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.I would like to know exactly why these people believe that a short term default would either be a) short term or b) not trigger a credit event?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.
Let's address "a" first. Once the "technical default" happens, what makes anyone believe that a deal will be quickly cut (and one where the Republicans get everything they want and the administration gets nothing). I would argue that once the event takes place, both sides will become more entrenched (since default has already happened and your positions haven't changed) which could easily lead to a dragged out fight (mostly in the press) but no movement and thus real risk of an actual default. Any dragged out fight after August 2, would also likely lead to another US recession, as credit market turmoil, uncertainty, and potential missed payments (to anyone ie doctors, seniors, defense contractors, etc) would lower GDP and cost US jobs. I simply do not believe it is appropriate to risk the full faith and credit of the US government to score a political victory.
As for "b", I would love to know where Senator Sessions and Representative Ryan are getting their information from. Have they called around to our foreign creditors? How about pension funds? Are they talking with the folks who run treasury backed money market funds (remember, the breaking of the buck on a non-treasury backed money market was one of the tipping points of the panic of 08)? Their statements are not only horribly speculative, but also terribly risky, and if they are wrong we are staring at a black swan event that could make the recent panic look like a walk in the park as money/investment flees the US for another "safe-haven", which would further reduce our ability to obtain favorable credit and likely exacerbate the debt problem we already have.
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One might expect that at some point the stock markets will remember the sart of eh two world wars, suggest that if Treasury notes are insecure than money market funds will not work *and there will be no way to move cash on stock sales for many people* (except 'your check is in the mail') and tell Congress that if there is a default, it may well be necessary to suspend stock trading. Oh, and by the way, here is the daft of the announcement of the formation of the new 'Investors' Party' which is planning on running a full slate of candidates in 2012.
Failing to raise the debt ceiling doesn’t mean the government would default. Interest on and maturities of government bonds are less than 20% of the government revenues?
@ anonymous
It likely does mean default for a few reasons. 1) receipts don't come in at an even pace and thus on a given week/day/month we actually may not have the cash to pay interest (this is your #1 reason). 2) the full faith and credit of the US also backs things like social security/medicare/troop salaries/etc, missing those payments could result in a loss of confidence and hence default as well. 3) even if we avoid technically missing an interest payment, the credit market implications may be such that could force another recession/panic.
The GOP will raise the debt ceiling when Obama and Biden resign, making Boehner president. That's the end game.
A default would trigger a great awakening in the country.
A nation cannot borrow and spend insefinitely to support a pampered and frivolous elite on Wall Street, in academia and in popular culture, including the media personalities.
This will all end badly. A default would just let us get on with reconstruction sooner.
Too big to fail is too big too exist.
@ anonymous #3
Sadly, it is this type of thinking that may lead us to a default. No, a default would not let us "get on with reconstruction sooner". While we do need to tackle long term budget/deficit issues, defaulting now is not going to do anything but put us back into recession and into a worse deficit situation as revenues would once again decline. Responsible adults do not default on their debts out of choice and neither should responsible governments.
It's a bluff. Consider the source of the comment: Tim Pawlenty. Tim Pawlenty is in a perfect situation to make that comment because it sucks up to the extremist base and he's not in any position to make that happen. So in the end he won't be held to account when the increase in the debt limit passes.
The reality is that Republicans know just as well as Democrats that the debt ceiling must be raised. More to the point, the Republican wall street backers no VERY well that it must be raised and Republicans will not cross them when push comes to shove.
Finally, even if Republicans really are that stupid, Obama can issue an executive order telling the Treasury to issue more debt and to ignore the debt limit. You can argue whether he has the constitutional power to do that, but ultimately unless the Senate is willing to sign off on impeaching him it doesn't matter.
As a management issue, a competent secretary of the treasury will stop shipping out cash before he hits the wall, so that he will not be in danger of getting whacked by receipt fluctuations. After all, he knows the exact day all his interest payments are due. Is the current secretary that competent?
"full faith and credit" is a legal term of art, that covers debt payments and nothing else. It does not cover social security, military spending, or raising or lowering flags.
However, as iirc our host has so correctly noted, the dollar is a reserve currency, so the only way the Treasury can fail to pay debt when due is if the currency office runs out of paper, ink, and diesel fuel for its emergency generators.
Obama ordering the Treasury to ignore the law and issue would give us a Constitutional crisis on top of a financial crisis, namely the Republicans would say that the bonds are invalid and will not be honored.
However, as iirc our host has so correctly noted, the dollar is a reserve currency, so the only way the Treasury can fail to pay debt when due is if the currency office runs out of paper, ink, and diesel fuel for its emergency generators.
That would be ironic. The GOP have been complaining about the debt because they say we'll turn into another Greece. So they push a situation in which we'd have to rapidly devalue our currency. That of course would drive interest rates through the roof.
As for the constitutional crisis, I'd take that over a financial one. A financial one is real. The constitutional issue is just a bunch of blow hards on television showering cameras with their spittle. We'd just need to have some congressman volunteer to post his johnson on facebook and the crisis would fall into obscurity.
You all must realize that there is a great political gain to be made by the GOP by forcing the country into another recession? But even if it is just a good sized downturn they can pin it on Obama and even the suckiest candidate will win. Delay is seen as their friend and the Democrats better figure out a strategy to deal with it while making the old gray elephants pay politically.
@James that'd be a bit of cutting off their own noses to spite their faces. While there's a political advantage there in theory, there's a couple huge risks from it:
1) If there's a big recession caused by that action, it could very easily be blamed on Republican intransigence and hurt them severely.
2) They would wipe out their support from Wall Street and business more broadly. Nobody likes losing money and it's unlikely Republicans would get away with that one.
What you suggest is plausible but also an enormous risk and politicians, generally speaking, shy away from big risks. Most of those people who can vote on it will get reelected next year if nothing dramatic happens. But ruin the economy, and that might just change.
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