Is a U.S. Default Inevitable?

[peejay 327]

Is a U.S. Default Inevitable?

by Patrick J. Buchanan

Posted 07/05/2011 ET

As President Bush prepared to invade Iraq in September 2002, the head of his economic policy council, Lawrence Lindsey publicly estimated such a war could cost $100 billion to $200 billion.

Lindsey had committed candor, and the stunned Bushites came down on him with both feet.

"Baloney," said Donald Rumsfeld. The likely cost would be $60 billion, said Mitch Daniels of the Office of Management and Budget. We can finance the war with Iraqi oil, said Paul Wolfowitz.

By year's end, Lindsey was gone, back, in Ronald Reagan's phrase, "testing the magic of the marketplace."

And the cost of the Iraq War? It has passed $1 trillion.

So Lindsey is worth listening to. And he is now saving that the Obamaites may be wildly underestimating the deficits America is going to run in this decade. Here is why.

The average rate of interest the Fed has had to pay to borrow for the last two decades has been 5.7 percent. However, President Obama is projecting the cost of money at only 2.5 percent.

A return to the normal Fed rate would, by 2020, add $4.9 trillion to the cumulative deficit, says Lindsey, more than twice the $2 trillion in savings being discussed in Joe Biden's debt-ceiling deal.

Second, Obama is estimating growth in 2012, 2013 and 2014 at 4, 4.5 and 4.1 percent. But the normal rate for a mature economy recovering from recession is 2.5 percent.

Hence, if we return to a normal rate of growth, rather than rise to Obama's projected rate, says Lindsey, that would add $700 billion to the deficit over the next three years and $4 trillion by 2020.

Taken together, a U.S. return to a normal rate of growth of 2.5 percent, higher than today, and a normal rate of interest for the Fed could add as much as $9 trillion to the deficits between now and 2020.

New taxes on millionaires and billionaires who ride around in corporate jets can't cover a tenth of 1 percent of these deficits.

Writes Lindsey, "Only serious long-term spending reduction in the entitlement area can begin to address the nation's deficit and debt problems."

His conclusion is logical, but seems impossible to achieve when both parties are talking of taking Medicare and Social Security off the table. Which makes his final point all the more compelling:

"Under current government policies and economic projections, (bondholders) should be far more concerned about a return of their principal in 10 years than about any short-term delay in interest payments in August."

Lindsey is saying that the probability of U.S. bonds losing face value through inflation or default is high, given the size of the deficits we will be running and the improbability that any deficit-reduction plan now out there can significantly reduce them.

Standard & Poor's and Moody's are already talking of downgrading U.S. debt if the debt ceiling is not raised by early August.

Is America then headed for an inevitable default?

One Chinese economist is already accusing us of defaulting, as the Fed's flooding of the world with dollars has seen the dollar lose 10 percent of its value against other currencies in the last year.

Holding $1 trillion in U.S. debt, China has watched the purchasing power of that U.S. paper plummet. Understandably, Beijing fears that if we ever pay back all they have lent us, it will be in U.S. dollars of far lesser value.

What should House Republicans do?

Stick to their principles and convictions.

For the cause of the deficit-debt crisis has been the explosion in federal spending under Barack Obama to the largest share of the U.S. economy since the climactic years of World War II.

Administrations of both parties contributed to this rise in the federal share of gross domestic product. But the GOP committed itself in 2010 to rein it in, without raising taxes. On that pledge the GOP triumphed and should keep its commitment.

First, because it is a solemn undertaking with a nation disgusted with politicians who say one thing and do another. Second, because our fiscal crisis, like Europe's, is a result of too much government, not too little revenue. Third, because there is no credible school of economic thought that says raising taxes on the productive sector when one in six workers is unemployed or underemployed is the way to prosperity.

Under Obama these past two years, the nation relied on the U.S. government to pull us out of the ditch. But Obama's $787 billion stimulus, his three deficits of 10 percent of GDP, and Ben Bernanke's tripling of Fed assets by buying the bad paper of big banks and $600 billion in U.S. debt all failed.

