
A U.S. Default Seen as Catastrophe Dwarfing Lehman’s Fall - JumpCrisscross
http://www.bloomberg.com/news/2013-10-07/a-u-s-default-seen-as-catastrophe-dwarfing-lehman-s-fall.html
======
awjr
There is a part of me (I'm a UK resident) that looks at this and wants to see
what would happen. As an outsider looking in (and having lived in the USA in
the 80s), I don't see a country, I see corporation. A place where the rich
really are rich and the poor can go f*ck themselves, but the poor don't seem
to mind, y'know, cos America is awesome. Also they don't appear to have a
voice.

Do I think the UK is in a better position? Possibly. I think the EU has
probably helped to hold back on corporate dominance. Legislation is less about
supporting corporations and more about supporting society. (I do think we have
a free speech issue. Glenn Greenwald in an interview said he would fly to USA
but not to the UK as he had better legal protection.)

The more interesting question most banks/countries must be asking themselves,
"How do we get out of the USD?"

~~~
bodski
Be careful, the UK's total external debt has exceeded 10 trillion[0]. We have
huge financial sector debt here and are worse exposed to financial shock from
the banking system than almost all countries globally.

Agreed that getting out of the USD hegemony is inevitable. As to whether it
will be an orderly transition, I'd say that is far from assured, especially in
the UK.

[0]
[http://en.wikipedia.org/wiki/List_of_countries_by_external_d...](http://en.wikipedia.org/wiki/List_of_countries_by_external_debt)

~~~
arethuza
I'm not sure that "external debt" is a great measure in this context - it
seems to include international liabilities so if people invest/deposit their
money in the UK (which seems like a good thing) that creates an external
liability (i.e. whoever put the money here will want it back at some point).

Given the UK has a huge financial sector you would presumably expect a large
external debt:

[http://www.economicshelp.org/blog/2984/economics/uk-
external...](http://www.economicshelp.org/blog/2984/economics/uk-external-
debt-and-assets/)

~~~
justincormack
People who put their money in generally want some form of return, so its not a
bad measure.

A large financial sector shouldnt mean you have large net external
liabilities. It does tend to mean they are very hard to measure though.

Clearly the UK financial sector is too big for us to bail out, we should have
let it go under in the last crisis.

------
flexie
Always interesting to speculate about what would happen.

A default in the traditional sense probably won't happen this October but one
day in our lifetime they are going to have to come up with a way to finance
the 126 trillion unfunded liabilities:
[http://www.usdebtclock.org/](http://www.usdebtclock.org/)

One way to do that - without defaulting in a legal sense - is to work the
printing press and call it stimulation or monetary easing. Nah, Quantitative
easing! That's a nice term.

~~~
rayiner
It's misleading to call those unfunded liabilities. Most of that is Social
Security and Medicare projected expenditures. Unlike true liabilities, those
are not legally guaranteed. The government can reduce eligibility for those
programs, reduce payouts, etc, without being in default, unlike say a state
pension plan.

Comparing them against current assets is equally misleading. Say you plan to
spend $2k on rent for the indefinite future. That's $24k per year, $240k per
decade, etc. Are you insolvent if you don't have all that in the bank now? No,
of course not. Those are ongoing expenses paid out of ongoing income.

The Medicare trustee estimates the unfunded liability of Medicare at $40
trillion over 75 years (the $123 trillion figure includes a Medicare estimate
of twice that). Projected GDP over that period is $907 trillion.

Finally, there is nothing wrong with quantitative easing. The people that'll
be hurt by inflation are by and large the same ones whose fault the current
financial mess is (older people own most u.s. assets). The government will
probably encourage inflation at some point to reduce the value of these
expenditures as a percentage of GDP without making nominal cuts. I don't see a
problem with that readjustment.

~~~
cdash
The thing about quantitative easing is that it is not producing much if any
inflation and that is because it is not the same thing as printing money as so
many people like to call it and distributing it to everyone in the US.

This is mainly because all that money that is being injected into the banks is
not going anywhere. They are not lending it out but keeping it in a vault. To
show a graphic of this here is a chart of bank excess reserves held which is
the amount of money held over the reserve requirement.

[http://upload.wikimedia.org/wikipedia/en/8/81/EXCRESNS.png](http://upload.wikimedia.org/wikipedia/en/8/81/EXCRESNS.png)

This is actually out of date and the total is now at 2.3 trillion.

~~~
digitalengineer
Looks like they cannot end QE-to-∞

 _Reuters_ "The Fed has no clue what will happen when it starts selling
assets," IMF Chief Economist Olivier Blanchard told a meeting of the Institute
of International Finance in Paris. "So it cannot make any commitments in term
of quantities." [http://uk.reuters.com/article/2013/06/25/us-economy-imf-
idUK...](http://uk.reuters.com/article/2013/06/25/us-economy-imf-
idUKBRE95O0FV20130625)

------
tomelders
The world can't afford a super power. The world needs to diversify it's
interests and insist on total nuclear disarmament. Imagine a sidelined and
flat broke USA with neo-cons at the helm, with access to the big red button.
That scares me, and it should scare everyone.

