Michael Maiello's picture

    So, We Default?

    By Michael Maiello on Mon, 10/07/2013 - 1:38pm | Politics

    There are two kinds of borrowers who default on their debts.  One type defaults because they cannot pay.  It is typical to say that they have over borrowed but it is easily as likely that some sort of catastrophe has destroyed the borrower's earnings power, perhaps permanently.  Then there are defaults of choice.  A borrower decides not to pay, even if they have the means.  Perhaps they feel that they were swindled by the lender and that the debt is thus invalid.  Or, maybe they just don't want to pay.

    Any thoughtful lender realizes that calamity can strike a borrower, turning a once manageable debt into one that cannot be paid.  That is a risk of lending money.  Such circumstances are regrettable, but understandable and ultimately acceptable.  If intent to pay is not the issue, then accommodations can be made.  Argentina can default but still participate in the world financial system.

    If there is no intent to honor debts, and no argument made against the validity of those debts, then the lender has a whole other issue.  They are dealing with a question of character, not financial means.  The United States can pay all of its debts.  Technically, since it issues its own currency, it could prepay all of its debt tomorrow.  Even without resorting to money printing, the U.S. could likely tax its way out of debt in a reasonable amount of time, even if those taxes would be painful.  Total economic output in a given year is still 3-4 times the size of the federal budget.  The means are there.

    So, when John Boehner says that we are headed for a debt default in 10 days, what he is really telling the world is that issues like delaying implementation of the Affordable Care Act are more important to his party than making bond payments on time, as we are obliged to do.  So now every current and potential lender to the U.S. has to face that we might not be willing to pay them, even when we have the money on hand.

    I understand that people like Ted Yoho, a freshman Republican from Florida are under the impression that a debt default would not be a big deal to the global economy.  It might be that the wrong lessons were learned in the summer of 2011.  The Standard & Poor's downgrade did not have lasting economic impact.  Low interest rates trumped the headlines.  The economic recovery was slow but real.  Corporate earnings were up.  Corporate defaults were down.

    It is possible that the world would ultimately shrug at a missed bond payment.  But I wouldn't count on it.  I don't think that people like Yoho understand that the character of the country is at stake here.  Are we the kind of country that pays its debts when it has the money, or are we the kind of country that stiffs its bondholders because some members of our government don't like a law enacted three years ago?

    I do not believe, by the way, that the interests of bondholders are always paramount.  But when you can pay but choose not to, well -- nobody much likes that person.  I don't think the world shrugs that off.

    Topics: 
    Politics

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    There are, however, a lot of entrepreneurial types that walk away from debt all the time. In my field, developers start projects, go bankrupt and start all over again.

    And when so many people couldn't pay mortgages, it was brought out that while ordinary middle class folk saw failing to pay a mortgage as a dishonorable failure, many wealthy people see it as part of the game.


    by Donal on Mon, 10/07/2013 - 2:51pm

    Indeed, Donal.  It is part of the game.  But, again, those are economic decisions.  The business collapsed.  Walk away from the debt, let the lenders take the fiber optic cable you laid and try to make something of it.  The house isn't worth the mortgage anymore, walk away.  People get that.

    But the U.S. case is different -- the house is worth more than the mortgage and the money is there to pay it.  If we default it's for no reason at all accept a refusal to pay.


    by Michael Maiello on Mon, 10/07/2013 - 3:13pm

    Ah hell with it.

    Let us use the Detroit Model.

    Just appoint Justice Roberts as Bankruptcy Judge and Newt Gingrich as Trustee.

    We could get rid of the Department of Education, HUD and a plethora of other departments.

    Most of all, we should get rid of NASA, because:

    Default lies not in our stars but in ourselves!


    by Richard Day on Mon, 10/07/2013 - 3:15pm

    Default lies not in our stars but in ourselves!

