Opinion

Felix Salmon

The default has already begun

By Felix Salmon
October 14, 2013

The big question in Washington this week is whether, in the words of the NYT, we’re going to see “a legislative failure and an economic catastrophe that could ripple through financial markets, foreign capitals, corporate boardrooms, state budget offices and the bank accounts of everyday investors”. In this conception — and I have subscribed to it just as much as anybody else — the sequester is bad, the shutdown is worse, and the default associated with hitting the debt ceiling is so catastrophic as to be unthinkable.

This frame is a useful one, not least for the politicians in Washington, who seem to have become inured to the suffering caused by the shutdown, and downright blasé about the negative consequences of the sequester. Both of them could last more or less indefinitely were it not for the debt ceiling, which is helpfully providing a hard-and-fast deadline: Congress is going to have to come up with a deal before the ceiling is reached, because the alternative is, well, the zombie apocalypse.

There’s more than a little truth here: I’m a firm believer, for instance, that the president both can and should prioritize debt repayments in the event that the debt ceiling is reached. If we’re going to be so stupid as to hit the ceiling, then prioritizing debt service is the least-worst outcome. But at the same time, the situation is less binary than it looks, not least because the US government is already in default on its obligations.

The best way to look at this, I think, is that there’s a spectrum of default severities. At one end, you have the outright repudiation of sovereign debt, a la Ecuador in 2008; at the other end, you have the sequester, which involves telling a large number of government employees that the resources which were promised them will not, in fact, arrive. Both of them involve the government going back on its promises, but some promises are far more binding, and far more important, than others.

Right now, with the shutdown, we’ve already reached the point at which the government is breaking very important promises indeed: we promised to pay hundreds of thousands of government employees a certain amount on certain dates, in return for their honest work. We have broken that promise. Indeed, by Treasury’s own definition, it’s reasonable to say that we have already defaulted: surely, by any sensible conception, the salaries of government employees constitute “legal obligations of the US“.

Conversely, if you really do expect zombies to start roaming the streets the minute that the US misses a payment on its Treasury obligations, you’re likely to be disappointed. Yes, the stock market would fall. But the price of Treasury bonds would remain in the general vicinity of par, and it might even go up if Treasury announced that past-due interest would be paid on all debt at a statutory rate of 8% per annum. Even when it’s Treasury bonds themselves which are the instruments in default, Treasury bonds remain the world’s flight-to-quality trade, and the expected recovery on all defaulted Treasury obligations would be 100 cents on the dollar — or more.

The harm done to the global financial system by a Treasury debt default would not be caused by cash losses to bond investors. If you needed that interest payment, you could always just sell your Treasury bill instead, for an amount extremely close to the total principal and interest due. Rather, the harm done would be a function of the way in which the Treasury market is the risk-free vaseline which greases the entire financial system. If Treasury payments can’t be trusted entirely, then not only do all risk instruments need to be repriced, but so does the most basic counterparty risk of all. The US government, in one form or another, is a counterparty to every single financial player in the world. Its payments have to be certain, or else the whole house of cards risks collapsing — starting with the multi-trillion-dollar interest-rate derivatives market, and moving rapidly from there.

And here’s the problem: we’re already well past the point at which that certainty has been called into question. Fidelity, for instance, has no US debt coming due in October or early November, and neither does Reich & Tang:

While he doesn’t believe the U.S. will default, Tom Nelson, chief investment officer at Reich & Tang, which oversees $35 billion including $17 billion in money-market funds, said that the firm isn’t holding any U.S. securities that pay interest at the end of October through mid-November because if a default does take place, “we’d be criticized for stepping in front of that train.”

The vaseline, in other words, already has sand in it. The global faith in US institutions has already been undermined. The mechanism by which catastrophe would arise has already been set into motion. And as a result, economic growth in both the US and the rest of the world will be lower than it should be. Unemployment will be higher. Social unrest will be more destructive. These things aren’t as bad now as they would be if we actually got to a point of payment default. But even a payment default wouldn’t cause mass overnight failures: the catastrophe would be slower and nastier than that, less visible, less spectacular. We’re not talking the final scene of Fight Club, we’re talking more about another global credit crisis — where “credit” means “trust”, and “trust” means “trust in the US government as the one institution which cannot fail”.

While debt default is undoubtedly the worst of all possible worlds, then, the bonkers level of Washington dysfunction on display right now is nearly as bad. Every day that goes past is a day where trust and faith in the US government is evaporating — and once it has evaporated, it will never return. The Republicans in the House have already managed to inflict significant, lasting damage to the US and the global economy — even if they were to pass a completely clean bill tomorrow morning, which they won’t. The default has already started, and is already causing real harm. The only question is how much worse it’s going to get.

