U.S. Debt Default Would Be Worse Than Lehman | Hacker News Reader

U.S. Debt Default Would Be Worse Than Lehman

bloomberg.com

25 pointschailatte36 comments

It's an engineered distraction. We (led by the media) far for it every time.

Just like the nonsense about the "mosque at ground zero" - remember that? Notice how all the nonsense vanished?

Remember the debt is stuff we've already "bought" it's not the future budget and has been raised dozens and dozens of times, under every kind of leadership or lack thereof. This is just a puppet show - one side makes the show and the other side sits memorized and doesn't look at what else is going on.

Just imagine if we actually had this much effort by news outlets into health care reform (not the health insurance fiasco we got instead). We might have gotten an actual progressive solution.

An out-and-out default is extremely unlikely, but a massive devaluation in the US dollar would be just about the perfect treatment for America's economic woes. Devaluation of debt, and massive increase in export competitiveness...

So selling twice the number of $1 widgets at 50 cents fixes something? Or just makes us tread water faster?

How exactly do we compete against nearly free labor in manufacturing from China and Vietnam and such? (answer: we cannot and should not try - we should tax imports and make selling to ourselves cheaper with domestic products vs imports - people will buy from overseas when their widgets are 50 cents and ours are $1 but not if there's is 90 cents and ours is still just $1)

I agree this is the likely outcoming, but couldn't disagree more about it being the "perfect treatment". What you had with the housing boom was effectively devaluation in a limited sector (along with oil). Inflation causes massive capital misallocations and screwed up pricing signals. Think about how many people who were working in construction and real estate needlessly that could have been working on things people truly need/want. Eventually all those lost man years of effort add up to lost lives in the aggregate.

"It would be a totally self-inflicted cataclysm,” he said. “There’s no question the United States can meet its obligations. This idea that somehow that we cannot pay because we’re having a political fight over how to handle the spending and taxing” is “democracy functioning in the worst possible way,” he said."

Yup the who thing is a self inflicted cluster-f*k. From the politicians who spend to much, to voters who don't think about who they are voting for, to media who would love nothing more than armeggedon so they could get a few more rating points. One thing I know for sure, is that there will be a chapter on this period in the US and the world in economics textbooks.

In order to call it self-inflicted, you have to buy into the collection of people as an entity. It's not clear to me that this will continue to be viewed as the most useful abstraction.

I'm fairly certain there is no crisis. They'll come to some last minute deal, as always, after they've done all the theatrics for MSNBC and Fox.

I'm positive that that this is everyone's intention. But they've dug themselves into entrenched positions, and are running it down to the wire. In that situation, accidents can happen.

See http://www.telegraph.co.uk/finance/economics/8639896/The-las... for how a similar situation in 1979 caused us to accidentally pay $120 million slightly late, resulting in our paying several billion in additional interest.

Even if they don't raise the debt limit ever, there's no reason for us to default. Our tax revenues can pay for much more than our debt service.

Related to that, most of our debt is owed to the federal reserve, which just makes up money out of thin air for us anyway.

Could the federal reserve theoretically give a forbearance on interest payments? The debt owed to the public and international financiers (China,Japan) is fairly insignificant compared to what's owed to the Federal Reserve, and could probably be paid.

What happens if we pay everyone except ourselves?

Even if they don't, it's not likely to matter much. US sovereign default is unconstitutional under the 14th amendment.

Nobody doubts that the money will eventually be paid in full. However a failure to pay it on time will result in financial catastrophe.

"Default" is typicially defined to be "Interest is not paid on time."

If the Constitution says that you are supposed to be paid in time but, at that time, the money is not in your bank account, then you still don't have anything in your bank account.

We are headed towards a situation where we're in default, no matter what the Constitution says. If that happens our creditors will be in a position to go to the courts and get their money back. It will be a slam-dunk. They will win. But on the date that they are supposed to have their money, they still won't have money to spend. And that is a big problem.

Incidentally the actual text of the 14th amendment doesn't say anything about "default". It says, The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. In other words if you've been told that we owe you money, we owe you money. Period. But it doesn't actually say when or how you'll get that money.

Incidentally if we do default on some of it, we should, unlike what we did in 1979, pay it back with a generous penalty on top. That would do a lot to make lenders more comfortable that it isn't so bad to temporarily get paid late. For instance in 1979 the pre-emptive spending of, say, $40 million would have saved us billions over the next few years.

