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?
If the debt ceiling is not raised, the Treasury Secretary is put in the unenviable position of prioritizing which bills to will be paid.
(https://languish.org/forums/proxy.php?request=http%3A%2F%2Fdownload.lardlad.com%2Fframegrabs%2F5F14%2F109.jpg&hash=3988a991a9ddcc658f0a89fa91b34d785c8b2df6)
I think the coin should be minted with Krugman's face on it.
Quote from: Admiral Yi on October 02, 2013, 03:44:05 PM
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?
Quote from: Ideologue on October 02, 2013, 03:55:37 PM
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.
Quote from: Jacob on October 02, 2013, 03:56:41 PM
Quote from: Ideologue on October 02, 2013, 03:55:37 PM
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.
Quote from: Jacob on October 02, 2013, 03:55:48 PM
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.
Quote from: Admiral Yi on October 02, 2013, 03:59:20 PMNot sure. This is uncharted territory for me.
Me too.
I've heard a range of theories, from the merely disastrous to the utterly catastrophic...
Quote from: Admiral Yi on October 02, 2013, 03:59:20 PM
Quote from: Jacob on October 02, 2013, 03:55:48 PM
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.
IIRC, revenues will cover the debt service payments. New bond auctions would stop though. That's not necessarily a default.
Quote from: crazy canuck on October 02, 2013, 04:02:08 PM
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.
Quote from: MadImmortalMan on October 02, 2013, 04:04:16 PM
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.
Quote from: Admiral Yi on October 02, 2013, 04:04:59 PM
Quote from: crazy canuck on October 02, 2013, 04:02:08 PM
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.
Quote from: Jacob on October 02, 2013, 04:13:56 PM
Quote from: MadImmortalMan on October 02, 2013, 04:04:16 PM
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.
Quote from: Jacob on October 02, 2013, 04:13:56 PM
New T-Bills will, of course, not be issued.
As a minor quibble, new securities could still be issued as old ones mature.
Quote from: crazy canuck on October 02, 2013, 04:14:18 PM
Quote from: Admiral Yi on October 02, 2013, 04:04:59 PM
Quote from: crazy canuck on October 02, 2013, 04:02:08 PM
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?
Quote from: Admiral Yi on October 02, 2013, 04:16:35 PMAs a minor quibble, new securities could still be issued as old ones mature.
I'll take your word for it :)
... and I have no idea if that's enough to make a material difference.
Quote from: Ideologue on October 02, 2013, 04:17:39 PMTo whom? The bankruptcy court of God?
I'm sure people who felt ill done by would pursue all available legal means in the US.
The breakup of America and a return to a sensible world order.
Quote from: Ideologue on October 02, 2013, 04:17:39 PM
Quote from: crazy canuck on October 02, 2013, 04:14:18 PM
Quote from: Admiral Yi on October 02, 2013, 04:04:59 PM
Quote from: crazy canuck on October 02, 2013, 04:02:08 PM
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 :hmm:
You may have missed the part where I said the US doesnt want to sully its reputation any further than this fiasco already has.
Quote from: The Brain on October 02, 2013, 04:22:54 PM
The breakup of America and a return to a sensible world order.
The German ball bearing market is never coming back.
Interesting stuff guys, I don't pretend to understand this, though I'm rather concerned that Obama today was highlighting this issue, is that legitimate or to some extent playing with fire ?
Quote from: mongers on October 02, 2013, 04:33:58 PM
Interesting stuff guys, I don't pretend to understand this, though I'm rather concerned that Obama today was highlighting this issue, is that legitimate or to some extent playing with fire ?
We are seeing a shutdown of the American government over funding the government.
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.
We're hoping that saner heads prevail, but it's definitely a thing.
Quote from: crazy canuck on October 02, 2013, 04:16:00 PM
Quote from: Jacob on October 02, 2013, 04:13:56 PM
Quote from: MadImmortalMan on October 02, 2013, 04:04:16 PM
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.
I don't think that is a real problem. If it were, balancing the budget would be a problem.
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.
Quote from: alfred russel on October 02, 2013, 04:36:38 PMT Bills are popular because they are low risk highly liquid instruments. There are plenty of other low risk highly liquid investments entities can buy.
So entities requiring low risk highly liquid investments will drop T-Bills in favour of the alternatives?
If so, what's the likely impact of this?
If a significant amount of public debt is held by other branches of the federal government I guess that theoretically the government could choose to stop paying itself for it, thus gaining some more time.
Quote from: Admiral Yi on October 02, 2013, 04:16:35 PM
Quote from: Jacob on October 02, 2013, 04:13:56 PM
New T-Bills will, of course, not be issued.