Comments
68 comments so far | RSS Comments RSS

My money is in my safe…NOT anywhere it will get suck into this hole..

Posted by Callah | Report as abusive
 

also..This is about the Derivatives Market. A bunch of the GOP who have shut down the government “Hedged against the United States not making their credit obligations” like they did to France in 2009 and the “tainted credit swap and the UK with the LIBOR scam in 2009, and then two hours before the Government Got shut down, they changed the rules and made Cantor the only one who can re-open the Government. And didn’t BOTHER to tell anyone about the rule change till 12 days LATER. Now it’s all about whatever Hairball thing they can come up with to ensure that the US will default on Thursday, so they will trot out every freak they can as a distraction. So spread the word about what they are up to and lets all see if we can “Save the world” from financial ruin by forcing these Vampires OUT into the light of day. Share this EVERYONE..

Posted by Callah | Report as abusive
 

Withdraw cash and keep it under your bed. You will gain when all prices drop during the default.

Posted by WJL | Report as abusive
 

Good points.

Not sure sand can be extracted from Vaseline. What a show our politicians have put on for the world. I’m embarrassed for actually…. all of them. The Fold we’ve grown to expect extended this game of chicken.

Posted by SaveRMiddle | Report as abusive
 

Seeing as the sequester was written into law in 2011 — like the “shut down”, it took effect not because anybody at the time put it into effect, but because they failed to agree how to effect something different — I’m not sure who felt they were promised anything after September of 2011 that they felt they were due in 2013 and didn’t get because of the sequester, but such a promise was ultra vires on the part of the person making it.

Two or three years ago you were making arguments the gist of which were “it’s good that people no longer believe in risk-free assets”. Are you saying you no longer believe that? I wonder whether Taleb does.

Posted by dWj | Report as abusive
 

Note that the market went UP on Monday…obviously it thinks a deal will get done….

Posted by mfw13 | Report as abusive
 

Not as simple as one would think. That is why this is opinion. Here are the facts on how the treasury pays bills….NOT OBAMA.

http://www.washingtonpost.com/blogs/wonk blog/wp/2013/10/07/if-we-hit-the-debt-ce iling-can-obama-choose-which-bills-to-pa y-2/

Posted by cynzke | Report as abusive
 

I know you all are stuffing your beds with cash right now, but that is probably not the best thing to do with it if it decreases in value. Better to go buy land or personal items like gold, jewelry (get something for your wife). Cost of items will go up. Then when you are making 120/hr.. it really will only be 12/hr. So everyone will be poor. And it will be called Middle Class!

Posted by ddy | Report as abusive
 

There is no doubt that we will default. That was the plan the entire time. The Tea party right wants to bring down the government. What better way to do it. We are allowing ourselves to be driven off the cliff by a minority party, who knows that the handwriting for the end of life as they know it, is on the wall and they will destroy the entire nation rather than relinquish white power.

Posted by RichinCal | Report as abusive
 

DWJ makes some fantastic points.

I was at the Northern Trust investment conference last week and the manager of their cash funds said they have also minimized holdings of treasuries that pay or mature around October 31st to minimize disruptions from default. They even stopped buying bonds which pay or mature in December thinking that a 6 week deal will put us back where we are today around that time. They made these changed because they said they have a duty to their investors to be ready for anything however unthinkable or remote.

keep up the great coverage on this!

Posted by y2kurtus | Report as abusive
 

Here’s what will happen: The Senate will craft a compromise bill. Ted Cruz will go through the futile motions of delaying votes on the bill, which he can do thanks to various arcane parliamentary rules of the Senate, until the end of the day Friday. In reality, the Treasury can scrape through the business day Friday without setting the hair of the world on fire. Especially when everyone is told that this is a purely symbolic delay that will expire over the weekend. The bill will be sent to the House on Saturday, futzed around with, and passed on Sunday, in time to save the markets Monday. Cruz, who is nowhere near up for reelection, will get alllllllllll the “blame,” while he simultaneously claims he held out as long as he could (true enough.) That’s precisely how it will happen.

Posted by tommyjonq | Report as abusive
 

Here’s what will happen: The Senate will craft a compromise bill. Ted Cruz will go through the futile motions of delaying votes on the bill, which he can do thanks to various arcane parliamentary rules of the Senate, until the end of the day Friday. In reality, the Treasury can scrape through the business day Friday without setting the hair of the world on fire. Especially when everyone is told that this is a purely symbolic delay that will expire over the weekend. The bill will be sent to the House on Saturday, futzed around with, and passed on Sunday, in time to save the markets Monday. Cruz, who is nowhere near up for reelection, will get alllllllllll the “blame,” while he simultaneously claims he held out as long as he could (true enough.) That’s precisely how it will happen.

