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Republicans Are Pushing For A "Brief" Default As China Warns US Is "Playing With Fire"
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. The resulting losses could spark a bank run of the sort seen when Lehman Brothers collapsed in 2008.
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 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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Thrift and discipline have always bee rewarded, but in bubbles, sometimes the risks of profligacy are delayed... anyway, we're way past the point where a "system" will reward anyone. Technical default or not, we're all fucked, and it's just a question of whether we're fucked, now, next week, or totally fucked by Christmastime.
Will a technical default raise interest rates? Sure! And then, all the zombie addicts of ZIRP will go belly up, taking with them the whole massive overhanging cornice of derivatives, which will slide down the right side of the steepest south-plunging chart of economic indicators like the massive shitvolanche that it is.When the shit starts rolling downhill, it's past time for taking it personally. Better just to get out of the way and go long on toilet paper.
all the zombies and parasites need to go belly up.
And to think I thought this would be a boring summer!
Yes! I would like nothing better than to shoot an increased-bond-interest-rate bullet through the head of some salvering Wall-Street Zombie, or to drive a suddenly worthless CDS stake through the heart of a bank Vampire. It's just too bad that despite my heroic defense, the lurching hordes of the undead will overcome my position ad devour me just the same
John Locke is turning in his grave
What reasonable population would allow the banks and politicians to spend spend spend
And leave the consequences to the taxpayer
Yea....the population was really supportive of the bailouts.
That shit was forced down our throats.
Not raising the debt limit would not be a default on US Treasury paper. Geitner looks like he is sucking wind because the new GOP can smell blood. It just means that all US Federal workers would furlogh salaries until the ceiling is raised or tax reciepts are paid. We could even match off the unpaid and overdue tax liabilities of those same Federal workers with the furlogh. That will last until tax day 2012. Simple.
There does not have to be a default if we fail to raise the debt limit!
We merely have to stick to a budget.
We can continue to pay interest on bonds and roll them over. We just can't add any additional debt.
Go for it tea party!
No matter how this plays out politically, it will be the Tea Party in front of it.
Then, if American voters perceive the outcome as something favorable, the Republican Party more generally will take the credit. If there is a non-favorable perception of the "Default", then the TP will be shunned by the RNC. Then, they will reveal their real choice for presidential candidate.
Wheels within Wheels.
Fuck paying the banks back the money they never had but lent and INTEREST with it.
"The summer, traditionally a time when bond traders would leave for the Hamptons around 10 am each Friday..."
I used to go down to South Street on Friday nights, you know, for a cocktail. I remember asking my friend who all those loud, drunk and disheveled guys were. She was surprised by my question. How could I not recognize the traders, BOND traders? They're a very unattractive bunch when they get all liquored up. Now I know they likely got a good head start on Friday festivities.
This is all so surreal. Are we the only ones that know that we are insolvent. Drives me batty.
Actually, most of the rest of the civilised world knows you guys are insolvent, and just playing 'pass the parcel' (of chocolate-coated doggy-doo). We're normally simply too polite to say, though.
A technical default might not kill the brand, but it would further tarnish the "Full Faith and Credit". Because it disproportionately targets foreign entities since they can't directly benefit from domestic stimulus aka money printing doled out in various ways. Furthermore, the loss of faith would trickle down and amplify through every grade of public and private US debt. It would be harder to peddle bonds if defaults are perceived as "Good Policy".
Drunkenmiller is in the ole camp of "bad is good": a default would make Treasuries stronger since it would mean the ole GOP is back in the saddle. Well, that's more a projection of his own biases than reality. Because the world has largely moved on already from the glorification of US paper. This would provide the fire to the naysyaers and competition
First off I don't really care for either jokster party but let's get real here.
What is up with republicans? Wasn't it their idea to bankrupt the US in order to let things flow freely? Didn't Bush dig 75% of this hole? And now they want to be the saviors? What a joke.
Funny thing is people will buy that. Just wait till they get in charge and continue on the rich war path, all social safety nets will be removed. Then you'll finally see the true state of the economy. The deficit won't improve they'll still be too busy chasing Habib around the desert trying to stick an exon oil flag up his butt.
Knurled upper lip Cheney "deficits don't matter" unless they're stuff we don't want to pay for.
Rumsfeld(or however u spell the fags name) Mr. Rumsfeld why are we in Iraq "duh, they're sitting on a sea of oil." That was on tv, I seen it, he was put on gag order after that.
This is what happens when a bunch of sociopaths get a machine that prints all the money they want, for anything they want, anytime they want.
The End.
rsnoble...nice propaganda...now go back to Huffing and Puffing Post
+1
And we have a Civil War, one way to get rid of both parties................simple.
Yes, they will buy it. They are standing in line to buy it.
People have seriously short memories, and they hear what they want to hear; as long as it isn't too wordy or complicated. Or mathy.
