Why a Default on the Debt Might Actually be a Good Thing

[The Big Vetolski]

The airwaves and the blogosphere have been filled with warnings of the dire consequences of defaulting on the debt if the deficit ceiling is not raised. The Dude is not very worried about it. Here's why:

First, my personal financial situation. I have a steady job that I know will be around for at least two more years--as to how I know, well, that's personal, you'll just heve to take my word for it. It pays not quite 40K/year before taxes, so I net maybe 32K. I have no credit cards. I have no 401K. I have a pension fund that is being looted so frequently I can't count on it. I have no car payments. I have a savings account with a balance of $5.95 as I type this. I own no stocks.

This morning on ABC's This Week, the new French director of the IMF was asked by Amanpour just what an American default on the deficit would mean. After saying she was convinced that would not be allowed to happen, she said that if it did, well, interest rates would go up, stock markets would tumble, and worldwide unemployment would worsen IF the debt ceiling was not eventually raised.

So, how would all of that affect the Dude here in the short term? Stock market crash? Upset investors? Whining billionaires? The Dude would enjoy the free entertainment, man. No stocks, no bonds, no worries. Rising interest rates? Well, that would mean my savings account would then earn more interest than my checking account, so the Dude would start putting some bucks in there again.
Rising longterm unemployment? Well, that won't affect the Dude for at least another couple of years.

Second, how would a debt default affect most ordinary Americans? Well, they may have to ditch those credit cards as interest rates on them soar to say, 50%. 401K's would lose value, but a LOT of people have already cashed out on those, so that won't matter to them. Stocks? Bonds? Really, man, how many people REALLY make their living off of that stuff? Or even supplement their incomes to any major degree? 10%? 20%? At MOST, so they get to feel our pain, too. Maybe that would be a good thing.

Rising unemployment? Well, the private sector has already failed on that score, so the ONLY thing that will reverse this trend is for governments to directly hire a LOT of people and pay them a living wage. That way, money goes back into the economy, demand increases, and government workers pay taxes, too, so government revenues will go up, man.

IOW, I think most ordinary Americans have more in common with the Dude here than they do with Wall Streeters or the TV talking heads. So bring it on, man. DON'T raise the debt limit, you Republican fanatics! You'll hurt yourselves more than you will people like me.

[some guy]

1. Bad headline

default on the deficit?

try default on the debt. I'll skip reading this thread. Anything that starts as badly as this, usually doesn't get any better.

[The Big Vetolski]

3. Oops my bad. nt

[truth2power]

32. Just an observation....I don't refuse to read something just because

one word is incorrect. There's always the possibility of it being a typo or maybe just a brain-fart on someone's part.

You know, books go through a stringent editing process before they ever go to print. Here on the internet we type something, give it a cursory look-see, hit enter, and there it is, mistakes and all. I think we need to be not so hard on people about this issue. Just sayin'

[some guy]

36. Conversely,

if the OP is criticized for their error, they may do more than " . . . give it a cursory look-see . . . " before they post their next OP.

I treat OPs differently than I treat responses, and I'll continue to criticize what I choose to criticize, with or without your approval.

[DURHAM D]

2. I believe this forum is for Editorials - not DUers opinions. nt

[The Big Vetolski]

4. Really? I thought this qualified as an editorial-mine. Mods, if this is

in the wrong forum, I have no problem with you moving it to the right one.

[Hawkowl]

25. You can editorialize with the best of them

Some very valid points.

[truth2power]

31. I've seen MANY opinions/editorials by DUers in this forum. n/t

[Lucky Luciano]

5. ludicrous and naive. nt

[The Big Vetolski]

6. Why? Prove your point. You sound like a talking head. No details

are given. Only dire warnings and predictions. I have yet to see anything that says a debt default would be so horrible for most people. Why? Because they tell you so? Just like they did with the bank bailout?

Somebody give me some freakin' EVIDENCE!

