Thank you pookie18
Posted on 07/21/2011 6:39:47 AM PDT by Vintage Freeper
What could really happen if Congress doesn't raise the debt ceiling
From Dan Ferris in Extreme Value:
Until June 30, investors were focused on what would happen in the wake of the end of the second installment of quantitative easing, the Federal Reserve's eight-month, $600 billion, money-printing, Treasury bond-buying operation.
Luckily, not much happened after June 30. But now we find ourselves up against another big deadline: August 2. If Congress doesn't raise the debt ceiling by August 2, big things will happen on August 3. The debt ceiling is a legally imposed limit on the amount of debt the U.S. government is allowed to have at one time. It can only be raised by a vote of Congress.
The last time it was raised was early 2010, when Congress voted on a ceiling of $14.294 trillion. That limit was reached two months ago. Since then, according to U.S. Treasury Secretary Tim Geithner, the government has avoided not paying its bills through "extraordinary measures" and "accounting maneuvers." We're told these measures and maneuvers will run out on August 2.
Without a debt ceiling increase by August 2, the government will wake up August 3 unable to pay approximately 44% of its bills for August. The overwhelming majority of those bills are simply disbursements of funds for government programs, without which this would be a richer, freer country. Interest on the national debt due in August is not a big item.
The hype surrounding the August 2 deadline is that the U.S. will "default" on its debt. I see it a little differently. It's unlikely the U.S. will default on its debt on August 3. According to the Bipartisan Policy Center's recent report, interest payments on Treasury securities total about $29 billion for the month of August, and the U.S. brings in about $173 billion a month. There's no reason why the U.S. government should fail to make any of those payments in the month of August.
What about the $470 billion of debt the government has to roll over in the month of August alone? If it can't borrow more to pay that off, won't it default then?
That's obviously a bigger problem... But again, not as big as you might think. The U.S. government has about $2.88 trillion of total assets. It appears to have about $1 trillion in cash, stocks, bonds, mortgage-backed securities, and other liquid assets it could use to pay off Treasury debt. If that takes us through the end of September, we'd be able to go another few months, running the total debt back up to the debt ceiling of $14.294 trillion.
In an April 4 letter to Congress, Geithner said selling assets "would undermine confidence in the U.S." That's like when a government says it won't devalue its currency, or a company president says bankruptcy isn't on the table. Bringing up the possibility of selling U.S. assets automatically refutes the assertion that you're not thinking about doing it.
In the meantime, in the weeks and months that follow August 2, something unexpected would happen... something nobody in government wants you to know. You'd find out how much you don't need the government.
For example, you'd find out that the Departments of Commerce, Energy, Interior, Agriculture, and a few others are completely unnecessary and a total waste of money. They'd spend only a couple hundred billion dollars out of a $3 trillion budget, but it would be a huge start on the way to showing you how unneccessary government is. Once that ball got rolling, it'd get harder and harder to stop.
That's why Geithner is saying it would be a catastrophe not to raise the debt ceiling. And that's why Fed Chairman Ben Bernanke says it would be calamitous. Komrade Obama says it would be "financial Armageddon." They're all trying to scare you, because they don't want you to know that the big, strong government we all depend on so much is really a weakling you can easily live without.
I relish the possibility of huge swaths of our bloated, oppressive federal bureaucracy shutting down. Even more, I relish the prospect of hundreds of thousands of government employees, people with perfectly productive minds, some of them quite brilliant, making the change from parasites to producers, though I realize this is way too much to hope for.
I doubt this unleashing will take place. I doubt the voting public will stand for it. I'd like to believe we're a nation of self-responsible, self-reliant adults. My fear is that we've become a nation of whining, dependent children. Unfortunately, the last thing most people want is to be responsible for everything they do, say, need, and want. Freedom means freedom from government assistance. Hardly anybody wants that. But a fella can dream...