That's why they don't learn from history.
As if they knew any.
Duh
When was the last time we actually had ay money? It's amazing how long someone can stretch out their insolvency. Reality checks are a bitch...
I guess the Republicrats think they can't lose. If a tech-default turns ugly, they can always blame the mess on Obama, or at least start talking about his fake Birth Certificate. If their gamble pays off, then they can take credit for it. Either way they win...except that they have no plan (who does?) to fix anything, but that's tomorrow's problem, and today, they have an opportunity to sieze power...
Man I can't stand David Frum. He's a moron. I'm not a big believer in default. But I do think we can manage the debt down if we stuck to a friggen budget.
Can't wait for you guys to take whatever outcome and say, "as we predicted."
I've been in cash for over a month now. I expect deflation. Just not this much!
derivatives, swaps...fractional reserve bets comprised of hot air 'money' that NEVER EXISTED. What's to lose anyway? Vampire gangs in suits...send them back to into the twighlight zone from whence they came. We'll get over it.
- tom
Umm, isn't the Reserve Currency already backed by an insolvent nation? Just because its better to pretend it isn't doesn't lessen the danger and potential catastrophe.
Yeah, we'll get over it.. but in the meantime, maybe a buggy-whip maufacturer is a good investment. Because by the time we "get over it," a significant part of our society will have reverted to an 1870 standard of living and let's face it, some forms of energy are more appropriate to decreased levels of buying power than others. Remember those pictures of donkey carts you've seen in the streets of Gaza and Havana? Welcome to the future, boyz!!!!
I wonder how many derivatives and swaps have any provisions written into them for a US sovereign default no matter how brief? And I wonder how many exist mainly for that event? Insurance against the political extortion of minority parties. Yes those would unlikely be exercised but they would also be really cheap, so far out of the money it not worth calculating.
The GOP fascists think they can "manage" a technical default? Like the flash crash was managed? I would actually sort of like to see this little drama play out, I mean we are all fucked anyway with a broken system that has to collapse on a global scale so we might as well get some theater out of it. How about a computer driven sell-off in equities of about 45% in a six minute period? I hope they use GOP house member face cams on those that advocated the default so we can watch live streaming video of them going into panic mode and turning violet as they realize what they have done.
They must have missed that part of congressional orientation where they were informed that Goldman Sachs and Wall Street really run the place and if you do not behave they will spank you. I can see that day, bills drop a lot, notes drop some, bonds drop a little, but equities collapse in seconds on the open while commodities go trough the roof, and that will "only be temporary" but it will teach the GOP who is in charge.
Does anybody remember what Wall Street did when the GOP threatened not to go along with a trillion in juicy bailout money for the fat assed cronies? Have you forgotten that sickening sensation of seeing the ticker hit -765 in the red? That was not a financial uprising by the US public, that was a sharply pointed message to those in the GOP refusing to play ball. Now they can drop the Dow 6,000 in five minutes and bring it back 7,000 by afternoon coffee. But people, real citizens out here have their pensions, kids college funds in that market and when they see their fortune cut in half in the time it takes to eat a sandwich they get a bit testy about it. They don't know that it is just GS telling the GOP/Teabaggers to straighten up and fly right.
I want to watch...I do! I do!
Buggy whips aside, I think the tea party folks are simply advocating for a 'Declaration of Independence'...as basically, I always have. King George knows no bounds and needs another lesson.
- tom
I'd fan you if I could!!
boil,
The GOP fascists think they can "manage" a technical default? Like the flash crash was managed?
Is that similar to Benie saying he can remove liquidity, and control inflation rates any time he wants?.
Last I checked, BHO was the one that has kept the punch bowl filled, and asking for more.
To the tune of 4 Trillion........+
So, (I hate both parties) but after TARP, do you think if the bowl was removed, and the tree allowed to fall.We would be back to near normal WAY before now?.
I think hell yeah.
So why has BHO kept making it worse?.GOP made him do it.
No, after the "tax cuts" of 2001 we were on a slippery slope that cannot now be reversed, it would not have mattered who was appointed president. I do not actually blame BennyB or BHO for what is going on now because they were handed an impossible situation, had McCain got the nod he would also have the same problems and reactions (other than maybe declare war on Canada or something). There is quite literally nothing that can now be done, no satisfactory answer, no way to regenerate organic growth in our economy, no way to repay the combined debts denominated in dollars.
A lot of the commentary here is centered on responsible and fair taxation and fiscal discipline, and those would have been good, kept us out of trouble, and they will be good when we start from scratch after eating shit with the chickens for a time post crash. But as of now these things are no more possible than Wall Street growing a conscience. Go back to uniform accounting standards? I hope we do some day in the future, but for now that would just trigger the collapse we all say (jokingly or otherwise) want.
