Republicans Are Pushing For A "Brief" Default As China Warns US Is "Playing With Fire"

Tyler Durden's picture

Yesterday Reuters reported that a troubling, yet potentially inevitable development may be imminent: the default of the US, granted, a short-lived one (though we are not sure just how the world's "reserve" currency will be backed by a national that is technically insolvent). Luckily for the US, everyone else (except China) is just as bankrupt. Yet if there is one thing pushing Lehman into competitive bankruptcy just so that Goldman would have a monopoly in the US fixed income sales and trading market, it is that any such action will have massive downstream consequences, and in the pyramid of "unpredictable downstream effects", the insolvency of the US is at the very top. And just to make it clear, now that a default is becoming a palpable option, China announced that the United States is "playing with fire" if it opts to briefly default on its debt, which could undermine the dollar, Li Daokui, an adviser to China's central bank said on Wednesday. Yet the statement could very well backfire after Li, speaking on the sidelines of a forum, said China needs to dissuade the United States from defaulting on its debt, but he believed China may hang on to its investment in U.S. Treasuries in any case. This is precisely the case made by Stanley Druckenmiller: in fact, should there be a technical default, US bonds will become a true safe haven investment as America will for the first time take a step to indicate that it believes the relentless abuse of its fiscal situation is coming to an end.

In the meantime, here is why the soap opera in DC may take a big turn for the worse:

An increasing number of Republicans do not believe the Obama administration's dire predictions of economic "catastrophe" if the debt limit is not increased. They argue a period of technical default can be managed without plunging markets into chaos.

Establishment Republicans including Tim Pawlenty, the former Minnesota governor who announced his presidential candidacy last month, are backing a short-term default if it leads to deep, immediate spending cuts.

Jeff Sessions and Paul Ryan, the top Republicans on the Senate and House Budget Committees, have also said failure to raise the debt limit would not trigger immediate catastrophe.

Republican Senator Pat Toomey has even introduced legislation directing the Treasury to prioritize debt service over other payments if the debt limit is not raised. It has 22 Republican co-sponsors in the Senate and 98 in the House of Representatives, although no members of the Republican leadership have backed it.

David Frum, a former speechwriter for President George W. Bush and a Republican advocate for raising the debt limit, said he holds regular question-and-answer sessions with Republican congressman over a beer.

"I have yet to meet one Republican who actually says a failure to raise the debt limit scares them," Frum said. "It is deeply, deeply troubling the number of Republicans I now talk to -- and I include the mainstream -- who think a technical default is manageable.

Many on Wall Street disagree. They fear even the briefest default would cause a steep climb in interest rates worldwide and a tumbling dollar, which would tip a fragile economy back into recession and cause financial market upheaval on a scale not seen since the collapse of Lehman Bros.

Fueling skepticism over this outcome is an argument made last month by legendary investor Stan Druckenmiller, a one-time ally of George Soros, who said he would favor a short-term default if in exchange lawmakers in Washington struck a deal for massive spending cuts and a medium-term plan to tackle the $1.4 trillion deficit.

"That had a lot of impact on Republicans," said Vin Weber, a veteran Republican strategist and party moderate. He said the idea that a short-term default would not be a problem "is definitely becoming a mainstream belief."

That this is happening despite Geithner's constant cries of "wolf" is no longer surprising. At this point the only credibility redeeming move for the tax avoider is to resign. Which is why it is not surprising that the SecTres now needs the support of "strategists" from Bank of America, who alas have demonstrated about the same amount of correct predictive ability.


Treasury Secretary Timothy Geithner says failure to increase the debt limit by August 2 will lead to a crisis in the markets that could plunge the back into recession.

Priya Misra, head of rates research at Bank of America-Merrill Lynch, said $25.6 billion in Treasury interest payments due on August 15 could be in jeopardy if the August 2 deadline is not met.

If the United States defaults, money market mutual funds that invest in short-term government bills, considered one of the most secure investments, could "break the buck" by falling below $1 a share, Misra said.

The resulting losses could spark a bank run of the sort seen when Lehman Brothers collapsed in 2008.

The summer, traditionally a time when bond traders would leave for the Hamptons around 10 am each Friday, is about to see far less traffic on the LIE, as everyone remains glued to their terminals late into Friday in anticipation of US insolvency news.

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bob_dabolina's picture

I have been saying this for months. 

oh_bama's picture

Why no one here trusts the GOVERNMENT AND THE FED???

Can they FIX IT? YES WE CAN!!

trav7777's picture

that default will make us an even safer haven?  ROTFL

bob_dabolina's picture

What makes us a safe haven right now? 

A u6 unemployment rate of 17% with a national debt of 15 trillion (not even counting GSE debt) and 60 trillion in unfunded liabilities? 

Every American owes over $500,000 (not including GSE debt) and that makes us a safe haven? 

This doesn't even account for the debt problems at the municipal level, which is a quagmire in it's own right.

We need to raise taxes across the board and massively cut spending, or, we need to default.

Our situation is untenable.

FWM's picture

"We need to raise taxes across the board and massively cut spending, or, we need to default."