Remember the unleashing of human potential that occurred in the U.S. in the wake of World War II, when all the soldiers came home? It would be similar to that, though it would involve fewer people. Over 4 million servicemen and women came home after WWII. If 44% of the federal government employees were out of work as of August 2, it would amount to roughly 880,000 new productive workers (according to the Bureau of Labor Statistics' estimate of 2 million federal employees).
Many government employees are highly educated and highly trained. Many are experienced leaders, more than capable of feats of entrepreneurship. Frightened children like Bernanke and Geithner see scary monsters everywhere. Adults with vision and experience see opportunities.
Would there be disruptions to the economy if the government's role in it was instantly reduced? Of course there would. Would that look ugly in the short term? You bet it would. But I doubt it would be as bad as everyone is trying to scare you into believing. Remember... it's not you and me going broke here. It's the government. And it should go broke. It is broke. It should be forced to shrink expenses, reduce debt, and sell assets. Would this be a bad thing in the long term? Absolutely not.
There are many good reasons to reduce the size and cost of government in the United States – and few good reasons to pretend the job can wait another minute.
We could be in for a rocky ride, but it's hard for me to understand how 44% less government would be anything but an economic miracle.
Crux Note: Dan has developed a plan to help Extreme Value readers profit safely... no matter what the government does next. To access Extreme Value, click here.
“I do not know if there is or is not a “turkey basters for lesbians” program. “
Well,,, There is the ‘Weiner Washing Program For African Men.” I wonder if there’s a list of all these stoopid programs? I’ve seen partial lists, but I’ll bet the comprehensive list would be astonishing! And you could send it out to voters,,,,, if you could afford the postage!
If 44% of the federal government employees were out of work as of August 2, it would amount to roughly 880,000 new productive workers
And these productive workers will work where? I see 880,000 militant unemployed persons demonstrating and generally causing chaos through civil unrest this country has never experienced.
Jobs they now have will never be found in the private sector.
Jobs, even without the generous benefits, simply are not there.
well, tanking the world economy would ensure Obama’s defeat next fall, and I’m fairly certain Moody’s is not aiming for THAT.
Well stated, rlmorel. Well stated.
“Since then, according to U.S. Treasury Secretary Tim Geithner, the government has avoided not paying its bills through “extraordinary measures” and “accounting maneuvers.”
Probably the only thing Geithner is good at- avoiding paying bills....
So you’re saying these people could not somehow become more entrepreneurial? Start businesses? Figure out a way to manufacture something? Re-grow the economy — I mean, it HAS happened before.
Oh ye of little faith . . .
Since this economic disaster has begun, we have given up on vacations, extra clothes, fancy dinners out, we’ve cut down to perhaps a night out at the movies every other MONTH, and we’re driving an old falling apart van into the ground. — I mean — we have cut down on WANTS, not needs. We still have jobs, a roof our our heads, food, utilities still on. We’re OK. And we’re learning — NO MORE buying what we truly cannot afford and NO MORE hanging out w/ loads of credit card debt.
The government needs to do the same. Yes, we WANT everyone to be fully taken care of, have a flat screen, a nice apartment fully funded, all their grocery bills paid free and clear ...but we just can’t always have that.
Perhaps a few millions illegals might leave if we cut the welfare off, perhaps a few more welfare mamas will move in w/the baby daddies ... perhaps a few folks will have to move back in with mom and dad ... or what have you.
Perhaps a lot of people will have to learn quickly how to take responsibility for themselves, or stop drinking and smoking themselves to death or whatever. Perhaps they’ll have to cut out a few nights at the casinos, or the discos.
Thank you pookie18
I don’t know. There’s so many knee-jerk comments on these threads nowadays that I wonder if anyone who actually cares about the issues even bothers to scan through them, but here goes anyway...
The author of the article is quite possibly wrong when he says that the government would have to sell assets to pay off maturing debt issues. When a T-bill, or note, or bond, matures it opens up room under the debt ceiling. We would get the cash for paying it off by issuing a new bond, note, or bill. As long as the issues were simultaneously created and repaid, the total debt would stay the same and the debt ceiling would not be violated.