------
dbpokorny
If aliens were to arrive, they would probably ask our university professors
why the economic system has a single point of failure.

And then after a while they would ask us why we are driving around in motor
vehicles powered by a non-renewable resource.

And then after some more reflection they would ask us why we get our news and
form our opinion of consensus reality based on a tiny number of sources, all
of which generally agree with one another and which also happen to generally
agree with the single point of failure in the first question.

And then we would hear a strange noise: alien laughter.

------
devx
Speaking as someone who receives his income in dollars, I hope US defaults.
Maybe then people in US will finally start to give a second thought on the US
military expansion all over the world, and the trillions of dollars it's
spending on weaponry. There are a lot of domestic programs are that very
wasteful, too - not just the police militarization ones, but also social ones.

Maybe this will make them look at every program from sub 100,000 in funding to
the hundreds of billions of dollars. Almost $4 trillion in spending a year
with a little over $2 trillion a year as income is simply _unsustainable_ , no
matter how you cut it. I think everyone can see that. As others mention, the
default _will_ happen eventually. It's just a matter of time, and the more
it's delayed, the bigger the impact will be.

What worries me most, though, is that if an imminent collapse of the dollar
will happen in the future because countries start dropping the dollar, out of
desperation, US will start becoming a lot more aggressive in its bullying, and
possibly even take military action against them for "hurting their economy",
or at the very least use NSA surveillance to blackmail them into not doing so
(my guess is that's already happening, though), and it's part of their
"diplomacy" with those countries.

~~~
ashray
It's unlikely that the US will ever really default in the near future. Why ?
Well, the global economy is becoming more and more linked as time passes. A US
default will trigger a collapse in the larger global financial markets. Do US
creditors want this ? Nope. They'll just keep extending deadlines but of
course this charade can only last for a certain amount of time. Personally, I
think the collapse will not come from a US default but due to this bubble over
extending itself and eventually popping in a Lehman'esque style.

An example of this is how last year India (a developing country, although with
a rather large GDP) donated money to the European Union in the form of an
economic stimulus, basically to prevent a default. The reason was simple, an
unstable european market hurts growth prospects worldwide. There's a saying in
India "When Wall Street sneezes the Indian markets catch a cold". An
increasingly linked global economy puts economic stability at #1 on everyone's
agenda. Of course, this is great for the US because they can wage wars, etc.
etc. while taking on unlimited debt and no one wants to lift a finger
(militarily, they can't - economically, they can't either because of the
repercussions). Of course the bubble will pop at some point. We don't know
when, though.

~~~
kamaal
Just wondering what a crash of that magnitude would do to a city like
Bangalore.

Big IT shops will shut down most of their operation. Several hundreds of
thousands of people will lose jobs. They in turn will default on their loans.
For those who don't know the real estate scenario in Bangalore, these days
even mediocre 2BHK flats sell for >65 lacs. People who are in neck deep in
debt, will default. Big real estate projects(which are a common place in
Bangalore today) and even small time real estate builders will crash and burn.
The lenders to those builders will in turn crash and burn.

A lot of bad blood will be eliminated and won't be able to come back for
years.

But I think it will ultimately do good for IT community as a whole. The
current scenario is full of super idiots powered by dirtiest form of politics
climbing the corporate hierarchies and building their real estate wealth with
that money and position.

I for one am praying for this crash to happen.

~~~
pekru
I'll join you in the prayer too. But be very aware of the fact that once the
investors and companies are off, even the bright ones around will have a tough
time. IT(sic) would take a lot of time to stabilize in India.

~~~
kamaal
Frankly speaking, I don't mind good people growing by working their way out of
tough situations.

The only thing that bothers me is bad people unfairly beating good people
because the situation was easy.

~~~
pekru
My friend, it's not that easy. The guys who have already made it big (those in
top management) have a great deal of financial security built up for
themselves. The unfortunate ones would be the 'supposedly' good folks who have
only been slogging while making those fat fellows richer. Now, again, much of
the wealth and means of production is with the erstwhile PHBs. And now, they
would have even better control on things as they won't have an organization to
report to but can call shots by starting their own companies. And the 'good
folks' will have nowhere to go but those firms, casue the other bigger/better
ones are all gone by now. In such a situation, who do you think would still
get jacked?

~~~
kamaal
>>The guys who have already made it big (those in top management) have a great
deal of financial security built up for themselves.

Not really, I agree for people at VP levels etc. But you could count these
people in numbers of 10's.

Most people are neck deep in debt and lifestyle expenses. These are middle
management layers. And I have no sympathy for them.

The most unfortunate ones will be guys who are not productive, who don't read
or learn often and just don't have the appetite or the curiosity to work on
difficult projects and build something of value. These are basically people
who pick up programming because some one told them there is good money in it.
And now the only way they can make it to the top is either by job hopping or
doing all kinds of politics.

Either way with the growing start up community in Bangalore and what I have
seen when it comes to meritocracy, its already becoming a trend that good
people leave to either start up on their own, or help others.

------
ck2
This is most certainly going to happen because negotiations to prevent the
shutdown and the default should have been going on since the summer.

