So we hit the debt limit...

[Razgovory]

Debt limit aside, what would be your plan to deal with our budget deficit and outstanding debt?

Prevent Republicans from holding office.  The first step in healing a wound is to remove what ever offending object caused it.

Then what?

Well, with most of the crazy people gone we can raise taxes and cut spending.

[Admiral Yi]

Well, with most of the crazy people gone we can raise taxes and cut spending.

That sounds like an awesome plan. 

Why do you think no one thought of this back in November of last year?

[Grey Fox]

Well, with most of the crazy people gone we can raise taxes and cut spending.

That sounds like an awesome plan. 

Why do you think no one thought of this back in November of last year?

Oh I'm sure everyone thought of it back in November. Getting rid of the stupid people just ain't easy.

[Admiral Yi]

Oh I'm sure everyone thought of it back in November. Getting rid of the stupid people just ain't easy.

The stupid people didn't get a majority in the House until January.

[Grey Fox]

Oh I'm sure everyone thought of it back in November. Getting rid of the stupid people just ain't easy.

The stupid people didn't get a majority in the House until January.

Oh. Democrats aren't as bright as we think they are?

[Razgovory]

Oh I'm sure everyone thought of it back in November. Getting rid of the stupid people just ain't easy.

The stupid people didn't get a majority in the House until January.

There were still a lot of stupid people between 2008 and 2010.  You could spot them because they were going on about death panels and promised to block everything the President tried to do and were holding big rallies.

[The Minsky Moment]

Default is really bad, but our default wouldn't be like a default in Argentina bad.

The markets seems to agree; treasuries keep gaining.  And one possible counterintuitive result of a default would be to switch on the "risk on" trade and boost treasuries even more.

But there is a little echo of Lehman here - the reason Paulson allowed them to fall was on what seemed to be the sound assumption that Lehman was not a central player in the international financial system and had no bank deposit money at risk.  What was not understood until too late what Lehman's deep interconnections with the "shadow" system - including debt they had placed with MM funds, their serial re-hypothetication of assets entrusted to their prime brokerage, and critically their counterparty relationships in huge complex webs of derivative and credit transactions.

The US Treasury securities market is the deepest, most liquid, most extensive market for securities that has ever existed in human history; it penetrates to every institution of significance in every corner of the globe.  Exactly how all these holders will react to even a technical default is unknown.  Many may hold tight, some may even buy.  But dome will dump; some will have to dump (by mandate); and some may choose to dump out of fear that if they wait and see first they could get trampled on the way to the exit.  Anyone that makes firm statements about what will happen or not happen IMO is fooling themselves, and the debt markets have been whistling in the dark by reacting to the news by bringing yields down.  Maybe nothing really bad happens; probably that is the likely result.  But there is real uncertainty, and a real risk of a nasty surprise.

[garbon]

Dome will dump!

[Admiral Yi]

There were still a lot of stupid people between 2008 and 2010.  You could spot them because they were going on about death panels and promised to block everything the President tried to do and were holding big rallies.

I see.  So the only thing holding the Democrats back from serious deficit reduction was Tea Party rallies and articles about death panels?

This whole time I thought the Democratic narrative until the Republicans threatened the debt limit was that the recovery was too fragile to consider deficit reduction at the moment but it was an awesome idea for the future.  I'm glad you cleared up my misconception Raz.

[Admiral Yi]

Joan, read an article in the FT a while back that enlightened me quite a bit on the composition of demand for Treasuries.  It may be old hat for you, but not something I had considered before.

As long as Treasuries are accepted as collateral for central bank lending and as Tier 1 capital, then demand could become divorced from standard notions of return/risk.

[Razgovory]

There were still a lot of stupid people between 2008 and 2010.  You could spot them because they were going on about death panels and promised to block everything the President tried to do and were holding big rallies.

I see.  So the only thing holding the Democrats back from serious deficit reduction was Tea Party rallies and articles about death panels?

This whole time I thought the Democratic narrative until the Republicans threatened the debt limit was that the recovery was too fragile to consider deficit reduction at the moment but it was an awesome idea for the future.  I'm glad you cleared up my misconception Raz.

You seem to have missed the part where I wrote "promised to block everything the President tried to do", can't reduce the debt with assholes throwing wrenches in the whole process.  Nor should we trust the Republicans with the budget, after all they okay with the deficits at the time "Reagan proved deficits don't matter." -Dick Cheney

[Razgovory]

Interestedly most Republican voters don't want to raise the debt ceiling at all and don't want to compromise.  http://today.yougov.com/news/2011/07/08/77-agree-defaulting-debt-would-be-serious-economy-/

[garbon]

There were still a lot of stupid people between 2008 and 2010.  You could spot them because they were going on about death panels and promised to block everything the President tried to do and were holding big rallies.

I see.  So the only thing holding the Democrats back from serious deficit reduction was Tea Party rallies and articles about death panels?

This whole time I thought the Democratic narrative until the Republicans threatened the debt limit was that the recovery was too fragile to consider deficit reduction at the moment but it was an awesome idea for the future.  I'm glad you cleared up my misconception Raz.

You seem to have missed the part where I wrote "promised to block everything the President tried to do", can't reduce the debt with assholes throwing wrenches in the whole process.  Nor should we trust the Republicans with the budget, after all they okay with the deficits at the time "Reagan proved deficits don't matter." -Dick Cheney

And you seem to want to downplay the role that the Dems were playing in the early part of the time period you highlighted.

[Admiral Yi]

You seem to have missed the part where I wrote "promised to block everything the President tried to do", can't reduce the debt with assholes throwing wrenches in the whole process.

You're absolutely right.  And it's true that with the death of Teddy the Democrats lost their filibuster proof majority. 

However when you claim that absent any Republican lawmakers we would be enjoying delicious, savory Democratic deficit reduction, it would help your case considerably if they had actually made an effort, even a pro forma one that they knew would be blocked by a filibuster.  Or even talked about it as a good thing.

Nor should we trust the Republicans with the budget, after all they okay with the deficits at the time "Reagan proved deficits don't matter." -Dick Cheney

See, this is the kind of argument that's actually much better suited for the proposition that we shouldn't care about the deficits, not that Democrats, if unfettered by Republican stupidity, would be doing an awesome job of deficit reduction.

[The Minsky Moment]

Joan, read an article in the FT a while back that enlightened me quite a bit on the composition of demand for Treasuries.  It may be old hat for you, but not something I had considered before.

As long as Treasuries are accepted as collateral for central bank lending and as Tier 1 capital, then demand could become divorced from standard notions of return/risk.

If there is even a technical default, it is not clear to me whether foreign central banks could accept treasuries as collateral; Trichet's comments on Greece suggest no for the ECB, although most likely there would be an interpretation around that.

The bigger issue is the repo market, which is the principal way that banks obtain short-term financing.  US treasuries are by far the most popular collateral used in repo transactions, and at any given time about $4 trillion in treasuries is collateralizing repo deals.  That is a significant chunk of change.  If market participants react by demanding that counterparties relying on treasuries for collateral post additional security or up margins, there is a risk of clogging up the entire market a la Lehman as financial institutions all over the planet simultaneously scramble to come up with billions in addition collateral or margin.