The Result of a Federal Default?

[Jacob]

Okay, so in a few weeks the debt ceiling is coming up again.

Without getting into the whys and wherefores and whose fault it is, what will the result be if a it is not raised? If it stays not raised for a while? And assuming that Obama doesn't pull some sort of grey area trick to ignore it, what happens?

It's my understanding that all the various clever accounting manoeuvres have been exhausted and that the US won't be able to issue any more T-Bills, nor honour any of its various financial obligations.

So what are the results? For the US? Globally?

[Admiral Yi]

If the debt ceiling is not raised, the Treasury Secretary is put in the unenviable position of prioritizing which bills to will be paid.

[Barrister]

[Ideologue]

I think the coin should be minted with Krugman's face on it.

[Jacob]

If the debt ceiling is not raised, the Treasury Secretary is put in the unenviable position of prioritizing which bills to will be paid.

That's it, eh? You make it sound so anodyne.

Is he legally allowed to prioritize spending?

Are there even mechanisms in place for him to carry out such prioritizing and executing on it?

[Jacob]

I think the coin should be minted with Krugman's face on it.

Should be Reagan's.

My initial question, however, was based on the assumption that no such shenanigans were used.

[Ideologue]

I think the coin should be minted with Krugman's face on it.

Should be Reagan's.

My initial question, however, was based on the assumption that no such shenanigans were used.

Okay, didn't realize the coin counted as grey (the law totally authorizes it).

Love the Reagan idea.

[Admiral Yi]

That's it, eh? You make it sound so anodyne.

Is he legally allowed to prioritize spending?

Are there even mechanisms in place for him to carry out such prioritizing and executing on it?

Not sure.  This is uncharted territory for me.

[Jacob]

Not sure.  This is uncharted territory for me.

Me too.

I've heard a range of theories, from the merely disastrous to the utterly catastrophic...

[crazy canuck]

That's it, eh? You make it sound so anodyne.

Is he legally allowed to prioritize spending?

Are there even mechanisms in place for him to carry out such prioritizing and executing on it?

Not sure.  This is uncharted territory for me.

Normally if someone makes those kinds of decisions it would likely be called a fraudulent preference of one debt holder over another.  Not sure the US wants to sully its reputation any further.

[MadImmortalMan]

IIRC, revenues will cover the debt service payments. New bond auctions would stop though. That's not necessarily a default.

[Admiral Yi]

Normally if someone makes those kinds of decisions it would likely be called a fraudulent preference of one debt holder over another.  Not sure the US wants to sully its reputation any further.

Not sure how that applies.  I was thinking about the choice between various combinations of debt service and federal salaries and programs. 

[Jacob]

IIRC, revenues will cover the debt service payments. New bond auctions would stop though. That's not necessarily a default.

That matches what I've read elsewhere. Mature bonds would be paid out, and interests, most likely will as well. New T-Bills will, of course, not be issued.

The thing is, T-Bills underpin pretty much all economic activity. There are tons of entities that are legally required to buy T-Bills for various purposes; T-Bills basically backstop any and all risk-management strategies once you keep digging down.

Again, I'm repeating what I've read - but the crisis five years ago came about when the real estate value backing up about 3 trillion in economic activity came into doubt. The value of the T-Bills themselves are about 16 trillion, and they're backing quadrillions worth of economic activity.

How will the markets react? What will happen to that economic activity?

It sounds pretty grim, though.

[crazy canuck]

Normally if someone makes those kinds of decisions it would likely be called a fraudulent preference of one debt holder over another.  Not sure the US wants to sully its reputation any further.

Not sure how that applies.  I was thinking about the choice between various combinations of debt service and federal salaries and programs.

If by debt servicing you mean preferring some debts to others then the issue is raised.

[crazy canuck]

IIRC, revenues will cover the debt service payments. New bond auctions would stop though. That's not necessarily a default.

The thing is, T-Bills underpin pretty much all economic activity. There are tons of entities that are legally required to buy T-Bills for various purposes; T-Bills basically backstop any and all risk-management strategies once you keep digging down.

Yeah, that is going to be a real problem.  I am not sure the Tea Party understands this concept.