[The Big Vetolski]

7. That's what I thought. No replies. The silence is deafening. Does

ANYONE really know what a debt default would mean? Or are a lot of people allowing themselves to be panicked by the corporate talking heads who have a vested interest in avoiding it? Demeter, are you out there? Or Paul Krugman or someone who actually knows what the hell they are talking about on this subject?

[creeksneakers2]

8. Do you only care about what happens to you?

[The Big Vetolski]

9. Is THAT the best you can do, oh map of Pennsylvania? Come on,

man. I'm serious. What exactly would a debt default REALLY do to most Americans? Sure, I care about me, and the at least other 90% of Americans who are like me!!!From the admittedly narrow sample of responses I see here, nobody knows what would happen on a debt default except that the stockholders and bondholders would lose money. GOOD! I'm not rich. Are you? I give just as much of a damn about what happens to them as they do about what happens to me. Which ain't squat.

The Dude is starting to think he's on to something here. Somebody prove me wrong with some freakin' FACTS!

[creeksneakers2]

10. 54% of Americans own stock

Everybody isn't like you. If there is an economic collapse, almost everybody will be affected.


http://www.huffingtonpost.com/2011/04/21/stock-market-us-real-estate-gallup_n_851786.html

[The Big Vetolski]

14. 54%? You must be including stock options on pension funds and

401Ks. I'm guessing, but I bet I'm right, aren't I? You cannot mean 54% of Americans actually own stock that they CONTROL. Cite your source, capitalist propagandist. Prove me wrong. Bet you can't.

[Lucky Luciano]

15. Deosn't matter...if you own a pension/401K (you do control the 401K by the way)

...then you are exposed directly.

[creeksneakers2]

23. If the stock in your 401K goes belly up

so does the 401K. You don't mind that happening to people?

[The Big Vetolski]

35. The whole 401k game was gimmicked from the start, man. A ploy

to make rich capitalists on Wall Street more profits. And it worked. As for the stock in 401k's going belly up, no, the Dude does not care. I have no 401k. And every single person I know who had a 401k has already cashed out, so it will affect no one I know. No one.

So if the 401k's going down will help people clamor for slashing the defense budget and raising taxes on the rich to save Social Security, Medicare, and Medicaid, GOOD!

[JDPriestly]

27. How could anyone entrust their money to this Wall Street that

has already cheated so many people? How foolish can you get?

[Lucky Luciano]

12. Maybe I am enjoying my Sunday and not glued to every response on DU?

I saw your response on my iPhone, but I didn't care to type on my iPhone because that is such a hassle for anything longer than a sentence.

The world is terrified of a Greek default first of all. There are chain reactions and domino effects you clearly do not understand at work here. AUS default would be far bigger than a Greek default - which alone would be a clusterfuck.

How about this...The Lehman bankruptcy has been an unmitigated disaster for most Americans. A US default will be a few orders of magnitude worse - I cannot see how you can imagine it to be less problematic than the Lehman default. I will call unemployment to go over 30% if there is a true US default. I am glad that you will not be among the unemployed.

I am in the thick of this...I know plenty about what is going on though I have different motivations admittedly. I care heavily about stocks and bonds and have my bets placed accordingly.

Right now, no Wall St person seriously believes we will default anyway. Just check any time series for US bond yields - they have been very tight lately - though last week there was a jump as a result of the SPX getting to 1350 before Friday's disastrous unemployment results (rising markets correlate well with rising yields). In fact the 4 wk yield last week during the Treasury auction came out at literally 0.00%. When there is a real threat of default the yield curve inverts - it is very steep obviously at the moment because nobody can believe we will be so incredibly stupid as to default. Check a Greek yield curve to see what a defaulting country looks like - the 2 yr was yielding 26-28% last week and the 10 yr was around 15% - that is some seriously inverted shit right there! The US has a 0.00% 1 month rate...to a 0.45% 2 yr..to a 3.05% 10 yr to a 4.25% (or so) 30 yr. No default coming - that is Wall St saying this is all political theater and nothing else.