Posted by tommyjonq | Report as abusive
 

Even if your cash is safe, this will lead prices up. No one will be untouched by this.

Posted by mmcgrew | Report as abusive
 

total market value of US listed stocks is $60 Trillion’
A default on Friday AM will drop the market 10% or 6 Trillion dollars. Does anybody think the Overseas market investors [China ] will wait a week to see if the interest will be paid? The GOP wants a million dollar medical tax repealed and will bet 6 trillion to get it… idiots.

Posted by friscoeddie | Report as abusive
 

Felix, why are you perpetuating this fantasy that there is any way to “prioritize debt repayments in the event that the debt ceiling is reached”. The computers that processes the MILLIONS of checks per day, pay them on the basis of “first due, as due”. There is NO WAY to re-program the computers to pay some and not others [these payment are made in conjunction with many other computers that link to the main one].
The last time we came within a 24 hours of the debt ceiling before “passing it just in time to avoid default”[during the 3 Mile Island nuclear plant disaster], it cost the United States a 0.6% increase in interest that the government has to pay on its bonds. As a result of the “near miss”, by government studies, it has cost the US over 12 BILLION DOLLARS in additional interest costs [FOR NO REASON!] over the first 10 years after it happened – and that rate hike has not yet been reduced. [See Rachel Maddow's program today for more details.] And ALL of that money comes right out of the pockets of taxpayer’s pockets – for NO PURPOSE.
I do agree the the default has ALREADY begun because investors are smart, and not myopic, to the problems that are devastating the country because of the irresponsibility of the fringe conservative members of the government. They are demonstrating to anyone who bothers to look, and the investors are watching carefully, that the US can not be trusted to pay its bills as long as this pointless political posturing is going on – and once the interest rates are raised, history shows they will not go back down and we the taxpayers will be footing the bill for decades to come.
So much for the party of “financial responsibility”.

Posted by portermaster | Report as abusive
 

Mr Salmon;
“There’s more than a little truth here: I’m a firm believer, for instance, that the president both can and should prioritize debt repayments in the event that the debt ceiling is reached. If we’re going to be so stupid as to hit the ceiling, then prioritizing debt service is the least-worst outcome.”

Please do not take offense, but you have to be disabused of the idea that this is possible let alone conceivable in the year of our lord, 2013. The only folks who share the belief this could be done are members of the Tea Party or the right’s media echo chamber. The only suggestion further down the rabbit hole is that of Republican Rep Yoho, “…a default might be good for us.” Prioritize? As the now common response the the suggestion of prioritizing, “are you volunteering to tell seniors that we’re paying China but will not be able to pay them their Social Security benefits?”

I genuinely do not mean to be harsh, and I respect you may believe in the idea, but the suggestion of prioritizing payments profoundly shows a deep misunderstanding of governments role in the US economy, and the US Treasury system and mechanics, its scale and complexity.

Please, doubt my comments. Research the matter for yourself. Regards.

Posted by Mabeleen | Report as abusive
 

Can you sell your bonds? I guess that depends on whether anyone is buying. And I guess that depends on how the world reacts to a default. The government won’t have the funds to buy your bonds at par, or even at discount. I guess there will always be a price for a defaulted bond, but it might be a steeply discounted price. What price did the holdouts pay for Argentina’s bonds after their default?

The problem with any forecasts is that no-one really knows how the banking system works – some people know a lot about bits of it, but it is so interconnected that no-one understands what those connections are. The GFC was so scary because no-one knew what was going to happen next. This time it will be much scarier, and the worlds’ governments have no money to bail out the banks this time around.

Posted by SunbeamRapier | Report as abusive
 

Until such time as the US House members who favor extortion as a tool are replaced, we will continue to see this tool used to the detriment of our nation…. they were elected to “govern”, but have turned their tenure in the US House into an ideological struggle to change for the worse the way our government works.

These few vacant heads don’t realize or care that everyone loses in their scenario… God help us.

Posted by heardthisbefore | Report as abusive
 

What is even more insidious is this is really an attack on the tenets and principles of democracy.

It seems that the Tea Party nutters only want democracy if it gives them what *they* want. If the people elect a President they don’t like, they do everything they can (including lie) to undermine, attack, and destroy any hint of progress. it is the same in the UK right now.

