far worse.
President Barack Obama says a failure to raise the U.S. debt ceiling would be Armageddon.
"The idea that this is catastrophic is wrong," Sen. Tom Coburn, R-Okla., rejoins. On "Meet the Press" on Sunday, Coburn said, "What is catastrophic is to continue to spend money we don't have." Besides, he added "the debt limit doesn't really mean anything because we've always extended it."
Well, which is it? A failure to extend the debt ceiling would seem like it is either a catastrophe or not. You can't be just a little bit "Armageddon" any more than you can be a little bit pregnant.
Frankly I think the catastrophe claim is justified -- but not on the evidence that anyone is offering.
Arguments that a failure to raise the debt limit will raise interest rates, slow U.S. economic growth, increase inflation and ultimately cost the United States its AAA credit rating are all true, but they don't add up to an ultimate end-of-the-world battle. The inability to deal with something as relatively simple as raising the debt ceiling is a symptom of fiscal dysfunction in Washington that will push the U.S. further down the road to economic stagnation. But the image that comes to my mind is that of a frog cooking to death in a pot of water that heats up so slowly the frog never jumps out, rather than fire blasting from heaven to devour Gog and Magog.
Mind you, there is a possibility that failure to raise the debt ceiling could set off a catastrophe in the financial markets along the lines of the Lehman Brothers meltdown. But no one seems to be talking about how that could happen -- maybe because it's too complicated for us rubes to understand or maybe because it's another example of why the current system of global finance needs to be torn down and completely rebuilt. Come to think of it, it couldn't be that second reason, though -- Wall Street and Washington would be fine showing everyone how the sausage is made. Really, they would.
Understanding the problem
The problem posed by the debt ceiling is actually pretty simple. Every month the United States takes in less than it spends. The gap has averaged $125 billion a month in 2011. In February, the monthly deficit hit $223 billion, which was a record. May, a very good month for revenue inflows, saw the lowest deficit for that month in five years -- but that deficit still hit $59 billion. It was also the 32nd consecutive monthly deficit. The cumulative red ink pushed the federal government right up to the current debt ceiling of $14.29 trillion on May 16. The U.S. Treasury has been juggling accounts ever since by, for example, delaying internal transfer payments, but it will run out of gimmicks on Aug. 2, according to its calculations. At that point, the federal government will have to stop spending more than it takes in -- unless Congress raises the debt ceiling to allow more borrowing.
Going cold turkey on debt is made more difficult because some parts of federal spending are climbing automatically. As of May, spending formulas increased the cost of Social Security, Medicare and Medicaid by 3.6%, 3.8% and 5.4%, respectively, in 2011 from 2010, according to the Congressional Budget Office. The biggest jump came from spending on the public debt, up 16% from 2010.
If the Treasury can't juggle cash internally to avoid running up against the debt ceiling, then it will have to juggle externally to bridge the average $125 billion monthly gap. In June, the interest due on the U.S. debt came to $110 billion, but most months it's closer to $30 billion. The government sent out about $60 billion in Social Security checks in May. Not sending out Social Security checks and not paying interest on Treasury debt would go a long way to closing the monthly gap.
The consequences of failure
Here are the five arguments Obama is making for raising the debt ceiling:
First, at least one core function of the U.S. government -- with lots of public support -- is going to take a big hit if the United States suddenly has to live within its revenue. What's it going to be? Social Security? Veterans' benefits? Pay for active-duty military personnel? Interest on Treasury debt?
Want to avoid hitting a big, politically powerful group hard in your efforts to fill the gap? Can't be done.
Eliminating the entire budget for the Smithsonian museums, for example, would save just $800 million over a year, or about $67 million a month. Completely zero out the NASA budget and you reduce the gap by about $1.6 billion a month. Cut the Environmental Protection Agency's budget completely and the monthly gain is $750 million. Even combined, they're peanuts compared with that $125 billion gap. To close the gap, you've got to go after the big programs that have been responsible for bringing the current negotiations over the debt ceiling to deadlock.