 

Agreed, in theory; however, the current FedGov, as constituted in the 20th and 21th Century, has abolutely proven itself untrustworthy and unreliable in following through.  Tax increases will be promptly followed with spending increases.

The FedGov needs to be deposed.

Arthor Bearing's picture

Taleb has explained how our reliance on debt has increased the fragility of our economic edifice. Default would send the whole thing tumbling downward, which I would consider a good thing. May the rain wash all of the dumb fucks away, and maybe we'll do it better the next time around the ol' 5000 year cycle

tmosley's picture

The fact that we have not defaulted in hundreds of years.

That is IT.

Yes, our situation is untenable, but a default puts into action a series of events that ends with the destruction of US living standards via a mechanism of US Dollar hyperinflation, likely accompanied by hyperinflation in several other major currencies.

But you keep holding those dollars.  You deserve each other.

Thisson's picture

Not necessarily.  If a default causes us as a nation to have an adult conversation and to determine that we will no longer spend beyond our means, than a default would be deflationary and result in stability rather than hyperinflation.  I don't expect that to happen.  I expect the bond market to impose fiscal discipline at some point. 

mudduck's picture

What's $1.4 trillion a year between friends? Just a dollar every business day from every human on the planet, not including roll-over refinancing. Sounds like one of those 'you can stop this child from starving today' commercials, oh wait, never mind.

Djirk's picture

agreed, I do not have my PHD in economics, but I fail to see how a default of any sort will create a safe haven.Maybe longer term but there would be some serious short term pain and buyers of debt would disappear. Reserve currency status would be gone forever.

 

Seems possible to have cuts in spending and meet debt obligations. CUT military quick.

CPL's picture

Yup...

 

<sigh> this isn't going to end well in any direction selected it's just simply too late.  the time to have let it crash and burn was after dot.com (bomb).  With all the other annoyances going on, congress is just saying to it's US investors that they are ready to bounce checks on them and jack up interest rates to double digits again.  Because this is exactly what is going to happen to curb the borrowing the only way to stop it is to jack up rates.

 

Double digit interest rates on 14.5 Trillion in debt becomes nearly exponential, even at 7% interest while adding another 2 trillion a year.  In 5 years the US will end up with around 32-33 trillion in outstanding debt.

 

In someways congress knows what it's doing.  Althought it should have been doing it 12 years ago during the Clinton timeframe.

SYantiss's picture

"Double digit interest rates on 14.5 Trillion in debt"

And you're not even counting State debt or the debt coming due with SS and Medicare.

We'll have default after default, unlimited confett where it becomes cheaper to us bills for wall paper rather than wallpaperi, or war... Maybe all three...

CPL's picture

Like a string of firecrackers, default after default.

HamyWanger's picture

The problem with the debt limit is a regulatory problem, not an economic problem. 

As I've said, the world is ruled by men, not holy words. Thus the debt ceiling will be hiked. If it is not done by the Congress, it will be done by an Obama Executive Order exploiting some forgotten loophole in the Presidential powers, in case of an "imminent peril", stuff like that. 

spanish inquisition's picture

Those words confuse me coming from you.....I will junk you, not because I disagree, but because I never did junk Harry.

Cynthia's picture

It wouldn't surprised me in the least if Obama uses the Patriot Act to extend the debt ceiling. I'd look at it as being just another fascistic act by Adolf Obama.

Rick Masters's picture

Where were you when Bush raised it ten times, practically every year and sometimes twice a year. And I seem to recall not being in a dire siutation then where the gov't had to spend record amounts to keep the food stamps coming so people dont starve. I know, I know: They should eat cake. But seriously anyne who didnt say a peep about debt in the 00s should shut up now since that crushes their credibility and exposes them as partisian. If the tables were turned, and GWB was still Pres and needed to raise the roof, half the naysayers would be crying about Dems putting troops in danger. The hypocrisy is astounding. This doesnt apply to everyone but it sure does apply to a lot of the hacks on this board...I remember when ZH was all about economics and business; those were the days. Now we've been invaded by infidels who only care about politics and division and hate.

1911A1's picture

The debt limit can be raised continuously as long the rate of increase doesn't exceed GDP growth.

That is clearly no longer the case, especially when only "real" GDP is considered by subtracting government deficit spending.

 

Thisson's picture

There is no GDP growth once once you back the debt back out.

GDP = C+I+G+X.  Borrowing money to increase G (government spending) has increased the GDP.  GDP has not increased from consumption, investment or net exports in real terms over the past 30-ish years.

 

1911A1's picture

Rob Arnott disagrees with you: http://www.johnmauldin.com/frontlinethoughts/muddle-through-or-crisis/

GDP minus government debt has been growing up until about 2008.

GDP minus all debt has been negative for 30+ years; however, it is not necessarily the case that that an increase in "all debt" is counted in GDP.  In fact, there are a lot of examples where an increase in non-government debt is NOT included in GDP.  So simply subtracting these two values does not provide a reflection on the "real" (non-government driven) economy.

As an example, mortgaging a paid-off property increases non-governement debt but does not add to GDP, so subtracting this debt from GDP doesn't indicate anything about the real economy.