In the US you have this Tea Party movement undermining the government, in the UK it is the Eurosceptics who want out of the EU. In both cases, it appears to be a classical divide and rule strategy, like a pincer movement by the far right on democracy. Who is behind this is unclear, but follow the money to get some clues; there are a lot of very rich and shady donors to the more mainstream right wing political parties in both countries and the two far right pressure groups within each mainstream party do seem to be incredibly well funded.

As for those thinking keeping cash in USD under the bed is a safe option because they think the value of the Dollar won’t be affected by all this, they may have a shock coming and need to wake up and smell the coffee!

Posted by FifthDecade | Report as abusive
 

“I’m elected to get MY people what they want” is NO WAY to run a republic!

Hopefully, the Tea Party will split off from the Republican Party and be annihilated.

Posted by BenRound | Report as abusive
 

Wow. What a headline. What a conclusion.

What an overwhelming void of facts, proof, or data.

My gosh Rueters…what ever happended to facts and actual reporting?

Oh yeah… here’s one for you:
- Many people travel on vacations.
- People travel o the moon.
- Therfore, many people travel to the moon for vacation.

WHY ARE YOU NOT REPORTING THIS? The conclusion is undeniable!!!

Posted by idiot_wind | Report as abusive
 

The difference between truth and fiction is that fiction must deal with the possible, truth doesn’t. Mark Twain.

I suppose it is a possibility that the president or the US Treasury could prioritize payments. But the only folks who share the belief this could be done are members of the Tea Party or the right’s media echo chamber. OR possibly some who cannot grasp the scale or complexity of the systems or how it works. The only suggestion further down the rabbit hole is that of Republican Rep Yoho, “…a default might be good for us.”

Reflect on the real world. Treasury processes hundreds of millions, billions of transactions a day. NASDAQ or NYSE exchanges do billions of transactions just during business hours quite simplistic compared. Treasury never stops. Only God knows the number of massive enterprise super scale computers/servers at regional centers across the US. Transactions are processed as they come in. Buy, sell, interest payments, bid/ask, currency transfers, exchange rates, time zones … who can even begin to list all the types of transactions. You ‘firmly believe’ one type of payment can be prioritized over another? Software developed over, 40-50+ years?

I suppose it is a possibility as Mark Twain said.

Posted by Mabeleen | Report as abusive
 

“The Fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. I therefore intend to oppose the effort to increase America’s debt limit” –Senator Barrack Obama 2006

Posted by Rls2be | Report as abusive
 

The difference between truth and fiction is that fiction must deal with the possible, truth doesn’t. Mark Twain.

I suppose it is a possibility that the president or the US Treasury could prioritize payments.

Posted by Mabeleen | Report as abusive
 

The difference between truth and fiction is that fiction must deal with the possible, truth doesn’t. Mark Twain.

I suppose it is a possibility that the president or the US Treasury could prioritize payments.

Posted by Mabeleen | Report as abusive
 

Congressman Alan Grayson, (D) FL has a solution to the debt ceiling crisis….. http://reut.rs/1fZRXxN

Posted by club_ed | Report as abusive
 

Rome is burning.

Posted by CannibalCat | Report as abusive
 

#FifthDecade

Kills me how many people don’t realize that this statement is also true:

“It seems that Obama and Senate dems only want democracy if it gives them what *they* want. If the people elect a republican, they do everything they can (including lie) to undermine, attack, and destroy any hint of progress”

All parties involved are equally at fault here.

Posted by TaterSalad1077 | Report as abusive
 

“Right now, with the shutdown, we’ve already reached the point at which the government is breaking very important promises indeed: we promised to pay hundreds of thousands of government employees a certain amount on certain dates, in return for their honest work.”

So you’re arguing that we can never reduce funding in an appropriation if it will reduce government payroll? Or are you arguing that, instead of delaying payments to government staff, we should fire them instead?

“The US government, in one form or another, is a counterparty to every single financial player in the world. Its payments have to be certain, or else the whole house of cards risks collapsing…”

Clearly the market is terrified of the US government’s current behavior: Witness the staggering, crushing, ruinous burden that a 12 basis point rise in the 10 year note is demanding. Or the stock indices that have plummeted all the way to the center of their trading range.

Look, it’s bad enough that we have to endure this level of stupidity from Congress and the White House. There is certainly real danger here and this is certainly no way to run a government. But wouldn’t it therefore be a bit more prudent for financial journalists like you to dial back the hysteria and hyperbole, so as to, you know, actually reduce the chances of bringing about the situation you claim to be so frightened of?