If you really believe a default is imminent, you should bet against the shortest term government debt in size - I mean massive fucking size. You can short the short-dated maturities with massive amounts of leverage. Also, you should buy way out of the money August VIX option calls because the VIX will go over 100 if the US defaults. Aug VIX futures are around the 22 handle, so we are simply not priced for a default. Wall St is not taking a US Gov't default seriously at all...They know a deal will be done. That said, any such bets would probably fail because whatever broker the trade went through would be bankrupt and SIPC would default as well. Shit out of luck no matter how you bet then. Might as well go long! haha....


Some ramnling here since I am watching tv and editing at the same time. Suffice it to say, you don't know what you are talking about.

[The Big Vetolski]

18. I don't think a default will be allowed, either. I never said I thought it

would actually happen, now, did I? Where did I ever say a default was imminent? (Waiting, as you actually READ my posts) Tick, tick, tick.

You see? I always thought this was all Kabuki theater, that the same corporate interests control both the Republicans and the Obama Administration. And you just confirmed it.

Thanks, dude!

As far as ME betting anything, I have nothing to bet. Except that I am more likely to survive the coming social unrest better than you, because I have less to lose, and I live in a neighborhood of increasingly desperate lower middle class and poor people who actually LIKE me.

They won't like you.

[Lucky Luciano]

19. Meh. nt

[The Big Vetolski]

21. "Meh." Heh. OK, that's cool. We shall see.

Probably sooner than either of us would like. Mozoltov!

[Lucky Luciano]

22. If you are right, I'll owe you a coke. nt

[muriel_volestrangler]

30. You want to know what Krugman thinks:

The president’s response seemed clueless even then. He asserted that “nobody, Democrat or Republican, is willing to see the full faith and credit of the United States government collapse,” and that he was sure that John Boehner, as speaker of the House, would accept his “responsibilities to govern.”
...
Now, Mr. Obama was right about the dangers of failing to raise the debt limit. In fact, he understated the case, by focusing only on financial confidence.

Not that the confidence issue is trivial. Failure to raise the debt limit — which would, among other things, disrupt payments on existing debt — could convince investors that the United States is no longer a serious, responsible country, with nasty consequences. Furthermore, nobody knows what a U.S. default would do to the world financial system, which is built on the presumption that U.S. government debt is the ultimate safe asset.

But confidence isn’t the only thing at stake. Failure to raise the debt limit would also force the U.S. government to make drastic, immediate spending cuts, on a scale that would dwarf the austerity currently being imposed on Greece. And don’t believe the nonsense about the benefits of spending cuts that has taken over much of our public discourse: slashing spending at a time when the economy is deeply depressed would destroy hundreds of thousands and quite possibly millions of jobs.

http://www.nytimes.com/2011/07/01/opinion/01krugman.html?_r=1&ref=opinion

You're remarkably nonchalant about more unemployment. You say the only thing that will reverse the rising unemployment trend is for the government to hire. Yes, but the whole point is that if the government defaults on debt, it won't be able to hire more - it will have to fire more, since it won't be able to borrow money to pay them so easily. The only way it would be able to hire is if, after the default, Republicans in Congress suddenly turned round and said "hey, looks like we've been wrong all this time, and we have to massively increase taxes after all, to keep government spending going!" Do you really think they're going to do that? That they would be irresponsible enough to force a new depression, and then suddenly become economically responsible?

[bhikkhu]

20. What I think would happen

...is that the interest on treasury bonds would have to go up - as they a government backed securities, and a default would hit the government credit rating, then the higher risk would lead to higher bond interest rates. They are so low now that they could easily double or triple.

I don't know the short term impacts, but the long-term one would be that borrowing would be much more expensive. Government borrowing funds medicare, veteran's benefits, military payroll, police, running water, the electric grid, roads and bridges and other infrastructure, schools and universities, etc...

Generally speaking, if its more expensive to pay for things and you are at your credit limit, you have to get less and many times do without. I think its worth a good around to appreciate what government does do, and what anyone thinks we can do without.

...and also, the entire Social Security trust fund is held in treasury bonds - when some people talk about "selective default", those are usually the bonds they are talking about selectively defaulting on.