    I hereby grant you the … wait, are you eligible for the award, or does that stink of cronyism?


    by Verified Atheist on Mon, 10/07/2013 - 4:34pm

    Oh I have fewer and fewer cronies lately. hahahahaha

    I'll take it!


    by Richard Day on Mon, 10/07/2013 - 5:41pm

    At our house we have the "piss pants award." My grand daughter is more than happy to pass the baton on to you for the day with a kiss. {{{SMOOCH}}}  She is certain she will get the award back before the week is over because nobody never likes her or will be her friend.  It has to do with the fact that she is the middle child between two brothers who adore her.


    by trkingmomoe on Tue, 10/08/2013 - 1:48pm

    The national debt is different because it is not really debt at all but private savings. It is the accumulation of several decades of budget deficits that gave people and institutions the safest place in the world to 'invest' their hard earned savings. A lot of people (really a lot) would rather hold Treasurys than cash especially in uncertain times. Close that channel and the money starts looking for the next safest things to hoard, usually commodities like aluminum making Coke cans more expensive and grain harvests bumping up the price of bread.

    And despite how how outrageous $17T in debt sounds, it pretty much matches the year's Gross National Income, same as it has for many years now.  Anyone with a home mortgage probably borrowed more than one year's income so why set the debt limit so low for all of us combined?

    And, btw, that $17T also closely tracks the current combined market capitalization of the NYSE and NASDAQ which is not included in the the GDP because that, too, is savings.

     


    by EmmaZahn on Mon, 10/07/2013 - 3:37pm

    In case my identifying the national debt as savings sounded strange, I just found some information that may make it sound more reasonable.  From a recent treasury.gov report:

    The U.S. asset management industry oversees the allocation of approximately $53 trillion in financial assets (see Figure 1). 

    Add together national debt/savings ~$17T, equity market cap ~$20T and money supply, ~$12T and it comes really close to the that total.


    by EmmaZahn on Tue, 10/08/2013 - 1:45pm

    Thought some arguments in this piece might interest you:

    America Needs a Debt Ceiling—But Not This One
    Everything about today's debt limit is wrong, from its awful measure of debt to its egregious trigger of national default. We could do better.
    Michael Shapiro, The Atlantic, Oct 8 2013

    Note the author byline: served as a senior policy advisor at the White House National Economic Council.


    by artappraiser on Tue, 10/08/2013 - 1:57pm

    Thanks. He is right that we need a better conversation about the debt. While his suggestions are certainly doable, they really only kick the can down the road for a while.

    There is just so much money in accumulated savings not making its way back into the general economy. The whole system needs rethinking, not just the debt.

     


    by EmmaZahn on Tue, 10/08/2013 - 3:02pm

    The US dollar is the reserve currency of the world, and has been since WW2. Every commodity, from corn to oil, is priced in dollars. Reserve status allows the US to run an import/export deficit year after year, as foreign individuals, businesses and nations hold US paper and dollars in exchange for shipping the US real goods.

    There is a lot more in a default than damage to bondholders. Interest rates on US debt would rise, the dollar would fall as inflation rises, government checks would be delayed or canceled for SS, paying contractor bills, Medicare etc. 

    The privileged position of the US /reserve currency would be seriously damaged.

    Boehner doesn't want a vote on a 'clean CR'. If it passes he looks like an idiot. If it doesn't pass, due to the 'suicide vest lemmings' of the GOP, markets crash.

    When markets start into free fall, the GOP will be forced to vote again, and pass it. GOP fingerprints will be all over the crime scene.

    Pass the debt ceiling and get nothing in return from the Democrats, or don't and watch the Dow melt down. That's why Boehner doesn't want a vote. He wants to play out his game of chicken as long as possible.

    That's also why Obama wants the House vote now, while there is still time for at least 17 of the GOP crazies to come to their senses before the Treasury does run out of cash.


    by NCD on Mon, 10/07/2013 - 5:41pm

    You know we have been trying to keep Yahoo Ted Yoho hidden here in Florida since we have not gotten over the embarrassment of Wrong Way Allen West.  Yoho thinks if we crash and burn the economy that world finances will be more stable afterwards and everything will be much better.  I wonder if he is that stupid in front of the owners of all those race horses that winter their horses in and around his district.


    by trkingmomoe on Mon, 10/07/2013 - 11:04pm

    Nice post, MM.

    To echo, Emma: our national debt is all virtuous, prudently invested government bonds.

    What happens to our economy if US government bonds cease to be a solid investment cannot be predicted in full detail, but it cannot be good.


    by Doctor Cleveland on Tue, 10/08/2013 - 12:51am

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