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US Debt Ceiling: Fed Starts Planning for Default
Topic Started: 23 Jul 2011, 03:19 PM (6,097 Views)
zaph
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davel
25 Jul 2011, 03:48 PM
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.
Sovereign default is not that rare when you look at a long enough time period. i was reading an article on the train this afternoon but can't find it. default isn't usually a get stuffed where not paying and the bird, it's a 'restructure'.

the uk defaulted on their war bonds. they paid out alright, but at 3.5% rather than the promised 5%. i think they lost their world reserve currency status as a result.

edit = spellling
Edited by zaph, 25 Jul 2011, 05:21 PM.
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Elastic
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They could always default on their bonds that were bought by the Fed.

The Fed just cancels them off their balance sheet and hey presto! the government debt has jut been reduced.
Only a rat can win a rat race.

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newjez
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There was a much bigger fall in the ASX than anywhere else bar China - but part of that was because of the momo rail crash. Was China a factor in the ASX fall?

I doubt the US will default, but they have shown their govt to be weak, and the world has taken note. Regardless of what the US does now, I don't think the world will ever be the same again. I can't imagine China or Russia having this sort of problem.
Edited by newjez, 25 Jul 2011, 09:11 PM.
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RayHyde
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They also have an unofficial debt ceiling which dwarfs the official debt ceiling.
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Admin
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http://www.smh.com.au/world/calamity-looms-as-congress-quibbles-20110725-1hx48.html

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Calamity looms as Congress quibbles

Simon Mann

July 26, 2011

WASHINGTON: World financial markets hung on the outcome of a dangerous game of political chicken being played out in Washington ahead of a deadline that may force the US government to default on its debt obligations.

As the White House and Republican leaders struggled to break their impasse, gold hit new highs, and Asian and Australian shares lost ground as investors grew anxious at the prospect of the US defaulting on its $US14.3 trillion ($13.17 trillion) debt.

Immediate-delivery gold gained up to $22.80, or 1.4 per cent, to $1624.07 an ounce and traded at $1620.20 by 11.15 am in London. Gold for August delivery was up 1.2 per cent at $1620.70 an ounce on the Comex in New York after reaching a record $1624.30.

Without a budget deal to allow an increase in the US's borrowing limit, the country will be unable to continue paying all its bills from next Tuesday. So far, Republicans have refused to countenance any tax increases and Democrats have refused to cede to a temporary increase in the debt limit to allow negotiations to continue.

Gold hit a record $US1624 an ounce, while the Australian S&P/ASX200 index fell almost 1.6 per cent to 4530.4. Asian indices fell by less than 1 per cent. Futures trading pointed to similar falls on Wall Street overnight.

However, a contained sell-off would suggest that the markets are still banking on a deal being struck in time to avert calamity.

Economists and credit ratings agencies have warned that a default would put at risk the US's AAA credit rating, push up interest rates and burden an already faltering recovery.

Despite frenzied weekend negotiations, Republicans and Democrats failed to meet their self-imposed deadline for a deal. At least three different plans were being drafted that nominated varying levels of spending cuts as a quid pro quo for Congress agreeing to raise the debt cap.

One was being championed by the Republican Speaker of the House of Representatives, John Boehner, with two others emerging out of the Senate.

Mr Boehner, who broke off talks with the President, Barack Obama, in acrimonious circumstances on Friday, was promoting a two-step deal that, initially, would add $US1 trillion to the debt ceiling in return for equivalent spending cuts.

The short-term fix would fund the government until early next year, and a bipartisan commission would be formed to identify a further $US3 trillion in savings over 10 years. "If we stick together, we can win this for the American people," Mr Boehner told House Republicans.

However, Democrats are wary of having to face a new round of negotiations just as the parties are intensifying hostilities in the 2012 presidential campaign.

Mr Obama, too, has insisted that any agreement must include a one-off increase in the ceiling sufficient to carry the US beyond next year, while indicating that he will veto any bill that embraces only a short-term deal.

Speaking on TV talk shows, the Treasury Secretary, Timothy Geithner, said he was open to a two-step process but not if it required a second vote to raise the borrowing limit. "What [a deal] cannot do is leave the threat of default hanging over the economy," he said.

Senators were working on alternative blueprints. The Majority Leader, Democrat Harry Reid, is proposing spending cuts of $US2.7 trillion in return for a similar rise in the ceiling.

But the plan reportedly includes woolly accounting such as "savings" of about $US1 trillion from winding down US involvement in the wars in Afghanistan and Iraq.

A fallback has also been put by Senator Reid's opposite number, Republican Mitch McConnell, who has proposed an agreement in which Mr Obama could raise the debt ceiling in three tranches through next year in return for nominated spending cuts.

While the Obama administration insists that August 2 is crunch time for the US running out of money, some Republicans remain sceptical and have argued that the Treasury could stave off default by prioritising payments.
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Generali
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RayHyde
25 Jul 2011, 09:19 PM
They also have an unofficial debt ceiling which dwarfs the official debt ceiling.
No they don't.

In common with most countries they have a lot of unfunded liabilities however.
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Frank Castle
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Business As Usual

Quote:
 
the prospect of the US defaulting on its $US14.3 trillion ($13.17 trillion) debt.


What will the AUD-USD conversion rates be if this happens?
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Generali
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Frank Castle
26 Jul 2011, 10:11 AM


What will the AUD-USD conversion rates be if this happens?
It could mean a fall in the value of the Aussie as investors seek lower risk assets.

It's hard to see what is low risk right now however. Gold I guess could benefit. The CHF would rise pretty sharply at a guess. Short AUD/long CHF would be the trade I think.
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newjez
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Frank Castle
26 Jul 2011, 10:11 AM
Quote:
 
the prospect of the US defaulting on its $US14.3 trillion ($13.17 trillion) debt.


What will the AUD-USD conversion rates be if this happens?
I don't think anyone knows Frank. If it was any other large economy that defaulted, the US would rise and the Aussie would fall. But seeing that the US is the one defaulting, you would think this wouldn't happen initially, but it still may. In the medium to longer term, I would see the US falling and the Aussie getting stronger. But it is entirely possible that they both would fall.

If I was to buy any currency as a short term haven - I would look at NZ dollars or Swiss Franks. Probably safer than Gold, which may fall if they don't default. But it's anyones guess really.
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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Frank Castle
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newjez
26 Jul 2011, 12:21 PM
In the medium to longer term, I would see the US falling and the Aussie getting stronger.
That was my thought as well
It would have me staying OS for a while longer if it did work that way, that's for sure
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