[JDPriestly]

28. Right now, Americans who save are getting 1% or at most 1.5%

on their savings. So a higher interest rate would be a benefit to people who save money.

Selectively defaulting on Social Security would cost more than just paying those Social Security bonds.

That is because the majority of people on Social Security have no other income. The government would have to pay them some sort of benefit or just let millions of people starve and sleep on the streets. You would have massive rebellion.

So, Social Security bonds will not be where the default is concentrated -- at least not for long.

Wall Streeters have utterly no clue as to what Social Security, Medicare and Medicaid really mean in terms of just holding the country together and keeping domestic tranquility.

It's the fat cat bond holders who will lose their money or make huge dividends depending on how interest rates fall and rise upon default.

The problem is that any politician who defaults on Social Security faces sure defeat at the polls. And if both sides default on Social Security a third party or some sort of opponent for the nomination will appear.

I think the default would teach Wall Street and those who gamble to make their living a wonderful lesson in what money really means.

The Republicans have bragged themselves into a corner. Many of their voters are on Social Security and Medicare. Yet the Republicans have bet on the "no new taxes" campaign slogan. The only way the Tea-Baggers' Medicare and Social Security can be preserved is if there are new taxes. It's kind of a funny thought: What happens when the Tea-Baggers wake up and realize that they avoided new taxes but lost Medicare? I know a very wealthy woman who waited to have some important surgery until two weeks after she became eligible for Medicare. She is, of course, a Tea-Bagger. So Boehner and his buddies may have a rude awakening when all this is over.

[vanbean]

34. For one thing you are not worried about what will happen two years from now.

Two years is not much of a safety valve. You are only worried about the Dude. That is how republicans are. If we don't pay our debts, we are deadbeats. There is a lot of "freakin' evidence" right here in this group of threads.

:eyes:

[Dokkie]

11. I couldn't agree more with your article

It seems like a lot of people have emotional reasons for supporting raising the debt ceiling, they see the republicans and Koch's are against it and the democrats and Wall street are for it so they automatically side with their team. If people would just sit and think about what it actually means to raise the debt ceiling like the republicans have been know to do over the years, they will see how unwise it is.

At the moment, we are paying $400B per year to service the interest on our $14T debt but now it turns out that we cannot meet our payment so the powers that be decide that we should infact increase the debt and thus the interest we pay per year just so we can meet our obligations on the interest. Remember folks, we are only paying the interest and haven't even started reducing the principal. Now what happens when the economy continues to sag? do we raise the debt ceiling again just to continue paying interest? and why call it a debt ceiling if every time we reach the limit, it is raised?

I have no doubt that defaulting on our debt would devastate some americans but the same would happen if we continue this road and still default later in the future after paying so much interest. I agree with you that we should change our constitution immediately and default. The money owed to the federal reserve would immediately be cancel and the debt owed to other sovereign powers with weapon then be renegotiated. I say this because they way the economy is, we just cannot afford to pay the $14T owed, debt owners would just have to take a big hair cut and maybe just maybe they learn a lesson not to lend to the US in the future.

Its better we take the pain now and start a fresh, its just like the home owner who is under water on their mortgage, they can continue paying the mortgage and end up filing for foreclosure or decide its not worth it and move out of the house immediately before sinking more of their income into the underwater house.

Default now

[stuckinarut]

13. I'm of the mind that it HAS to get worse before it gets better.

Look, let's be honest. As fucked (scuse the french) as we are right now, on all fronts, continuing our current system and trying to reform/fix it is only prolonging a bad situation.

Voting for EITHER of the two parties at this point is voting for the status quo. Neither has a substantive plan to put us on the right course, and to a certain extent their separate approaches are really very similar. Two shades of the same hue.

You make some great points on how a total default would not greatly effect you as an individual. I agree completely. As Bob said, "When you got nothing, you got nothing to lose..your invincible now".