Second, cuts of this magnitude will, in the short term, send the U.S. economy back into recession. In the first quarter of 2011, the U.S. economy showed a 1.9% annual real rate of growth (after subtracting the effects of inflation on the value of goods and services produced here). That resulted in the U.S. economy growing (once again after subtracting inflation) by a whopping $64 billion. That's only about half as big as the monthly cuts that would be necessary to fill the revenue gap in the event of a failure to raise the debt ceiling. Yes, in the long run the U.S. debt of $14.3 trillion is a powerful drag on growth in the U.S. economy. But in the short run, reducing the government's spending by $375 billion a quarter in borrowed money will depress economic growth.
Third, trying to run a government without either a surplus or the possibility of adding additional debt to balance out month-to-month swings in revenue and spending will produce massive uncertainty. So what does Treasury do when interest payments balloon in June and December as they do every year? Does the government cut back on interest payments even more that month and then increase payments in January and July? Tax receipts don't come in evenly over the course of a year, either.
Fourth, all this uncertainty and chaos will add to the interest rates the United States must pay on its debt. Stands to reason, doesn't it? U.S. Treasurys have been used as the definition of a risk-free investment because buyers could count on the U.S. always paying its bills and behaving reasonably responsibly. Now both of those attributes deserve serious re-examination. And even if Congress does come up with a deal that extends the debt ceiling, major damage has already been done to U.S. credibility. Imagine that you're an overseas investor following the current debate in Washington. You've heard U.S. politicians say that a default is better than raising the debt ceiling. You've heard statements that have basically challenged you to find another place to put your money. And you've seen politicians willing to sacrifice bond investors to short-term domestic politics. Every investor in the world has got to be asking: "How soon can I find an alternative investment for some of my Treasurys?"
Fifth, none of this is good for the long-term trend in the U.S. dollar. Standard & Poor's has put the U.S. AAA rating on credit watch with negative implications. The credit rating company has said that if a credit downgrade happens, it could come within the next three months. This, like the uncertainty surrounding the debt ceiling fight and the demonstrated inability of U.S. politicians to come up with a plan for addressing the long-term U.S. debt problem, has eroded the desire of overseas investors to hold dollars. Until Washington can demonstrate a real plan to reduce the projected growth in U.S. debt, I think the dollar will be locked into a downward trajectory. That adds to the upward pressure on U.S. interest rates, of course, as well as the downward pressure on the U.S. standard of living.
All this adds up to serious pain for the average American. Even if you aren't a member of one of the groups that winds up paying for a failure to extend the debt ceiling, you're still going to pay the price in slower growth and higher interest rates.
But I don't see Armageddon here. Interest rates won't go up overnight. In fact, they may not go up at all until the euro debt crisis is "solved." And even then, U.S. interest rates are likely to climb slowly because U.S. Treasurys are such a big part of the global portfolio that it's hard to find alternatives overnight. (Nonetheless the U.S. debt ceiling crisis, like the larger U.S. debt crisis, is good for gold and other commodities and for currencies such as the Canadian and Australian dollars, the Swiss franc, and the Norwegian krone.)
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FIRST..in this case there should not be democrats or republicans or liberals etc..they all are, and should think like AMERICANS!
SECOND..pull our troops out of afghanistan, iraq, syria, lybia et al. save countless lives of our troops AND save billions of $$$ which could/should be used to address problems here at home.
THIRD..the politicans(republicans) are holding fast on no tax increases..they are not increases but a return to the correct tax rate that was in place BEFORE the bush cuts.
FOURTH...keep your damn hands off my social security benefits. this is NOT an entitlement or a handout. i (read all working americans) paid into this our entire working life so it is a return of investment NOT a handout of any kind.
FIFTH..let the senate and congress pay, as we do, for their medical insurances, have them pay into social security and impose term limits of two terms. no need for career politicians that get complacent and have too many entities they become beholden to over the long term.
