Default scenario

October 7, 2013

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It’s week two of the government shutdown, and with 10 days to go before we hit the debt ceiling, there is one big question as to what would happen if the US defaulted on its debt. Is it merely bad for the US’s image — or would it initiate economic apocalypse?

Yalman Onaran says a US default would be worse than the Lehman bankruptcy, noting that it “will be an economic calamity like none the world has ever seen”. Stephen Gandel identifies four different reasons to freak out over the possibility of default. All four revolve around the fact that a lot of market systems are based on the assumption Treasuries won’t default, and no one is quite sure what happens if they do. The Treasury Department, meanwhile, is set up to make its payments on time and in full, and its payments are not prioritized.

On the other side of the debate, Nick Cawley points out that the markets remain relatively calm. Treasury yields are at the lowest they have been in two months, likely because while payments may be delayed, investors are reasonably certain they will eventually get their money. “Keep calm, carry on and watch out for U.S. Treasurys to push higher”, he writes.

But hitting the debt ceiling is about a lot more than missing a payment to creditors. Where the government shutdown mostly affects discretionary spending (think National Parks and furloughed workers), a default would start to affect mandatory spending programs like Social Security and Medicare. Brad Plumer takes a deep dive into whether the — or exactly how — the Treasury Department can prioritize who to pay in the event that the US breaches the debt ceiling, and still avoid a default. The short answer: it’s incredibly complicated and may not be possible. Furthermore, “to acknowledge that payment prioritisation is possible would enable the Republicans to force the president to use it”, says Cardiff Garcia.

Paul Krugman thinks hitting the debt ceiling will be a disaster, even if the economy manages to avoid a Lehman-like catastrophe:

[The government] would be forced into savage spending cuts, around 4 percent of GDP, that wouldn’t just cause hardship (Surprise! No Social Security for you this month!) but amount to a severely contractionary fiscal policy, sending us into recession if it lasted any length of time.

–Shane Ferro

On to today’s links:

Good Points 
The “non-essential” parts of the government that are shut down are actually quite essential – Mike Konczal

Bold Moves   
Not just a safety net, but a floor: the Swiss might give every adult a guaranteed income – Reuters

The Oracle 
Warren Buffett’s Berkshire made $10 billion lending to firms during the crisis – WSJ

Long Reads   
“Life swaps,” “creators” and how San Francisco’s entrepreneurial culture is changing the country – Nathan Heller

Twitter   
At what price Twitter? A wonky guide to its IPO valuation – Aswath Damodaran
Twitter could be valued at $20 billion after it starts trading – Bloomberg

Billionaire Whimsy 
What happens when two billionaires rescue America’s biggest union-owned bank – Max Abelson

Questions to Which the Answer Is No One Knows
“Why is the Fox newsroom full of absurdly giant iPads?” – Gizmodo

Hope/Change/Etc.
“Obamacare may well be the best thing Washington has done for American small business in decades” – James Surowiecki

Alpha
Renowned investor concludes Steve Jobs just wasn’t that nice – Business Insider

Charts
The US loan-to-deposit ratio is at its lowest level in 30 years – Sober Look

Wonks
Raise your hand if you know how the Treasury’s payment system works – Cardiff Garcia

Twitter
“Twitter can be a magical wealth-creation machine powered mostly by hot air” – David Carr

Pivots
JP Morgan wants to get into the dissertation advisory and review business – Inside Higher Ed

Billionaire Whimsy
Bill Gates invests in fake meat – Fast Company

Bitcoin
An analysis of Silk Road’s impact on Bitcoin – Genesis Block

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