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US Debt Ceiling: Fed Starts Planning for Default
Topic Started: 23 Jul 2011, 03:19 PM (6,098 Views)
newjez
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Will this story come true?

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"Hellooo Mr. Frog!" called the scorpion across the water, "Would you be so kind as to give me a ride on your back across the river?"

"Well now, Mr. Scorpion! How do I know that if I try to help you, you wont try to kill me?" asked the frog hesitantly.

"Because," the scorpion replied, "If I try to kill you, then I would die too, for you see I cannot swim!"

Now this seemed to make sense to the frog. But he asked. "What about when I get close to the bank? You could still try to kill me and get back to the shore!"

"This is true," agreed the scorpion, "But then I wouldn't be able to get to the other side of the river!"

"Alright then...how do I know you wont just wait till we get to the other side and THEN kill me?" said the frog.

"Ahh...," crooned the scorpion, "Because you see, once you've taken me to the other side of this river, I will be so grateful for your help, that it would hardly be fair to reward you with death, now would it?!"

So the frog agreed to take the scorpion across the river. He swam over to the bank and settled himself near the mud to pick up his passenger. The scorpion crawled onto the frog's back, his sharp claws prickling into the frog's soft hide, and the frog slid into the river. The muddy water swirled around them, but the frog stayed near the surface so the scorpion would not drown. He kicked strongly through the first half of the stream, his flippers paddling wildly against the current.

Halfway across the river, the frog suddenly felt a sharp sting in his back and, out of the corner of his eye, saw the scorpion remove his stinger from the frog's back. A deadening numbness began to creep into his limbs.

"You fool!" croaked the frog, "Now we shall both die! Why on earth did you do that?"

The scorpion shrugged, and did a little jig on the drownings frog's back.

"I could not help myself. It is my nature."

Then they both sank into the muddy waters of the swiftly flowing river.

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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anyone remember that episode of the Simpsons. Bart to the Future?

bart: "What happened to you china, you used to be cool"
Representetive of china: "Hey china still cool! you pay later, LATER!"

not only do they perfectly encapsulate all aspects of life today, but seemingly in the future, too...

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newjez
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So is it to be Meltdown Monday ? Anyone brave enough to short the Dow?


Barack Obama warns of market meltdown if US debt talks fail
US President Barack Obama and top Congressional leaders are scrambling to agree a deal to raise America's $14.3 trillion (£8.8trillion) debt ceiling before financial markets open on Monday.


Both President Obama and Democrats and Republicans in Congress have insisted that an agreement on reducing America's long-term deficit is required to approve an increase in the debt ceiling.

The stakes have risen dramatically in the last 48 hours after long-running talks between President Obama and John Boehner, the top Republican in Congress, collapsed in acrimony.

"It's very important that the leadership (in Congress) understands that Wall Street will be opening on Monday, and we'd better have some answers," President Obama warned.

Failure to strike a deal by August 2, when the government has said it will no longer be able to pay all its bills, will leave markets facing the prospect of the first ever major default by the US.

Both President Obama and Democrats and Republicans in Congress have insisted that an agreement on reducing America's long-term deficit is required to approve an increase in the debt ceiling. But weeks of increasingly fraught talks have delivered nothing. Having met in The White House yesterday, President Obama and the leaders from both parties in the Senate and House of Representatives are expected to meet again on Sunday as the pressure intensifies.

Although the US Treasury has set a deadline of August 2, observers say the outline of a deal is needed early next week to ensure there is time for Congress to vote it through. "The whole thing is semi ridiculous that they're at this point," said Launny Steffens, founder of investment firm Spring Mountain Capital. "Do I think there would be a massive market reaction with no deal? There very well could be."

Investors and traders on Wall Street and across the world's financial capitals have been confident so far that Capitol Hill won't risk a default that Federal Reserve chairman Ben Bernanke has warned would be "catastrophic." Prices for US government debt, considered the safest asset in financial markets and a key instrument for setting borrowing costs for consumers and companies in the US, closed on Friday near their high for the year. "The market has been telling us that it's not concerned about the debt ceiling," said Priya Misra, a bond strategist at Bank of America Merrill Lynch. "I don't think anyone is prepared for default."

That confidence will come under renewed pressure tomorrow as efforts to reach a deal enter their final week. There are signs that US authorities are stepping up their planning should the ceiling not be raised by August 2. Timothy Geithner, the US Treasury Secretary, and Mr Bernanke met on Friday to examine the possible consequences for financial markets and the wider economy.

Experts say that because US government bonds, or Treasuries, are seen as the safest financial asset many investors will struggle to protect themselves against the risk of a default. "If you polled all the money managers who own Treasuries, I'm not sure they would know what to do," said Thomas O'Connor, a trader in New York at Pierpont Securities.

With just days to go, the prospect of a deficit deal that preserves America's prized 'AAA' rating is also receding. Ratings agency Standard & Poor's has warned that unless a deal convinces it that politicians are serious about cutting the deficit, then the US risks a downgrade for the first time in its history.

That will deal another blow to an economy that investors say is already suffering because of the protracted and politically divisive talks in Washington. "It's having a negative impact on business sentiment, on consumer sentiment and it's not helpful to an economy facing challenges," said Tony Crescenzi of Pimco, which runs the world's biggest bond fund.

Investors and politicians will be reminded by the scale of those challenges when the latest US growth figures are released on Friday. The world's biggest economy is expected to have grown just 1.6pc in the second quarter, down from the 1.9pc in the first three months of the year.