Posted by TheRadicalModte | Report as abusive
 

Obama seems to have discovered his backbone today. He’s got Boehner and his merry band of nutcases on the run.

Obama can’t afford to cave on the latest GOP negotiating points designed to smash the solid Democratic coalition in the House and the Senate. Boehner has to take the nation over the cliff’s edge because he’s a toothless tiger, and he knows it. He the blackmailer is himself the target of blackmail.

If the president caves in, his party will abandon him like rats fleeing a sinking ship. They might even join the Taliban Tea Party to impeach and remove him.

Posted by Philo526 | Report as abusive
 

Great post. Just one very small point to add. You refer in your last paragraph to “Washington dysfunction.” I wish this term could be banished from our collective vocabulary, at least for the time being. As you know quite well, I realize, what is going on right now is not a general “Washingtong” dysfunction but a very specific madness in the GOP. We need to make sure that our language is clear about this.

Posted by f.fursty | Report as abusive
 

Interesting prose, but the only analysis one need perform to prove it wrong is to look up the S&P index, which is near all time highs. If the market was really reprising risk, as the author suggests, the market would not be at these levels, not even close.

Posted by Pod | Report as abusive
 

I’m especially concerned about the effects of a default upon the interest rate derivatives market. Presently valued at over 500 TRILLION.

You want to talk about Armageddon?

Posted by Philo526 | Report as abusive
 

Yes – only the republicans are at fault!

Barack “I will not negotiate” Obama has no part in the shutdown/default ordeal.

Imagine if instead of getting infront of the teleprompter to lambast republicans for 3 weeks, he actually did his job and sat down to talk with them…

The republicans are not the only ones at fault here. The Dems are just as willing to hold the American public/economy hostage to get 100% of what they want. To think otherwise is simply foolish.

Posted by TaterSalad1077 | Report as abusive
 

This default is a Wreck on Rails, placed on the rails forty years ago. Moynihan, on floor of the Senate back then: “God help us when they realize what we did to them.”

Folks still eaiting for a miracle, which at this point would require a time machine to go back forty years and fix this mess without massive displacement.

Didn’t do it, and so what is left is Reality kicking in the doors.

Posted by frediano | Report as abusive
 

So much for the notion that the Republican Party is the party of fiscal responsibility.

Posted by expatjourno | Report as abusive
 

Callah may have a real point. Follow the money and figure out who is winning. Someone is winning; Boehner, Reid, they are all in it for the money in my mind.

Posted by oldfool0 | Report as abusive
 

where “credit” means “trust”, and “trust” means “trust in the US government as the one institution which cannot fail”. The USA does have many toxic institutions. Those pestilent, toxic and greedy corporations, have just outstayed their welcome.

The only question is how much worse it’s going to get? Depends on the greed machine. Goal = Peace, freedom and justice.

Posted by 2Borknot2B | Report as abusive
 

When the government undermines the nation, the only sensible thing to do is to begin undermining the government. Because of baby-boom demographics, these budget showdowns are only just beginning. It is past time that the US federal government began to set realistic budget priorities, and this is the first step in that process.

Posted by NickJihad | Report as abusive
 

Sorry can’t get past the fact that someone named Felix wrote this!

Posted by GrtGooglyMoogly | Report as abusive
 

“Right now, with the shutdown, we’ve already reached the point at which the government is breaking very important promises indeed: we promised to pay hundreds of thousands of government employees a certain amount on certain dates, in return for their honest work”

Really Felix? Honest like the IRS targeting other American Citizens who do not agree with this Marxist regime! That kind of honest GUBmint worker! Tough crap on them, let them find real jobs where they actually have to work hard for a living…

Posted by GrtGooglyMoogly | Report as abusive
 

Good points Felix, but why say that the ‘default’ has begun instead of saying that the system is beginning to realize that the spending binge has to stop sometime?

And when it comes to ‘trust’, how can anyone trust a debtor who spends more than they earn?

Posted by reality-again | Report as abusive
 

It is clear from Section 4 and 5 of the Fourteenth Amendment, that the US Government is pay it’s lawful obligations and Congress is to make provisions to do it. Since the constitution the highest law. Unless other things change, or the courts fully packed with tea party sympathizers, the courts will have to declare the House actions unlawful in some way. Such as striking down laws or giving the house a court order.

Posted by Samrch | Report as abusive
 

Seems like the perfect time to inact EXECUTIVE ORDER 11110…. The act signed by JFK on 4th June 1963…. which takes back the right to print money to the government…. time to end the Banksters ponzi scheme.