The problem is all the negotiations had a hold placed on them. Take a guess
who put the hold on them.

The timelines dissecting what actually happened next month are going to be
epic in a very bad way.

~~~
patdennis
Sorry, but the idea that a failure to raise the debt ceiling "is most
certainly going to happen" is laughable.

It might happen. It's highly unlikely, but not impossible.

If you're so certain, you should be shorting the whole market and laughing
your way to the bank.

EDIT: Not to get too partisan, but the justification for not negotiating on
the debt ceiling is to put a stop to the use of the debt ceiling as a form of
political hostage taking.

To let this sort of thing go on gives Congress a de facto veto power over the
executive branch that was never laid out in the constitution. Once you let
Congress know that a majority (in a single chamber!) can get whatever they
want simply by threatening to tank the whole economy, there's no going back.

That's why it's the rational policy to refuse to negotiate when a single house
of a single branch of Congress starts threatening that sort of thing.

~~~
ck2
Explain to me how exactly de-funding the health insurance act is NOT going to
be attached to raising the debt limit?

Because the default is 9 days away.

Default will happen at least for 24 hours, maybe longer, so it can be used as
campaign slogans.

~~~
patdennis
Speaking as someone who writes campaign slogans: no.

On the shutdown: The house can and will pass a clean CR (clean as in it won't
defund the ACA) with Democratic votes. This will either happen when Boehner
abandons the Hastert rule or through a process such as moderate R's abandoning
their party to force a vote through a discharge petition (which has already
begun circulating).

On the debt limit: Same as the above, except with more urgency.

EDIT: without writing a dissertation on the current fractures in the
Republican Party, the Ted Cruz wing is currently very, very hated within the
party, and everyone is looking for a way out.

~~~
ck2
Discharge Petition is plausible but remember that all signatures are now
public record since mccain-finegold which makes me wonder.

Boehner will never defy "Hastert rule" because he likes his job, no matter how
horrible he is at it.

~~~
patdennis
Yes. The signers will be Republicans whose districts also went for Obama in
2012. Pete King in NY-2 would be an example.

Boehner has already defied the Hastert rule to pass the Violence Against Women
Act and to pass emergency aid for hurricane Sandy victims. He will do it
again.

~~~
ck2
There is a clip now of him saying 24 hours ago that a clean debt limit raise
would not pass the house. Which means he will not likely present one.

[http://www.bloomberg.com/news/2013-10-06/boehner-says-
house-...](http://www.bloomberg.com/news/2013-10-06/boehner-says-house-doesn-
t-have-votes-to-raise-debt-limit.html)

Tada. This is definitely happening. At least for a day if not more.

------
waps
Why would this be a catastrophe ?

I may be stating the blatantly obvious here, but :

1) Neither the US nor any European country, nor the middle east, nor the far
east (Abeonomics or not) will ever stop rolling over their debts. Not just
because they don't want to. Because they can't. This means interest payments
rising at a rate faster than inflation a given.

2) "Real" expenditures (as demostrated by the US shutdown for example) take
precedence over loan repayments. As they should.

3) This being blatantly obvious is not stopping a great many people from
buying ridiculously bad government debt. The US, all of Europe (not just the
EU), Japan and most of Asia with it, are trying to induce inflation by
printing exponentially more money over time. It's not working, meaning none of
those countries are getting any closer to paying back their debts, even if it
was realistic.

1+2+3 = Every country on this planet, with few exceptions, will default on
their debts. They may do it by hyperinflation (unlikely, as it will make all
of the population very unhappy) or they may just outright default (just makes
investors unhappy, and as Greece demonstrated[1], they have very few options
left). But there is no way out of this situation that does not involve a large
number of government defaults.

We've long since jumped from the plane. And what's this thing coming toward me
very fast? So big and flat and round, it needs a big wide sounding name like
'Ow', 'Ownge', 'Round', 'Ground'! That's it! Ground! Ha! I wonder if it'll be
friends with me? Hello, Ground!

[1] [http://www.tradingeconomics.com/greece/government-bond-
yield](http://www.tradingeconomics.com/greece/government-bond-yield)

~~~
lmm
It's entirely possible for a country to pay off its debts, gradually, if the
politics lines up. The US was making plans for that eventuality under Clinton.
Germany paid off large amounts of loans, even if it took them fifty years.
Stop fighting so many wars, stop cutting taxes on the rich, and you'll get
there.

~~~
gaius
The problem with taxing "the rich" is either there aren't as many of them as
you think they are, or they aren't as rich as you think they are. Fiscal drag
has seen to that, and inflation. You can be a higher-rate taxpayer in the
South East (of England) and not be able to afford a house. Or you can live in
a big house bought before the boom, but have basically no disposable income,
indeed struggle to pay your council tax! Or there are the so-called super
rich, well you can tax the crap out of them, assuming they all pay up rather
than just leave, well the sums involved just don't add up, there aren't that
many of them to start with!

Governments in general, and the UK in particular, can't tax themselves out of
this hole. They have got to just spend less. Despite all the talk of
austerity, this isn't happening right now.