I think there is really something to it. I am young, just past my mid twenties. Im glad that you are secure in your current situation as I know many people (family included) that are completely reliant on the system for their livelihood and sustenance. I, on the other hand, am not. Although I am being told I have to keep paying into a system that I will NEVER benefit from, and am currently working a (similar) job to the one I had BEFORE I went to/graduated from college...The difference is, now I make $4/hr. less. I'm not complaining, I am lucky to be employed, and the woman and I try and live as minimalist as we can...but it is definitely tough out there.

I feel where you are coming from, But I hope something does happen. I cannot imagine living to be your age within this system. That thought alone makes me almost throw the hands up, and say fuck it. Why have kids? Why buy a house? These things are fantasies of delusion at this point. And if we were to achieve such LOFTY goals as one day owning a house, I have seen people thrown out of them WHILE PAYING THEIR MORTGAGES. Its insane to me.

Sorry for the rant, but what you wrote really made sense to me. I hope you can see where I'm coming from. Imagine you were 26 again. What would you think?

[The Big Vetolski]

16. If I were 26 again, now, I would get all the credit I could, max it

all out, and either file for bankruptcy or wait for the collapse. Or both. If I even could get any credit, that is. Which I couldn't, even 26 years ago.

Something definitely IS going to happen in the next few years, maybe even in the next couple of years. Let me put it this way: I will be modestly surprised if there is a presidential election in 2016, and I will be REALLY surprised if there is one in 2020. I don't think our current political system has that long to live. It does not work, therefore, it will fail, and be replaced by something else.

What? I have no freakin' idea, dude, and that scares me. Better the devil you know, and all that. But what we've got is not working for a large majority of people, most of whom are used to the system working FOR them at least most of the time. That is no longer the case. That's bad.

So your statement that you cannot imagine living to be my age in the current system is an imminently reasonable one, for I don't think our current system has a snowball's chance in a hot hell of lasting that long.

Don't be sorry for the rant.

When you see the chance, Lead. A lot of people will be looking for leadership they can trust. relatively soon.

[stuckinarut]

17. I will..

Thanks for the response. It is truly a strange time to be living in...here's a little goody from me to you. The ONLY thing that gives me solace.

http://www.youtube.com/watch?v=v7HF69pQDMs

Enjoy!

[BR_Parkway]

29. There's also the possibility that it could crash the financial system - and put

an end to the stranglehold they have on our democracy.

[struggle4progress]

24. A default would make it more costly for US to borrow money, which means even more public cash

would get sucked into debt service

It's Grover Norquist's dream

[JDPriestly]

26. The Fed is trying to keep interest rates low.

That just motivates Americans to try to borrow money. And the credit card offers keep coming -- even when you are no longer working and have almost no income. It is ridiculous.

Higher interest rates will motivate Americans to save and to invest in real things. So, I don't see that a default would affect most of us very much.

The only people who could really suffer are those with adjustable mortgages and those with student loans that have not yet been consolidated into one loan with a definite interest rate. At least that is the way I see it.

I think we would go through a couple of years of really tough times and then people would generally wake up to the fact that we are all in the same boat and we can't get out of it. If one sinks, we all sink. That's the reality.

Maybe the independent and Tea-Bagger Americans would decide to work with those of us who are already sold on working together. And we will get a more liberal program in D.C. and a healthier economy.

So, I am not that worried about a default. I have this feeling that those of us on Social Security would fare better with a default than with the so-called compromise that Obama is seeking.

We don't all have to have the same income. We don't all have the same talents or interests. But we do all have to care about our country and about the weakest, poorest, most vulnerable among us. In the end, we are, each of us, only as strong as that person who is weak, poor and vulnerable.

Next time you see a homeless person on the street, don't turn away in embarrassment. Take a second and think how far, how many paychecks, you are from that person's homeless life. Because most Americans are on the brink. Add up your assets. Subtract your debts. How rich are you really?

How much can you lose? Probably not much. And if we have a default, it is very likely that we will get a liberal government that will provide a minimum of support for the average Joe.

We are still a very rich country. Our problem is the disparity in incomes between rich and poor, not a lack of resources or money.

[truth2power]

33. A comment on this thread, in general. People really are cranky, today. n/t