Comments on: Treasury’s astonishing statement on US default A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: Asiafinancenews Fri, 01 Apr 2011 22:48:42 +0000 Ask China about how to default on sovereign debt ($260 billion worth) and how to do so free from a default penalty:

By: hsvkitty Sun, 23 Jan 2011 20:25:32 +0000 Hmmm,Tuesday accounting…”I’ll gladly pay you Tuesday for a hamburger today ” I wonder how sustainable that is.

Never fear;tweaking the books solves everything.(ask Enron) K6OK20110121

By: klhoughton Sat, 22 Jan 2011 20:58:24 +0000 If Felix owes me $25 and tells me “I’ll pay you back on Friday” but doesn’t do it until the following Tuesday, is that a “default”? (And,if so, is it better if the reason is that we’re both snowed-in until Tuesday?)

By contrast, if Felix contracts to borrow $1,000 from me with the condition that he will give me $25 on the first day of February and August of every month and $1025 five years from now, I’m rather expecting those ten payments, and his missing one of them violates the terms under which I agreed to give him the money in the first place.

If he’s getting $25 in on Thursday and another $25 on Monday, it’s clear which obligation has significant consequences if it’s breached, no?

(That Tim Geithner remains an idiot, and that the policy proposed is idiotic is moot. The standard state and local government practice of moving a payment due on the last day of one fiscal year to the first day of the next does not mean the payment isn’t being made, and sowing confusion in that respect is not supposed to be part of the job description.)

By: TFF Sat, 22 Jan 2011 13:44:38 +0000 Agreed with Akrueger, but the bond markets would surely be happier with “entitlement default” than with “bond default”, just as entitlement recipients would be happier with the latter alternative.

Which begs the question, which constituency is more important to the federal government?

By: Akrueger Sat, 22 Jan 2011 13:08:00 +0000 This blog is about the necessity of an adjective — does “default” mean a bond default, as commonly assumed in finance, or a failure to pay any legally required obligation, as defined in the legal lexicon? Either way, a default by the U.S. Government would be troubling. Troubling for the world economy and troubling for our system of government, which would have failed to complete it’s most basic tasks.

Salmon assumes that default means a bond default. He downplays the economic effects of a default on other obligations. But Treasury has long taken the view that failure to make the payments that Congress legislates (e.g., Social Security) or that are required by contract (e.g., payments to vendors for goods and services or interest on the debt) is a default. Indeed, when I suggested last year that the Congress consider changing the priority of interest payments, I was told by the General Counsel’s office that prioritizing payments to skip some of them is the equivalent of default.

While I agree with Salmon that a default on government obligations other than bond payments would not be as catastrophic as a bond default, I believe it will still spell serious trouble for the world economy. Social Security, Medicare and military expenditures far exceed interest payments on the national debt. Delays in unemployment checks have had noticeable effects on aggregate consumption and GDP; sending IOUs instead of dollars to benefit recipients, doctors, contractors and others would have a far worse effect, especially when the recovery is still fragile.

Congress should set priorities by explicitly legislating changes in spending and revenues that reduce deficits to sustainable levels. Congress must also raise the debt ceiling, which applies to commitments already made. It should not shirk from its  responsibilities by changing the priority of interest payments and leaving Treasury to do the dirty work of figuring out which bills not to pay.

By: johnhhaskell Sat, 22 Jan 2011 08:03:08 +0000 The same logic was used by Dean Rusk and LBJ: “If we don’t defend South Vietnam, the world would recognize it as a failure by the U.S. to stand behind its commitments.” Whoops!

By: EllieK Sat, 22 Jan 2011 02:07:52 +0000 You said
This is a dangerous and ill-advised rhetorical tack to take. For one thing, it’s false: the transfers made from a government to its citizens are qualitatively different from its bond payments to creditors, and if they’re missed the consequences are not nearly as catastrophic.

Very true. And actually, statements like this from the Treasury have the potential (not the certainty, mind you) of becoming self-fulfilling prophecies. This is the sort of comment that ratchets up fears of instability amongst so many already nervous, uneasy domestic and global investors. Yes, it is odd, and troubling.