Unfortunately nobody has the political will to consider that course of action, no matter how good it would be...

That seems to be the consensus, but I am not really sure.

The problem is that the Tea party people can't afford to compromise their position at all and even many who are not members of it are still under their influence.

My thoughts when reading these sorts of articles is that we are faced with essentially two choices:

* Keep building the house of cards

* Let it fall down

I don't see any points of view that advocate slow unwinding of the issues that got us here, and that's troubling.

Obama and Boehner had the outlines of a 10 year, 4 trillion deal that had some pain for everyone. For about 24 hours.

Unfortunately, that would have been a victory for Obama (and the country, incidentally). So it's a no-go as far as the Tea Party is concerned, which meant Boehner had to back out. Nevermind that these are people who've been shrieking about the deficit since January 2009.

And that's the risk. The process looks like it's based on ideology. Ideology knows no compromise.

It will be interesting to watch.

It's not even ideology, it's fear, hatred and tribal identity.

Ideological conservatives would have leaped at that deal Obama and Boehner hammered out.

Agreed. It's not ideology, it's partisanship. It's the illusion that it's okay for the country to suffer now, because it will benefit my party and after the next election my party will make up for it with the great legislation we will be able to pass.

I'm trying to think of the last time this actually happened. Civil War?

Not if their ideology includes never raising taxes as a fundamental principle.

That's not really a conservative ideology though (at least in the traditional sense). For example, Reagan raised taxes a number of times. The whole never raise taxes thing is quite new and comes from the Tea Party, not Republicans or conservatives in general.

The never-raise-taxes thing was started by Grover Norquist and has been going since 1985/1986:

http://en.wikipedia.org/wiki/Americans_for_Tax_Reform#Taxpay...

http://en.wikipedia.org/wiki/Grover_Norquist#Americans_for_T...

I don't understand how the politicians who subscribe to never raising taxes can function. Do they not understand how governments work? Would they like to propose how a zero-tax system would work?

There is a no reason a government has to increase taxes to function.

If a government is free to reduce taxes to pander to special interests and voters, but is unable to ever increase taxes, the result is an eventual ratcheting downwards in government taxation until you hit a crisis.

As an example I give you California. It is politically impossible to get any tax increase through, but not politically impossible to get tax decreases through. The result is that Arnold Schwartzenegger got elected on a promise to reduce the vehicle licensing fee. Ever since we've had a structural deficit that is about the size of the reduction in the vehicle licensing fee, and no way to fill it.

See http://articles.latimes.com/2011/jul/11/local/la-me-cap-budg... for verification.

You feel comfortable with that statement as a universal?

I don't think so. While many people have put forth proposals and claimed that they would cut half or more of the deficit, the largest cut in any of these proposals is less than $400 billion. We would need four times that to balance the budget.

What a rubbish article. 1000 words to sum up something that most people probably know. With absolutely no analysis or details or links into anything interesting. Press release journalism at it's most boring.

(Yes I know it's not technically a press release)

I don't think anyone thinks we shouldn't pay.

Instead, what everyone thinks is that we -have- to balance the budget, and this appears to be the only way to get politicians to do their jobs. They seem to be treating a balanced budget as if it isn't their problem. That someone else should be doing that.

I'm starting to wonder if that's right. Maybe there should be another body that has oversight of our ridiculous spending.

We have to balance the budget in the long run, but this is a hare-brained way to make it happen. If anything, a default will make it harder to balance the budget in the long run, because if the markets get spooked into higher interest rates on T-bills, a greater proportion of tax revenue will have to be spent on debt service.

Actually, lots of people think we shouldn't pay. More specifically, Millennials will need to decide at some point if they are willing to pay for the profligacies of their parents. Many of them rightly understand that they are shouldering a burden they neither asked for nor benefitted from.

Right. Not exactly being able to pay one's debts will surely be corrected by taking more debt. And having more loaned money to spend will naturally just encourage tightening up one's expenses.

If this financial situation wasn't about a nation but a private person, it would be obvious to everyone that his finances are simply fucked up.

How much is owed to the Fed? If they don't raise the debt ceiling, just "default" to the Fed -- they still have the $4 trillion sitting there that hasn't been touched.

obvious headline is obvious.

Hah when I read the title of this post I was like Duh, no kidding it would be way worse.

Reply on news.ycombinator.com