I don't know why some of you so want that day of reckoning so badly, it is going to suck for years. We will eventually emerge, hopefully as one nation, hopfully a fair and strong democracy where human beings come first and corporations are treated as fictions of business rather than people with a whole lot more power than actual breathing citizens, but there are no guarantees, and no matter how much PM you have socked away or how highly you think of it as a hedge, it is still going to suck. We will ALL lose, a lot. We will all witness great tragedy to come. A whole lot of baby is about to go out with the bathwater. Viva la revolution. Who will be OUR Maximilien Robespierre?
There are only two choices - default or hyperinflate. Making the choice consciously is really the discussion here...
...bullish for gold (and earless rabbits)
How can USA default on its own debt?
Just inflate debt away.
Put that on a plaque in Ben's office.
mayhem,
dude, your gonna get your choice, devaluation,deflation, then Hyper Inflation.
So, any way you go you be happy.
Very happy these days. I stuff my pillows with PMs instead of down.
:D
Washington is caught up in the classic Clintonian dilemma of Briefs vs. Boxers. That's a false dichotomy as Jamie Dimon's consensual confrontation with Ben Bernanke clearly displayed yesterday. Dimon's invoking of the Briefs Over Boxers Combo (i.e. BOBcom) career and economic security physical manifestation of virtual Hope & Change Your Underwear Keynesianism was presented in fine fashion by Krugman's attempted girdling of the Old Gray Lady today.
http://tradewithdave.com/?p=6856
Dave Harrison
www.tradewithdave.com
Read my lips:
High inflation and then when debt has been massively devalued... high interest rates again. Simple. Always works.
Default on debt is for "wannabe rich" countries that didn't invest the easy money lent to them to produce and pay loan+interest. Just like the credit card junkies.
What have "we" been investing in for the past 20 years?
-Flatscreens HD TVs
-Entertainment
-Military
-Financial Sorcerers & Wall Street & Stock Exchanges & Madoff Ponzi's
-Lots and lots of drugs (OTC, legal & illegal)
-State sponsored jobs.
-UAW, Postal Service
-Lots of houses (flipping, houses of cards, tulips)
-Hollywood
just to name a few...
A debt default ...hopefully would see interest rates go up...albeit until deep spending cuts were enacted. Then they would fall.
The market would correctly ascertain that the Fed has tried everything in it's quiver except a complete devaluation of the USD, and now Wash DC has to reign in spending.
USD strengthens, and bank stocks rally. Within a year the economy begins to experience rael growth again.
Feckin coward politicians cannot see further than the next press conference.
I'm buying all the physical Gold and Silver I can.
I don't want to let a good crisis go to waste.
Hmm, let me get this straight: some guys propose the right thing (first step) to do... and ZH slams them for irresponsibility?
What a brave new world.
So instead of passing Glass-Steagall, the idiots known as republicans, not to be confused with idiots knows as dems, suggest that a 'brief default' in order to destroy social security and medicare are the better approaches?
What fucking fools they are.
You Glass-STeagall the debt, you don't screw your sick and elderly (and china...the trifecta)....and not even to solve the problem.
Republicans want to kick the can down the road, i.e. not fix the problem, but band-aid it, and in return they want to destroy social security and medicare (and fuck with china). Even though that band-aid might be over the femoral artery, that's the spot they want. (and they have no idea of the bleed that could come by cutting where? femoral artery)
Republicans are dumb, deaf, blind, and stupid...just like dems...but here they are also suicidal.
Can any republicans read Glass-Steagall or are they still re-reading the best of trickle down theory?
Let's pay off fraud by destroying social security and medicare! Let's keep the system in place that caused all this. I swear left, right, center, or tea are all fucking stupid as hell.
Glass-Steagall (and after that, you agree to exchange china's reserves for raw materials and expertise in developing their west...western china)
The problem can't be fixed. It's mathematically impossible. The only question now is who is going to get screwed.
It looks to me like some tea partiers want the banksters to bite it while the neo-libs and neo-cons in the White House and congressional leadership want to pull the plug on the welfare state. The crazy part is that progressives and liberals should be calling for screwing the banksters, too, but they're all obedient sycophants of the Tool-in-Chief, so what's good for the banksters is good for the left. Kooky.
I say freeze the debt ceiling and balance the budget by bringing all the troops home and by turning over welfare, Medicaid, etc. responsibility over to the states. Let each state decide whether to raise taxes or throw people out into the streets--and let them suffer the consequences of whatever they choose to do.
After cutting spending enough to balance the budget, adjust tax rates back to the Reagan era, which apparently was the sweet spot that helped, rather than hurt revenue, and pay off the debt with the surplus.
The pigmen are so transparent. Of course! A brief default of the USA is required to settle all those CDS positions written on Greece, etc which have gone south but were hedged with CDS bought on US Treasuries.
buy gold you must