Posted by lex_70 | Report as abusive
 

@reality-again: ‘Spending binge has to stop’… Yes, however, it was this same House of Representatives that has already approved all this spending (that it now says is no good)…. So why did they approve it in the first place? The Constitution says that ALL spending must begin the House. You went to dinner, now you don’t want to pay the bill… talk about welfare cheats! You’re it…

Posted by edgyinchina | Report as abusive
 

Healing running debt with the default is like healing runny nose with a guillotine, as French expression suggests…

Posted by UauS | Report as abusive
 

@FifthDecade,

I’ve always enjoyed reading your thoughtful well written posts. Your lead “What is even more insidious is this is really an attack on the tenets and principles of democracy” got me thinking. Are their any acceptable limits to democracy? If a clear 55% majority grants democrats full control of the government shortly could that majority implement a 75% tax rate on earnings above 1 million and a 90% rate above 10 million? What about a 90% tax on estates over 10 million… Just take nearly all of the money the Koch brothers make each year going forward and then nearly everything they own when they die… They would still earn 100 million dollars a year after taxes, their heirs would still inherit something like a billion dollars. Think of all the good that new money could do in the hands of benevolent public servants.

In the last election Democrats won a clear majority of votes cast. Only the decades old gerrymandering of house districts to create dense pockets of minority voters to allow for a more diverse congress allowed the GOP to retain the house. The demographics for republicans (as they existed in 2004) simply can’t be overcome… the population of people dependent the government is simply exploding upward and the greatest generation is dying off quickly.

My politico friends tell me that some of those right wing ideologues driving the bus off the cliff will do so knowing that they can’t hold the house in the next election, and are even likely to yield a super-majoity in the senate as well. Looking down the barrel of being effectively out of government for a decade they have decided that a scorched earth policy today, before they become totally irrelevant, is the least bad option.

If the far right can show the world in 2013 that the U.S. government can’t make good on the obligations demanded by the majority, we can have the economic shock now with Debt/GDP around 100% but prevent a much worse shock a decade down the road by which time debt to GDP would have otherwise been in the 150% range. Think the UK vs Greece. No good option on the table there, but one is clearly less bad than the other.

Posted by y2kurtus | Report as abusive
 

Wow, so I should get out of all the financial markets and convert everything to physical US Dollars?…you mean those Federal Reserve Notes (backed by debt) that will become even MORE worthless as time goes on? LOL.

Um, hey everyone, I hate to be the one to tell you, but if you haven’t already liquidated all your stocks and bonds and converted them to physical hard assets like gold and silver…you’re screwed. Okay, well you might have a few days left, if you’re lucky.

Posted by RD137 | Report as abusive
 

Mr. Salmon and commenters from BOTH sides of the aisle seem more interested in ranting and finger-pointing than identifying and resolving the cause(es) of this mess. Have we not common cause in it’s resolution?

To begin, our author here admits that he believes “…the sequester is bad, the shutdown is worse, and the default associated with hitting the debt ceiling is so catastrophic as to be unthinkable.” I don’t know what alternate universe he lives in, but that’s simply not reality here.

I don’t think a rational person can believe in good faith that the United States can keep spending in excess of available revenue forever. Presuming this true, and consensus will eventually be reached that excess spending MUST stop, answers to three more questions are necessary: (1) HOW MUCH of curent spending is “excess”, (2) WHICH of said spending, and (3) BY WHEN must it stop?

In this context, I think the sequester is the best thing to happen in a long, long time. Both parties agreed to it in the belief that they could keep it from ever happening. They could not agree to any alternative, and so it happened. “We, the people” needed it.

It has reduced government spending! Not by the amount both parties believe necessary, and not in a manner either side likes. This makes it, in my opinion, fair. Neither party, neither side “won”. But so long as it is in effect, “We, the people” are winning. If it forces liberals and conservatives to forge some “grand bargain” of similar or greater spending reductions it will have accomplished something nothing else has in decades. It will have kept our government from growing, however little, for a time.

Mr. Salmon claims to be a firm believer…that the president both can and should prioritize debt repayments in the event that the debt ceiling is reached. At present, I’m inclined to forgive him for irrationally believing that hitting the debt ceiling is “bad”. I say “irrationally” because otherwise Mr. Salmon must be counted among those who have NO RESPECT for ANY “debt ceiling”, fundamentally expecting such abstraction an unimportant, arbitrary figure which can and should be ever adjusted uoward. Now THAT would be stupid.

He understands that the U.S. must NOT repudiate sovereign debt. He also seems to understand that substantial sums of U.S. spending is for WANTS, and not NEEDS (you guess which).

