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Title: The default has already begun
Source:
Returs blog
URL Source: http://blogs.reuters.com/felix-salm ... the-default-has-already-begun/
Published: Oct 14, 2013
Author: Felix Salmon
Post Date: 2013-10-15 12:38:43 by Prefrontal Vortex
Keywords: None
Views: 131
Comments: 6
By Felix Salmon October 14, 2013 The big question in Washington this week is whether, in the words of the NYT, we’re going to see “a legislative failure and an economic catastrophe that could ripple through financial markets, foreign capitals, corporate boardrooms, state budget offices and the bank accounts of everyday investors”. In this conception — and I have subscribed to it just as much as anybody else — the sequester is bad, the shutdown is worse, and the default associated with hitting the debt ceiling is so catastrophic as to be unthinkable. This frame is a useful one, not least for the politicians in Washington, who seem to have become inured to the suffering caused by the shutdown, and downright blasé about the negative consequences of the sequester. Both of them could last more or less indefinitely were it not for the debt ceiling, which is helpfully providing a hard-and-fast deadline: Congress is going to have to come up with a deal before the ceiling is reached, because the alternative is, well, the zombie apocalypse. There’s more than a little truth here: I’m a firm believer, for instance, that the president both can and should prioritize debt repayments in the event that the debt ceiling is reached. If we’re going to be so stupid as to hit the ceiling, then prioritizing debt service is the least-worst outcome. But at the same time, the situation is less binary than it looks, not least because the US government is already in default on its obligations. The best way to look at this, I think, is that there’s a spectrum of default severities. At one end, you have the outright repudiation of sovereign debt, a la Ecuador in 2008; at the other end, you have the sequester, which involves telling a large number of government employees that the resources which were promised them will not, in fact, arrive. Both of them involve the government going back on its promises, but some promises are far more binding, and far more important, than others. Right now, with the shutdown, we’ve already reached the point at which the government is breaking very important promises indeed: we promised to pay hundreds of thousands of government employees a certain amount on certain dates, in return for their honest work. We have broken that promise. Indeed, by Treasury’s own definition, it’s reasonable to say that we have already defaulted: surely, by any sensible conception, the salaries of government employees constitute “legal obligations of the US“. Conversely, if you really do expect zombies to start roaming the streets the minute that the US misses a payment on its Treasury obligations, you’re likely to be disappointed. Yes, the stock market would fall. But the price of Treasury bonds would remain in the general vicinity of par, and it might even go up if Treasury announced that past-due interest would be paid on all debt at a statutory rate of 8% per annum. Even when it’s Treasury bonds themselves which are the instruments in default, Treasury bonds remain the world’s flight-to-quality trade, and the expected recovery on all defaulted Treasury obligations would be 100 cents on the dollar — or more. The harm done to the global financial system by a Treasury debt default would not be caused by cash losses to bond investors. If you needed that interest payment, you could always just sell your Treasury bill instead, for an amount extremely close to the total principal and interest due. Rather, the harm done would be a function of the way in which the Treasury market is the risk-free vaseline which greases the entire financial system. If Treasury payments can’t be trusted entirely, then not only do all risk instruments need to be repriced, but so does the most basic counterparty risk of all. The US government, in one form or another, is a counterparty to every single financial player in the world. Its payments have to be certain, or else the whole house of cards risks collapsing — starting with the multi-trillion-dollar interest-rate derivatives market, and moving rapidly from there. And here’s the problem: we’re already well past the point at which that certainty has been called into question. Fidelity, for instance, has no US debt coming due in October or early November, and neither does Reich & Tang: The vaseline, in other words, already has sand in it. The global faith in US institutions has already been undermined. The mechanism by which catastrophe would arise has already been set into motion. And as a result, economic growth in both the US and the rest of the world will be lower than it should be. Unemployment will be higher. Social unrest will be more destructive. These things aren’t as bad now as they would be if we actually got to a point of payment default. But even a payment default wouldn’t cause mass overnight failures: the catastrophe would be slower and nastier than that, less visible, less spectacular. We’re not talking the final scene of Fight Club, we’re talking more about another global credit crisis — where “credit” means “trust”, and “trust” means “trust in the US government as the one institution which cannot fail”. While debt default is undoubtedly the worst of all possible worlds, then, the bonkers level of Washington dysfunction on display right now is nearly as bad. Every day that goes past is a day where trust and faith in the US government is evaporating — and once it has evaporated, it will never return. The Republicans in the House have already managed to inflict significant, lasting damage to the US and the global economy — even if they were to pass a completely clean bill tomorrow morning, which they won’t. The default has already started, and is already causing real harm. The only question is how much worse it’s going to get. Poster Comment: The mechanism by which catastrophe would arise has already been set into motion. Allah willing!The default has already begun
While he doesn’t believe the U.S. will default, Tom Nelson, chief investment officer at Reich & Tang, which oversees $35 billion including $17 billion in money-market funds, said that the firm isn’t holding any U.S. securities that pay interest at the end of October through mid-November because if a default does take place, “we’d be criticized for stepping in front of that train.”