 

JLee2027's picture

The President cannot raise the debt ceiling by Executive Order or any other magical invented method.

BloodPigOnFeces's picture

But he can send troops without congressional approval. the office of the president becomes more dictatorship-like with each successive administration.

DosZap's picture

That would be a GREAT reason to do away with the ACT altogether.

I am all for it.If Adolph Jr uses his imaginary powers.

Watts_D_Matter's picture

I squish your head Hamy....

Long-John-Silver's picture

I agree with your premise simply because Obama has become a de facto dictator. Congress has no power at all now. They can do nothing but make noise.

Rick Masters's picture

Could you please list his dictaorial powers? I mean I just want to double check cause of that Obama sniper that killed that kid and then tortured him. Oh wait, that was Syria, which is just like here, a police state. Hell I can't leave my house without passing a column of tanks and piles of dead bodies, aka the tea party dissenters that Obama killed in South Carolina with his thugs. remeber that?

Taint Boil's picture

In stainless steel we trust:

http://www.mlive.com/news/detroit/index.ssf/2011/04/detroit_library_spen...

$1000 trash cans for the Detroit library! We gots lots a money!

Smokey1's picture

Obama is president. We gets whatever we aks for.

Alcoholic Native American's picture

If we default will we have to bring the mercs....I mean troops home?

Wouldn't that just increase the unemployment rate?

We have always been at war with unemployment.

 

Sandy15's picture

Why would it increase unemployment?  These people have contracts for years promised to serve.  We could put them on our boarders both for protection and to build a fence.  That would keep them busy for a while.

SYantiss's picture

They'll be needed to grow food wham we can't afford gas... And to keep order when interest rate driven hoarding of $$ begins.

Rick Masters's picture

Uh, hey, I bet you hate Obama given your border talk even though nobody said anythinng about that excuse for a fence Pres. Bush erected. I apologize if Im wrong. In any event, there is a law called Possee Comitatus and US troops can not act that way and start enforcing laws: that's the Guard and the states problem.

DosZap's picture

Hell, if DOE has the power to order out a SWAT team for a non paying Student loan recipient,(fking UNREAL,can any of you really believe that shit?,I am sorry, I cannot)we could use them for collection of non payment of traffic fines...........hell yeah.

Rick Masters's picture

Are you serious? They can do that? Have they done it. If so, nevermind a previous comment, that is unreal and flat out tyrannical. What's next: debotr's prisons? Oh wait, it's called being a wage slave now, though iPods make it bearable lol I'm no wage slave; i love my job. But I feel for the people who have shit jobs that make them miserable. I understand they should have done more, but still a living wage would level out the animosity sweeping our country like black clouds creepping overhead in the sky. I know the gov't can't set wage levels as it would kill business, but it would be nice if some of the more profitable companies, yes I'm looking at you Wal-Mart, paid employees more and for that matter hired a better cass of workers. You know, ones that actually work and when you ask a question don't just pit you to Aisle D5, subset 6B. Wherever the hell that is.

1911A1's picture

Yes they just did in CA:

http://www.news10.net/news/article/141072/2/Dept-of-Education-breaks-down-Stockton-mans-door

BTW, isn't the express purpose of a for-profit company to produce profit for its shareholders?  Thus keeping employee wages low is part of achieving that purpose.  If there is another company that can produce equivalent profits while paying employees more, wouldn't said Walmart employees go work for the other company?

trav7777's picture

for-profit companies are run to produce profits for management and executives now.

1911A1's picture

Not disaggreeing, but it depends on the company.  The shareholders of companies that do not distribute part of the profits are being duped.

There are also non-publicly traded companies...

 

GeneMarchbanks's picture

Not if we continue the war at home. The troops are constantly at war on the road, I've heard they're undefeated. Lets bring'em back and continue the war at home. Get up, eat breakfast, drive to war. Problem solved. Full employment.

You're Welcome.

Long-John-Silver's picture

Who's side would military personal take? Before commenting read this article.

 

Red-State Army?

http://www.washingtonpost.com/wp-dyn/content/article/2008/12/14/AR200812...

DosZap's picture

Remember, we have a Volunteer military now.

GeneMarchbanks's picture

Whoever pays 'em. Probably Lloyd Blankfein.

Gamblor's picture

It's funny to me that you use the term "big turn for the worst" when in fact it appears that the adults might finally be taking charge.  The GOP calling this bluff is surprising, given the lack of testicular fortitude they have on so many other issues.  I wish them well and godspeed.

docj's picture

Indeed. Now we're (finally) talking.

Fingers crossed.

topcallingtroll's picture

pray for default.  Pray that we have the morality to refuse to put further debt on our children.

Carbon Penguin's picture

I'm not so sure it's a bluff - its more his aversion to the bitter medicine the warfare/welfare state is going to have to swallow if it is to survive at all. Don't think for a minute it won't be ugly, though...

sschu's picture

it appears that the adults might finally be taking charge.

You may be right.  I fear insufficient adults, time or fortitude.

The politics of the budget are the key issues moving forward, all this other stuff is incidental until this is resolved. 

Either way it is going to be seriously ugly.

sschu