To prioritize is to legitimize, and so if debt limit negotiations are what is necessary to FORCE this government and “our leaders” to separate SOME of the “wheat” from the “chaff” by prioritizing payments, SO MUCH THE BETTER; both now and in the long run. Politicians, governmental agencies and their leigons of bureaucrats KNOW that serious review of what this country is spending and what for threatens the growth, culture and very existence of countless federal feifdoms whose purpose has long been lost and who have NEVER been questioned or accountable for money spent.

Here’s a radical idea from an arbitration ruling: “It is inappropriate to use repetition or volume in order to present opponents with a fait accompli or to exhaust their ability to contest the change.” This is precisely what happens when Congress “authorizes” specific expenditures without individual review. I suggest such practice by it’s very nature unconstitutional, and that such sums thus obligated are NOT bona fide “legal obligations of the U.S.”.

I would further argue that irresponsible Congressional actions and inactions going back decades are responsible for the fact that U.S. institutions AND the U.S. dollar are clearly not “without risk, and have not been in recent memory. The single reason that our dollar is the “reserve currency of the world is NOT that it is so solid a value, but that it is the best of available rotten fiat currencies. At this point in history anyone truely believing that “…the US government [is the one institution which cannot fail” is either incompetent or an idiot.

Other economic factors having to do with the effect of cheap computers and soft ware (which have infinitely increased the effiency and effectiveness of production while greatly reducing the number of employees necessary) and globalization/free trade (which gives products from poor countries meaningful competitive access to rich markets) will slow U.S. “growth”. That will slow growth elsewhere. In countries with an exploding population they cannot educate or employ, unemployment-driven unrest will create increasing instability.

The U.S. is very fortunate to have Canada as it’s neighbor to the north and fish to the east and west. Our only armed border will likely be to our south (if we’re smart, we will mine it).

Posted by OneOfTheSheep | Report as abusive
 

The derivatives market is the one that scares me – the whole $600tn notional value of this market is underpinned by US government securities rated at AAA. If these instruments get downgraded every meaningful bank in the world will suddenly be unable to collateralise their outstanding swaps and associated hedges. The world has gone mad!
http://getwd50.blogspot.co.uk/2013/10/we re-mad-as-hell.html

Posted by daviddenton | Report as abusive
 

The only way to remove sand from Vaseline is to arrange a meltdown!

Posted by daviddenton | Report as abusive
 

We would not have a debt ceiling if we lived within our means.

Posted by kevivoe | Report as abusive
 

@Callah: What kind of money is in your safe? Whose image is on your money? And what guarantees its worth?

Posted by matthewslyman | Report as abusive
 

False equivalence on this debt ceiling piece. It’s not “the politicians” who are “inured to suffering” it’s House GOP.

Posted by SocraticGadfly | Report as abusive
 

@OneOfTheSheep, I agree that the sequester was the best thing to come out of Washington in recent years. There is simply no way the parties could have agreed to spending cuts without their hand being forced.

Funny how Felix is no longer railing about the “Fiscal Clifford”. A lovely visual of apocalyptic doom, yet we went over that cliff — and kept plugging along. Contrary to the “spend and grow” school of thought, the deficit situation has actually improved by CUTTING spending.

That said, defaulting on the debt would truly be an economic disaster. We still need to borrow money weekly, both to support continued deficits and to roll over the existing debt. Let’s not do anything that might threaten the favorable interest rates we pay on that debt.

Posted by TFF | Report as abusive
 

I take it economics and history aren’t really required for journalism at Reuters? We’ve been on our way to defaulting for over 100 years when we first started spending beyond our means in the late 1800s and early 1900s. John Piers Morgan had to bail out the US Government. Twice. The 16th Amendment was passed but this did little to resolve the problem because more money coming in meant more spending and it was only compounded by both World Wars, the New Deal and The Great Society along with a constantly growing “defense” budget (should be called the Department of Offence. We had to create a Department of Homeland Security because the DoD actually does so little defense)

We’re so deep I really three options

1) This brinksmanship evokes such a public outcry that we have to figure out a way to make ourselves solvent or at least sustainable and not rely on the two dozen or so debt ceiling increases to just keep working

2) Inflate our money to pay down our debts infuriating the rest of the world and destroying the dollar and the economic well-being of most everyone. Weimar Republic anyone?