SIXTH..put in place a FLAT tax rate for ALL individuals and companies. NO deductions, NO exemptions, NO exceptions, pretty much do away with the irs as we now have it, reduce the size of the tax laws to one sentence, and last but not least it would be FAIR to all.
I know these are all pipe dreams but......this country was basically founded on dreams.
I THINK WE NEED A TOTAL RECALL OF OUR GOVERNMENT FROM THE TOP DOWN. THINK ABOUT THIS ON THE NEXT ELECTION. THE PEOPLE NEED TO STEP UP AND TAKE OUR GOVERNMENT BACK . THE WHOLE GOVERNMENT NEEDS A WAKEUP CALL.
A few billion here and a few billion there, it all adds up. 40 billion for foreign aid to countries that want to wipe America off the face of the earth. Seems like a good place to start making cuts.
Its time that this country stand up to each and everyone of these people and tell them they work for us not the other way around and get this country back on top. I'm tired of he said she said BS who cares what your party is, its AMERICA people. Get rid of the ones in this country that are not suppose to be here, stop handing money to the crack heads for free without a piss test, stop jacking with social security for the people who worked their back sides off to earn that money. I dont care what color the man that is suppose to be in charge but damn you over paid politicians get your crap together and get this country back on track.
I hear about all of these cuts, SSI, SSID, military, other so called etitlements, but I haven't heard whether Congress and the President would get paid or not. And that is exactly what should happen. If we all have to suffer cuts or not receive pay, Congress and the President shouldn't get paid. After all, they are the root cause of all of this!!
Let's call a spade a spade. There is no agreement on the debt ceiling because both parties think they can make political gain in 2012 by sticking to their guns.
The Republican have a new dogma about no tax increase and are willing to bet the house on it, the Democrats are hell bent on keeping the big programs (so called entitlements) as they are.
In the meantime, the country is stuck in the middle and to the rest of the world we look at a banana republic, nice image for the most powerful country on earth...
In this game of chicken nobody wins.
One of the first order of business, if we do not vote to increase the debt ceiling, would be to symbolically not pay our elected representatives, both in the Congress and Senate, it will not save or help much, but it will prove a point and since neither chamber has shown that they are an essential service (if they were they would have made a deal), then they should be the first one to suffer for their stupidity.
Regardless of the partisan debate, the debt ceiling must be raised in order for the country to continue functioning normally. In the meantime, our elected representatives must start to look at the level of spending and start making some painful cuts as well as raising taxes and reforming the tax code, then we can look at having a balanced budget on an annual basis.
But that takes a serious dose of political courage and will not happen before 2012. So we are stuck in neutral for another 15 months, with the american public and the world shaking their heads.
I think we shouldn't pay our elected officials (Democrats and Republicans) because they are fighting
back and forth not wanting to find a solution. This whole thing is about Politics and not what's best for the
First off we don't need 100 Senatores. 50 is enough, 1 from each state. the second one does nothing anyway.
Slash the house by a third, that is plenty of representatives.
End their pension plans and let them join Social Security, like the rest of us.
For those over 65 put them in medicare, just like us or buy your own. No Gov't handouts. ( The tea party congressmen should like that)
No more pork, give the president a line item veto.
Term limits. President 1 term 6 years
Senators 1 term 6 years
house members 1 yerm 3 years.
Now we wont have to worry about them spending time electioneering.
WOW we are saving millions already, and that is just the begining.
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[BRIEFING.COM] S&P futures vs fair value: +1.50. Nasdaq futures vs fair value: +1.70. U.S. equity futures display modest gains after spending the bulk of the overnight session in negative territory. The S&P 500 futures trade higher by 0.1%. Among news of note, Democratic and Republican lawmakers have reached a budget agreement that would avoid another government shutdown. However, the plan still needs to be approved by both chambers of Congress.
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