The Result of a Federal Default?

[Phillip V]

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

cheap stocks

[alfred russel]

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

cheap stocks

Sounds like saying the result of a business burning down is that you can buy it for a lot less money.

[Phillip V]

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

cheap stocks

Sounds like saying the result of a business burning down is that you can buy it for a lot less money.

Sometimes big discount for small burn.

[11B4V]

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.

To whom?  The bankruptcy court of God?

That might have some weight with the Tea Party 



You may have missed the part where I said the US doesnt want to sully its reputation any further than this fiasco already has.

It seems to be a regular thing now as long as Obama is Prez unfortunately. 

[Jacob]

It seems to be a regular thing now as long as Obama is Prez unfortunately.

Yeah. The Tea Party's reaction to the man has been destructively hysterical

[11B4V]

It seems to be a regular thing now as long as Obama is Prez unfortunately.

Yeah. The Tea Party's reaction to the man has been destructively hysterical

But, is it now a regular thing regardless of who's in the white house? Is this the norm I wonder. The Dem and GOP are really polarized.

[MadImmortalMan]

Clearly not. The House was Bush's bitch for eight years and let him spend like a freak.

[Sheilbh]

In about two weeks, Congress needs to raise the debt ceiling. All signs point to the Republicans following the same playbook as they have on funding.

I don't know. Last time there was a debt ceiling fight the Republicans more or less caved because they realised it mattered.

But, is it now a regular thing regardless of who's in the white house? Is this the norm I wonder. The Dem and GOP are really polarized.

We don't know. I believe that historically the majority in Congress would normally try and attach something to the debt ceiling rise, the White House would say no, so Congress would just raise it. I think there always used to be an element of kabuki to it with members being allowed to inveigh against the debt in the safe knowledge that it will pass.

What seems novel is the potential that this Republican party might not do that.

It reminds me of TARP which was hugely needed and the right thing to do. It's to Bush's and the Democrats enormous credit that they passed it despite opposing each other and a sign of problems to come among many Republicans that many couldn't vote for what was essential.

[Admiral Yi]

I don't know. Last time there was a debt ceiling fight the Republicans more or less caved because they realised it mattered.

I thought the last debt ceiling fight led to the sequester, which was about half of what Republicans wanted going in.

[grumbler]

What seems novel is the potential that this Republican party might not do that.

What is novel is the potential for the Speaker to be so terrified of a small minority in power that he would rather see the country ruined than risk having that minority get mad at him.  I doubt that you could find a dozen House members outside the Tea party caucus that are willing to play Russian Roulette like this (which is to say, with five chambers loaded).  Boehner, alas, seems to be one of them, even though he knows how stupid it is.

[Sheilbh]

I thought the last debt ceiling fight led to the sequester, which was about half of what Republicans wanted going in.

True they did lead to the sequester, but at the time no-one expected the sequester would actually happen. It was never meant to happen.

Maybe that's changed the dynamic and this'll be a regular feature of US government from now on, as Mitch McConnell put it 'I think some of our members may have thought the default issue was a hostage you might take a chance at shooting. Most of us didn't think that. What we did learn is this – it's a hostage that's worth ransoming. And it focuses the Congress on something that must be done.'

That's the problem of it all. I think the White House should utterly intransigent so it isn't taken as hostage - they have to shoot. But if that happens the actual economic consequences are catastrophic, so no responsible leader could do it.

[crazy canuck]

T Bills are popular because they are low risk highly liquid instruments. There are plenty of other low risk highly liquid investments entities can buy.

Then why do people buy from the US government?  Or perhaps why would anyone do it again if there are plenty of other options which do not present this kind of stupidity risk factor.

[alfred russel]

T Bills are popular because they are low risk highly liquid instruments. There are plenty of other low risk highly liquid investments entities can buy.

Then why do people buy from the US government?  Or perhaps why would anyone do it again if there are plenty of other options which do not present this kind of stupidity risk factor.

There is the primary market--where you buy government debt direct from the government.

There is the secondary market--where you buy government debt from a private seller.

If the primary market shut down for a while, there are still many trillions of government debt in the much larger secondary market. Organizations will still be able to get their government debt fix. Participating in the primary market is just one method to do that.

The risk with the debt ceiling isn't that we are going to run out of government debt for organizations to hold, it is the risk of default or inflation.

[lustindarkness]

The Result of a Federal Default? Massive amounts of fecal matter will impact a giant oscillating air movement apparatus.

[viper37]

So entities requiring low risk highly liquid investments will drop T-Bills in favour of the alternatives?

You are correct.

If so, what's the likely impact of this?

I thought about writing how T-bills work, but then I remembered we have the internet for stuff like this:
http://www.investopedia.com/terms/t/treasurybill.asp

T-bills are quoted in units of 100, so to take the example above, the T-bills sells for 98$ currently.  What happens with a credit default is the new T-Bill issued will be cheaper, because investors will now require a bigger risk premium to face the uncertainty of not being paid.

In the case of the US that probability will still remain low, so short term, the effects will be negligeable.  It's not that the US lacks the capacity to pay, it's that the political system lacks the will to pay.  Ultimately, what will happens is someone in Congress will break, either the Democrats will abandon their health care reform or the Republicans will admit defeat and re-establish funding. 

So, unlike other countries, like Argentina in the early 2000s, or Greece, it's not a question of not being able to raise sufficient money.

If the situation lasts longer, if the US starts defaulting significantly on its debts, than what you would see could be:
- devaluation of money
- inflation
- higher interest rates to try to minimize the effects of the above two.

Your next question will be "by how much", to wich I have no answer.  The only thing I can say, is the longer the crisis last, the harder the US economy will be affected by the above.