For Republicans to agree now to a tax increases that would violate their principles, their promises to the voters and their basic philosophy -- and be icing on the cake of Obama's debt-ceiling increase -- would be politically suicidal.

Indeed, were the Republican Party to do this, it would raise the question of why we need a Republican Party.

http://www.humanevents.com/article.php?id=44641

[mawilson 2,133]

Is a U.S. Default Inevitable?

Nah. The Republican-Democrat Regime will not let it happen. They'll play chicken until the last moment and then "unexpectedly" "reach a compromise".

[peejay 327]

Nah. The Republican-Democrat Regime will not let it happen. They'll play chicken until the last moment and then "unexpectedly" "reach a compromise".

Kind of like the ongoing saga of Greece? The US stock market dumps one week and bounces back the next week on Greek news. And the rich and connected play the bounce to get even richer. The old tried and true "pump and dump".

Edited July 6, 2011 by peejay

[mawilson 2,133]

Kind of like the ongoing saga of Greece? The US stock market dumps one week and bounces back the next week on Greek news. And the rich and connected play the bounce to get even richer. The old tried and true "pump and dump".

Indeed. What's worse, Congress members and Senators can trade on inside information - the usual insider trading rules do not apply.

[scandal 951]

The average rate of interest the Fed has had to pay to borrow for the last two decades has been 5.7 percent. However, President Obama is projecting the cost of money at only 2.5 percent.

All the more reason to lock in as much long term rate as we can at the long end of the curve. 30Yr bonds are at slightly over 4%. Just as a mortgage borrower locks in on firesale rates like these, so too should the Treasury. If investors want to oversubscribe our auctions, who are we (taxpayers) to deprive them of the privilege of owning our bonds? We've been in a secular decline in rates for decades now (since the Volcker era, really). Can rates go lower? Probably not (much). If you've got to borrow, this is a great time to be doing it.

[SMR 368]

What would a US government default actually look like? Typically, when a financial entity goes into some sort of default/bankruptcy, creditors have priority access to assets and income of that entity. Considering the present payments on the debt are significantly less than revenue, I wonder if the US actually can default on its debt. Leaving everything as it is and not increasing the debt ceiling, someone won't get paid. But would it really be the creditors? I say let the government 'default.' It will have to continue making debt payments and entitlements will be cut by default (no pun intended) since there will be no money to fund them.

[scandal 951]

What would a US government default actually look like? Typically, when a financial entity goes into some sort of default/bankruptcy, creditors have priority access to assets and income of that entity. Considering the present payments on the debt are significantly less than revenue, I wonder if the US actually can default on its debt. Leaving everything as it is and not increasing the debt ceiling, someone won't get paid. But would it really be the creditors? I say let the government 'default.' It will have to continue making debt payments and entitlements will be cut by default (no pun intended) since there will be no money to fund them.

That's not the way bond holders and rating agencies see it though. When a bond issuer does not make good on any of its legal obligations it's technically considered to be in default. For example - a corporation that has issued a series of 2 year, 5 year and 10 year notes, and also owes suppliers A, B, C for various receivables that are in its warehouse, and that owes payroll for its employees, and that owes taxes to state and federal authorities, is considered to be in default if it is unable to pay ANY of those bills. Paying the coupons on its bonds while stiffing its suppliers and/or employees and/or the taxman doesn't change the fact that it's in technical default. At that point (and likely -- well before it) the rating agencies are likely to downgrade its credit, and bond traders will have established a new (lower) price for its bonds in the marketplace, thereby driving up the yield on those bonds and making it more expensive to raise fresh capital. (Witness Greece for a textbook current case).

Congress has passed laws authorizing all the payments the Treasury Department makes. If the Treasury is unable to make good on any of those legally binding payments we as a nation have defaulted on the good faith and credit of the United States. Something we've never done. And something which once done can never be undone. We'll never ever again in the future of the Republic be able to talk about the squeaky clean never-missed-a-payment credit of the United States.