Edited by newjez, 24 Jul 2011, 07:03 AM.
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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ugg, there have been so many of these 11th hour critical dealings since the GFC made headlines, and each one has been sorted out just in time...


of course, if they did default, maybe that would plummet the value of the USD. which is probably something they want.

it must be annoying that when there is a financial meltdown, EVEN when it is one in YOUR country, that everyone STILL flocks to YOUR country's currency for security!

srsly! its like, fuck off somewhere else so we can depreciate our currency and be more competitive with trade!!
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newjez
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matthew_50
24 Jul 2011, 03:51 PM
ugg, there have been so many of these 11th hour critical dealings since the GFC made headlines, and each one has been sorted out just in time...


of course, if they did default, maybe that would plummet the value of the USD. which is probably something they want.

it must be annoying that when there is a financial meltdown, EVEN when it is one in YOUR country, that everyone STILL flocks to YOUR country's currency for security!

srsly! its like, fuck off somewhere else so we can depreciate our currency and be more competitive with trade!!
It's a bit like after the Tsunami when the Yen started to appreciate. It's like 'this is what we do in a crisis, this is what we have always done in a crisis'. The Aussie will be sold off too, when it's the Aussie they should be buying. Everyone is talking Aug 2nd - but the real date is this Monday 24th in order for them to get it past both houses and get the cheques signed. If they don't agree something this Monday, then the Dow will drop. But the ASX will be closed by then, so where it will get it's direction from in the morning is anyone's guess. Like the calm before the storm. But I guess if it's all agreed before the 2nd, a technical default won't make much difference, and any losses will bounce back
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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Generali
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Alex Barton
23 Jul 2011, 03:19 PM
Hi, Newbie here so please be gentle with me!

The FT Alphaville website/blog has had some excellent stuff about the debt ceiling.

This item that they posted from Goldman Sachs shows one possible timetable.

Another possible (probable?) outcome is that Obama is temporarily given executive power over the debt ceiling while talks continue. That means that the Democrats can carry on spending and the Republicans can let them without having to vote for higher spending.
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carter
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Tasman Vagrant

newjez
24 Jul 2011, 04:11 PM
If they don't agree something this Monday, then the Dow will drop. But the ASX will be closed by then, so where it will get it's direction from in the morning is anyone's guess. Like the calm before the storm. But I guess if it's all agreed before the 2nd, a technical default won't make much difference, and any losses will bounce back
ASX is dropping hard and fast today.
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newjez
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carter
25 Jul 2011, 02:19 PM
newjez
24 Jul 2011, 04:11 PM
If they don't agree something this Monday, then the Dow will drop. But the ASX will be closed by then, so where it will get it's direction from in the morning is anyone's guess. Like the calm before the storm. But I guess if it's all agreed before the 2nd, a technical default won't make much difference, and any losses will bounce back
ASX is dropping hard and fast today.
That's nothing - it's waiting for direction from Europe and the US

The gun's loaded and the finger's on the trigger. All we need is someone to shout boo. Looking at the state of the world - that's not a hard thing to imagine. It's a bit like the pop tart moment in Pulp Fiction.
Edited by newjez, 25 Jul 2011, 02:45 PM.
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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Black Panther
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newjez
25 Jul 2011, 02:38 PM
That's nothing - it's waiting for direction from Europe and the US

The gun's loaded and the finger's on the trigger. All we need is someone to shout boo. Looking at the state of the world - that's not a hard thing to imagine.
Its in the US's interest to default. I think there is a chance they will.

The British effectively defaulted in the 1930's, so why not the US.

"In the course of the Great Depression of the 1930s most European governments defaulted on their debts, following unsuccessful attempts to remain on the gold standard. In 1932, the British Government effectively defaulted by converting its 5% War Loan Bonds into new 3½ % bonds on terms that were unfavourable to their holders[5], and in 1934 the French government defaulted on repayment of a loan from the United States."

So don't be shocked if the Yanks do the same.

All the BS fixation on a tiny country like Greece was a smokescreen. The real problem is with the UK / US.

They do not want to accept that they are not the premier players anymore.

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davel
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Black Panther
25 Jul 2011, 02:48 PM
newjez
25 Jul 2011, 02:38 PM
That's nothing - it's waiting for direction from Europe and the US

The gun's loaded and the finger's on the trigger. All we need is someone to shout boo. Looking at the state of the world - that's not a hard thing to imagine.
Its in the US's interest to default. I think there is a chance they will.

The British effectively defaulted in the 1930's, so why not the US.

"In the course of the Great Depression of the 1930s most European governments defaulted on their debts, following unsuccessful attempts to remain on the gold standard. In 1932, the British Government effectively defaulted by converting its 5% War Loan Bonds into new 3½ % bonds on terms that were unfavourable to their holders[5], and in 1934 the French government defaulted on repayment of a loan from the United States."

So don't be shocked if the Yanks do the same.

All the BS fixation on a tiny country like Greece was a smokescreen. The real problem is with the UK / US.

They do not want to accept that they are not the premier players anymore.

If they do default its because they have a vocal minority of nutjobs who want to see an epoch-making event. These are people many of whom believe in the Rapture and literal meaning of the Bible. They also believe (perhaps rightly) that the more unrest and chaos there is, the more chance they have of advancing their own agenda. The only risk they run is that the consequences are really bad and they cop the blame, but they are relying on their proven ability to manipulate the media and the proven tendency of the US public to allow the debate to be taken to a childishly low level.

A default would be catastrophic for the US. It would be a defining event in their modern history and noone could really predict what will then happen.

Obama is basically calling for the markets to revolt, much as they did during the post-Lehman events which created the politcal will for TARP and its offspring.

If they do, the Republicans will wet themselves and cave in (a bit anyway). If they don't in the next few days, the events may occur too quickly for anyone to react.
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