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US Debt Ceiling: Fed Starts Planning for Default
Topic Started: 23 Jul 2011, 03:19 PM (6,091 Views)
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Fed starts planning for US debt default

Lori Montgomery, Paul Kane, Richard Blackden, London
July 23, 2011

WASHINGTON: The Federal Reserve has started making contingency plans should the US government default on its debt as talks over raising the debt ceiling continue to drag on.

The United States will not be able to pay all its bills unless the $US14.3 trillion ($13.2 trillion) ceiling is raised by August 2. Financial regulators are working through the possible consequences, a Federal Reserve official said.

''We are in contingency planning mode,'' Charles Plosser, president of the Philadelphia Federal Reserve Bank, told Reuters. ''We are all engaged … It's a very active process.''

Despite repeated warnings of the financial disruption that is likely to follow a default, the White House, and both parties in Congress, appeared no closer to striking a deal as the week drew to an end.

On Thursday the President, Barack Obama, and the House Speaker, John Boehner, rushed to strike agreement on a far-reaching plan to reduce the national debt but faced a revolt from Democrats furious that the accord appeared to include no provision to raise taxes.

With 12 days left until the Treasury begins to run short of cash, Mr Obama and Mr Boehner were closing in on the most ambitious plan to restrain the national debt in at least 20 years. Talks focused on cuts in agency spending and politically painful changes to cherished health and retirement programs aimed at saving roughly $3 trillion over the next decade.

Read more: http://www.smh.com.au/world/fed-starts-planning-for-us-debt-default-20110722-1hspm.html
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matthew_50
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lol... "but... hmmm should they still have a AAA credit rating??"

all the MMT stuff about the US not *having* to default is irrelevant if they DO!

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Strindberg
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Even if the debt ceiling is not raised it does not imply an automatic default.

A default will be announced if the US fails to make due bond interest payments and pay due bond redemptions. But they have quite enough ongoing revenue to meet those costs. They can choose to prioritise the bond payments and there will be no default.

The problem is that if they use the revenue to make all the due bond payments they will have to cut expenditure on other things like social services or whatever. But they do have a choice over whether to default on the bonds even without the debt ceiling being raised. Of course, some may say that not making due social security payments would also be some kind of default. It would but it would not be the kind of default that the ratings agencies would be ruling on.
Edited by Strindberg, 23 Jul 2011, 04:11 PM.
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BubbleBoy
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Strindberg
23 Jul 2011, 04:08 PM
Even if the debt ceiling is not raised it does not imply an automatic default.

A default will be announced if the US fails to make due bond interest payments and pay due bond redemptions. But they have quite enough ongoing revenue to meet those costs. They can choose to prioritise the bond payments and there will be no default.

The problem is that if they use the revenue to make all the due bond payments they will have to cut expenditure on other things like social services or whatever. But they do have a choice over whether to default on the bonds even without the debt ceiling being raised. Of course, some may say that not making due social security payments would also be some kind of default. It would but it would not be the kind of default that the ratings agencies would be ruling on.
That is correct. I am not sure why so called economic journalists have not made this point - you would think from listening to them that the inability to continue to pay its public servants or welfare benefits is the same as a bond default, when it clearly isn't. Given a choice between not paying bond committments v cutting government expenditure overnight I believe that they will clearly choose the latter.
My name is based on a Seinfeld character, not on a belief of a housing bubble.
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Enrico Palazzo
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But meanwhile keep holding gold stocks ( despite what the "experts" say) cause the world is a cunt hair away from economic armageddon
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newjez
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BubbleBoy
23 Jul 2011, 04:30 PM
Strindberg
23 Jul 2011, 04:08 PM
Even if the debt ceiling is not raised it does not imply an automatic default.

A default will be announced if the US fails to make due bond interest payments and pay due bond redemptions. But they have quite enough ongoing revenue to meet those costs. They can choose to prioritise the bond payments and there will be no default.