3) Refuse to pay our debts and use our military to deter debt collection. We screw the whole world over, ruin our credit and become the world’s most hated nation by FAR

Posted by elroydb | Report as abusive
 

In my view, it’s even worse than Felix suggests. The entire post WWII period – the last 65 years – business was done world wide in US dollars. Which created a demand for dollars, which, in turn, created a demand for American debt, allowing us to borrow money which the government could then spend (frequently foolishly). In the last couple of years and for more reasons than simply our obvious fiscal irresponsibility, we’ve seen bits of the world begin to move away from the dollar as the lingua franca of business. Which will reduce the demand for dollars, which will raise our borrowing costs, which will impoverish us all.

Posted by majkmushrm | Report as abusive
 

I agree with @OOTS & @TFF, the sequester was good for all of us and fairl. It should be done again, every year.
I don’t think I agree with @majkmushrm’s logic though, but being on psilocybin mushrooms might affect logic. probably in a positive way when it comes to politics.

Posted by tmc | Report as abusive
 

Well, @tmc, you’re welcome to disagree with my logic but I remember being struck by PJ O’Rourke’s cluelessness in his book Eat the Rich. He discusses any number of nations and how their economies suck but their numbers aren’t that different from the US’s. I thought at the time C’mon, PJ, you’re not stupid. The Romanians NEED US dollars but who the hell needs Romanian leu? Many, many people don’t appreciate the benefits of having the world’s reserve currency, especially since we’ve not done a good job of executing our responsibilities associated with that benefit.

Posted by majkmushrm | Report as abusive
 

@y2kurtus,

“…benevolent public servants.” Now THERE’S an oxymoron if I ever saw one!

Posted by OneOfTheSheep | Report as abusive
 

@y2kurtus,

“…benevolent public servants.” Now THERE’S an oxymoron if I ever saw one!

Posted by OneOfTheSheep | Report as abusive
 

in the current environment…..

Partisan Politics supersede the common good….

I’m running for office… brother, could you spare 10 million or so..?

Posted by rikfre | Report as abusive
 

How long can we keep going into debt and printing money?

Posted by CraigPurcell | Report as abusive
 

@CraigPurcell,

Only so long as China and others believe a dollar is still worth a dollar, a concept under attack 24/7 by our own government’s printing presses.

It’s a swindle of breathtaking efficiency and stupidity by the American government. It is purposely counterfeiting and then exchanging billions of dollars in purchasing power worldwide.

The cost, other than to international faith and trust in American currency, is only the direct expense of paper, ink and production labor. If this were the work of FOREIGN government, our military’s ships and planes would be there in a heartbeat forcing a “cease and desist.

Unfortunately, as Walt Kelly said in his “Pogo” comic strip years ago: We has met the enemy and he is us”.

Posted by OneOfTheSheep | Report as abusive
 

I’d be interested in knowing the opinions of Mr. Salmon (and anyone else) on the ideas set forth by Rodger Mitchell’s in his blogs on Monetary Sovereignty at http://mythfighter.com/2009/09/07/introd uction/ and linked documents. Thanks.

Posted by jstoops | Report as abusive
 

@jstoops,

This Bozo believes in free money, no fiscal responsibility, there’s always a bigger fool to buy U.S. Dollars, and the very idea of a government living within it’s means inconveniently old-fashioned. He is convinced that there exists a “perpetual money machine” and is trying to sell that idea as economic theory. Please.

It’ a little like jumping out of an airplane without a parachute. You and the person WITH a parachute have exactly the same trip, view, and experience all the way down to the last. But he lives. You don’t. BIG DIFFERENCE!

Posted by OneOfTheSheep | Report as abusive
 

@kevivoe,
Completely agree with you.
Underneath the superficial political circus the issue is much deeper.
The constant quantitative growth economy, the excessive overproduction/over-consumption is simply unsustainable within a closed and finite natural system.
And before the natural resources the human resources are already depleted, symbolized by social inequality, unemployment, unbearable public and national debt burden, and a host of domestic and international conflicts, problems growing out of this system.
As you suggested the solution is living within available means, adapting to the global, integral, natural system we exist in.

Posted by ZGHerm | Report as abusive
 

The posturing of the egocentric leadership “on the Hill” is despicable. They make too much money to do too little work and are only interested in promoting their private agendas (Reelection, Power, Money, Reelection,….) As an active constituency (NOT Tea Party), we MUST take back our government by voting out all incumbents and create “Term limits by the People, for the People and of the People” to remove the decaying odor of those gluttonous relics who have been feeding at the trough for far too long. We need people to lead our great nation out of this quagmire through compromise and respectful dialog with a genuine desire to serve the interests of the American People First & Foremost through reinstatement of the core values of The Declaration of Independence and The Constitution of the United States of America (51% Rules)!

Posted by BigKidBrother | Report as abusive
 

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