I said he’s “quite possibly wrong” instead of “is wrong” because the one hitch in this is that you have to have buyers of the new issue. There will be buyers, but they might not be satisfied with the current interest rate, and would demand a premium. At first, I doubt it would be very much, but I could be wrong, and over time it the premium demanded could rise significantly.
I doubt, though, that we would have to sell assets to stay within the debt ceiling due to maturing issues. On the other hand, we might sell assets to pay some of the other expenses.
You are correct, the government could continue to issue new debt instruments by rolling maturing debt.
The situation comes down to lowering outlays in other line items to cover the increased interest expense costs that will be demanded by the Treasury debt market participants. Or to increase revenues, where selling Federal assets is just one option, to increase revenues to pay the increased interest expense burdens.
The situation is reached an absurd parody level of hysteria, I’m personally willing to starve myself and the family if it resulted in the Federal Government collapsing and the world fiat monetary system being reset through jubilee.
Jubilee or slavery. There will be no muddling through these hard times.
If the debt ceiling is not raised, then whatever stimulative effect comes from employing nearly a million people and spending $1.6 trillion per year will immediately disappear.
Instead of buying cell phones, the newly shrunken government may find itself in a position to SELL cell phones. Whose going to buy new cell phones if they can buy like new phones from the government at fire sale prices?
Real estate continues to stagnate. Will nearly a million government employees find themselves buying real estate? Or will they be net sellers of real estate? What would that do to existing home sales or to the construction industry?
The same thought process can be applied to any expenditure being made directly by the government or by the million government employees who will be without a paycheck.
I don't see this ending well at all.
The whole world is now based on fiat money systems where money is borrowed into existence. History's largest debt/credit bubble is still expanding. If the Austrians are right, as long as somebody is borrowing, the bubble can continue to expand. And as long as people will accept printed pieces of paper as money, the printing can continue. But if the patterns history hold, there will come a time when the music stops.
Yahoo Finance has this clip as one person's expectation as to what might happen: Harry Dent
>>...the world fiat monetary system being reset through jubilee.<<
Jubilee is debt forgiveness, but that’s not how we do jubilee in modern day. The modern-day equivalent of jubilee is hyperinflation.
Same ending, in that no one owes anything anymore. The only people who come out of it all right are the ones who own physical goods, properties, and probably businesses if they’re fulfilling a need. It’s also the way out of the housing morass, as people will be able to pay off their mortgages with a week’s paycheck.
If we were a small country, we’d be at the mercy of our creditors. We’re not, so we will end up eventually inflating ourselves out of the problem unless Congress can somehow get spending under control. The process of creating a hyperinflation is already well under way under the guidance of our brilliant Fed Chairman, Bernanke.
You should really consider this scenario, because if it’s right it’s possible to defend against it damaging you personally. Own things that will always be worth something, provide a product that people will always want, and once you’re sure it’s seriously underway (it’s not, yet), borrow all the dollars the banks will give you, because you’ll have no trouble paying them back. Use those dollars to buy the stuff that will always be worth something.
Comic books, art, even gold, will not be good choices once the process gets underway because they will be viewed as inflation hedges and will be dramatically overvalued by then. The process will eventually end with a new currency replacing the old, and the economy will be in the crapper, so all of the perceived inflation hedges will be valued very low for a time in terms of the new currency.
But if you own land, or equipment, or are fulfilling an economic need, you will find that you’ve survived. Incidentally, some public companies will also survive, meaning that the stock market is actually a far better investment in such an environment than people think, especially if it gets hit hard in the earlier phases of the hyperinflation, as it will.
Do I think this will happen? Put it this way, if Obama is President in 2013, I’ll be in full hyperinflation protection mode. If the current debt ceiling morass doesn’t result in a significant retrenching of federal spending, I’ll move rapidly in that direction. We are more or less at the tipping point, but we haven’t yet “tipped” and we can still recover. If it turns out that there are four or five sane Senators among the Democrats, we might just do that, but I’m not exactly optimistic on that score.
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