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#1. To: Prefrontal Vortex (#0)
i believe. To question is to value the ideal of truth more highly than the loyalties to nation, religion, race, or ideology.
I just wonder where the author got his knowledge of vaseline and sand.
"If an angry bigot assumes this bountiful cause of Abolition, and comes to me with his last news from Barbados, why should I not say to him, 'Go love thy infant; love thy wood-chopper: be good-natured and modest; have that grace; and never varnish your hard, uncharitable ambition with this incredible tenderness for black folk a thousand miles off. Thy love afar is spite at home.'" Seeing as the sequester was written into law in 2011 — like the “shut down”, it took effect not because anybody at the time put it into effect, but because they failed to agree how to effect something different — I’m not sure who felt they were promised anything after September of 2011 that they felt they were due in 2013 and didn’t get because of the sequester, but such a promise was ultra vires on the part of the person making it. Two or three years ago you [Felix] were making arguments the gist of which were “it’s good that people no longer believe in risk-free assets”. Are you saying you no longer believe that? I wonder whether Taleb does. "If an angry bigot assumes this bountiful cause of Abolition, and comes to me with his last news from Barbados, why should I not say to him, 'Go love thy infant; love thy wood-chopper: be good-natured and modest; have that grace; and never varnish your hard, uncharitable ambition with this incredible tenderness for black folk a thousand miles off. Thy love afar is spite at home.'" I just wonder where the author got his knowledge of vaseline and sand. I wonder myself. When we worked for the State of Illinois, we would say, "pound salt". This would be much more irritable than pounding sand. ;) "When bad men combine, the good must associate; else they will fall, one by one." Edmund Burke
I sure as hell hope so. Now's as good a time as any. It's the financial markets, foreign capitals, corporate boardrooms, state and federal government offices alike that are all part and parcel of the problem.
If a REAL default does not wake Americans up to the necessity of ending the Empire, there may be only one thing left: A really nasty natural/national disaster like Yellowstone erupting and destroying much of America's agriculture (as well as tens of millions of people). At that point any agenda other than survival is not likely to be very popular. And the rest of the world would probably talk the US govt into disarming in exchange for food. It's an extreme scenario that came to me the other day. John Howard says: There are 4 schools of economics: Democrats don't mind war as long as they can have big government. Republicans don't mind big government as long as they can have war. The default has already begun
#2. To: christine (#1)
-- Ralph Waldo Emerson, Self-Reliance
#3. To: christine (#1)
Good comment at the source
-- Ralph Waldo Emerson, Self-Reliance
#4. To: Prefrontal Vortex, christine (#2)
The vaseline, in other words, already has sand in it. The global faith in US institutions has already been undermined. The mechanism by which catastrophe would arise has already been set into motion.
#5. To: Prefrontal Vortex (#0)
The big question in Washington this week is whether, in the words of the NYT, we’re going to see “a legislative failure and an economic catastrophe that could ripple through financial markets, foreign capitals, corporate boardrooms, state budget offices
#6. To: christine (#1)
Marxism: steal everything
Keynesianism: steal by counterfeiting whenever needed
Chicago school (Milton Friedman): steal by counterfeiting at a steady, predictable rate
Austrians: don't steal
'Wiped off the Map' – The Rumor of the Century
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