As a minor quibble, new securities could still be issued as old ones mature.
Except that the new securities can't be issued until the old ones are redeemed, and you don't have the money to redeem. Plus, the new issue is worth less than you are paying out.
But you are right; these are quibbles.
Quote from: The Larch on October 02, 2013, 04:39:18 PM
If a significant amount of public debt is held by other branches of the federal government I guess that theoretically the government could choose to stop paying itself for it, thus gaining some more time.
I guess as long as the government is shut down, it won't matter that it's not getting paid anyhow.
That will suck for people getting social security, though. I think that's a pretty huge chunk of intra-governmental debt.
Quote from: Jacob on October 02, 2013, 04:39:03 PM
Quote from: alfred russel on October 02, 2013, 04:36:38 PMT Bills are popular because they are low risk highly liquid instruments. There are plenty of other low risk highly liquid investments entities can buy.
So entities requiring low risk highly liquid investments will drop T-Bills in favour of the alternatives?
If so, what's the likely impact of this?
There is a lot of government debt out there. Many trillions in fact. It is available on the secondary markets. It is all considered low risk and highly liquid. I would think that if short term T Bills were unavailable, then most entities would move into longer term government debt, secure commerical paper, or safe foreign debt securities.
If all government debt became unavailable, there could be some interesting quirks in regulated entities such as insurance companies and banks that are required to hold certain types of investments.
Quote from: Jacob on October 02, 2013, 03:42:03 PM
So what are the results? For the US? Globally?
cheap stocks
Quote from: Phillip V on October 02, 2013, 09:02:59 PM
Quote from: Jacob on October 02, 2013, 03:42:03 PM
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.
Quote from: alfred russel on October 02, 2013, 09:19:28 PM
Quote from: Phillip V on October 02, 2013, 09:02:59 PM
Quote from: Jacob on October 02, 2013, 03:42:03 PM
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.
Quote from: crazy canuck on October 02, 2013, 04:23:47 PM
Quote from: Ideologue on October 02, 2013, 04:17:39 PM
Quote from: crazy canuck on October 02, 2013, 04:14:18 PM
Quote from: Admiral Yi on October 02, 2013, 04:04:59 PM
Quote from: crazy canuck on October 02, 2013, 04:02:08 PM
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 :hmm:
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.
Quote from: 11B4V on October 03, 2013, 11:50:19 AMIt 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 :(
Quote from: Jacob on October 03, 2013, 11:53:49 AM
Quote from: 11B4V on October 03, 2013, 11:50:19 AMIt 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.
Clearly not. The House was Bush's bitch for eight years and let him spend like a freak.
Quote from: Jacob on October 02, 2013, 04:35:54 PMIn 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.
QuoteBut, 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.
Quote from: Sheilbh on October 03, 2013, 12:09:12 PM
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.
Quote from: Sheilbh on October 03, 2013, 12:09:12 PM
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.
Quote from: Admiral Yi on October 03, 2013, 12:28:23 PM
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.
Quote from: alfred russel on October 02, 2013, 04:36:38 PM
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.
Quote from: crazy canuck on October 03, 2013, 01:32:38 PM
Quote from: alfred russel on October 02, 2013, 04:36:38 PM
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.
The Result of a Federal Default? Massive amounts of fecal matter will impact a giant oscillating air movement apparatus.
Quote from: Jacob on October 02, 2013, 04:39:03 PM
So entities requiring low risk highly liquid investments will drop T-Bills in favour of the alternatives?
You are correct.
Quote
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.
Quote from: crazy canuck on October 03, 2013, 01:32:38 PM
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.
Secondary market is riskier and more expensive. Sure, in the end, it's backed by the US government, but if the first entity default, you won't get your full money back.
Pretty sure that's not true veep.
Quote from: Admiral Yi on October 03, 2013, 02:31:17 PM
Pretty sure that's not true veep.
Well, it seems I was wrong. It appears you can buy 100$ T-bills directly from the US gov. I thought they were selling them in higher denomination to primary dealers wich then split them into smaller parts. They are the majority buyers there, but yes, we can buy them directly.
To buy Canadian T-bills, you still have to go through CDS participants, so you can't buy a 1000$ T-bill from the government of Canada yourself.
Quote from: Sheilbh on October 03, 2013, 12:39:07 PM
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.
I've been thinking about this and I think the view I've heard apparently from the White House is right. Even if this would lead to a default I don't think they should compromise on this. I think the precedent this would set is too dangerous in the long-run.
Of course they need to make that abundantly clear to Republicans in Congress. In a way I think Obama's lame-duckness could help with this.