The problem is that if they use the revenue to make all the due bond payments they will have to cut expenditure on other things like social services or whatever. But they do have a choice over whether to default on the bonds even without the debt ceiling being raised. Of course, some may say that not making due social security payments would also be some kind of default. It would but it would not be the kind of default that the ratings agencies would be ruling on.
That is correct. I am not sure why so called economic journalists have not made this point - you would think from listening to them that the inability to continue to pay its public servants or welfare benefits is the same as a bond default, when it clearly isn't. Given a choice between not paying bond committments v cutting government expenditure overnight I believe that they will clearly choose the latter.
They may want to change that 'right to bear arms' bit pretty quickly if they withhold social security payments.

Look at New Orleans - look how fast a stable democracy turns to dust. They are between a rock and a hard place.

But as b_b says - why can't they just print and keep printing?
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
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matthew_50
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yeah... thats a good point about the alternatives they have...

but still, is it just me, or which would look worse on the evening news?

"government defaults on debt and some investors loose some money"

or

"pensioners and public servants refused their pay because the government doesn't have any money to pay them with"

seems to me, they should just raise the debt ceiling a bit, wait for the wars they are in to cool off... then HALVE defense spending...

srsly, who the fuck would want to invade the US at the moment anyway? just 100s of millions of people with guns, and nothing to loose...



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Elastic
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I also find it amazing that amidst all this talk of austerity the idea of cutting the military budget is off the table.
Only a rat can win a rat race.

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newjez
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Elastic
23 Jul 2011, 09:57 PM
I also find it amazing that amidst all this talk of austerity the idea of cutting the military budget is off the table.
Are you nuts? They're about to go to war against China. They'll need all the guns they can muster.
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
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newjez
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Heat is on US over debt default deal
The prospect of America defaulting on its debts edged closer last night after the fraught negotiations between President Barack Obama and top Republicans collapsed.

John Boehner, the top Republican in Congress, pulled out of negotiations with the White House late on Friday, saying that he and President Obama "couldn't connect." President Obama has summoned Congressional leaders to The White House for a meeting scheduled for 4pm (BST) today aimed at reviving talks on what's expected to be the hottest weekend of the year in Washington.

In his weekly video address to America on Saturday, President Obama renewed his appeal for Democrats and Republicans to "work together" on a deal, but refused to back away from new tax demands on the wealthiest.

"Before we cut medical research, we should ask hedge fund managers to stop paying taxes at a lower rate than their secretaries," he said. "Before we ask seniors to pay more for Medicare, we should ask the wealthiest taxpayers to give up tax breaks we simply cannot afford under these circumstances."

But President Obama also stressed the need for compromise:

"We can come together for the good of the country and reach a compromise [...] or we can issue insults and demands and ultimatums at each another, withdraw to our partisan corners, and achieve nothing," he said.

The White House, and Democrats and Republicans in Congress, have just over a week to find the common ground that allows them to lift the country’s $14.3 trillion (£8.7 trillion) debt ceiling. The heat on the chief players has intensified in the 48 hours since European leaders agreed a fresh Greek bail-out.

Congress is in the awkward position of trying to conjure up a deal on long-term deficit reduction as a condition of raising the debt ceiling by August 2, when the Treasury has said it will run out of money to pay its bills.

That wasn’t enough to move US stock and bond markets out of the tight range they’ve traded in all week, as traders are torn between the talks’ lack of progress and scepticism that politicians would risk a default.

The debt ceiling, or the country’s legal borrowing requirement, has been raised many times since it was defined in law in the 1920s, but it has never proven so politically divisive.

Republicans want spending cuts – with some coming immediately – to tackle the deficit, while Democrats support tax rises on the wealthy. Rumours that President Obama was prepared to relent on tax rises provoked a furious response from Democrats, underlining the obstacles in reaching an accord.

Harry Reid, the Senate Democratic leader, warned the president to “show a lot of caution as this negotiation goes forward because any arrangement must be fair to all America, not just the wealthy”.

Although the majority of investors still believe a deal will be struck, nerves will be frayed further next week if the talks drag on.

Yesterday saw US government bond prices rise for the first time in five days on hopes of a deal, with the yield on the 10-year Treasury falling below 3pc.

On Wall Street, the S&P 500 edged up 1.22 points to close at 1,345.02, but the Dow Jones Industrial Average finished down 43.25 at 12,681.16.

Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
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