Monday, July 25, 2011

What Happens If We Default?

Before you read any further, please take another look at the Debt Widget above.  Over $47,500 owed per citizen...  Uhh.  Uhh.  That should scare us...

My best guess is that we will get some kind of sleazy deal on the US Debt Ceiling Extension that will likely involve fake spending cuts, some stealth tax hikes and letting .gov merrily go about "spending as normal."

If we get a BAD deal here (lots of taxes, no spending cuts, another kick o' the can down the road, etc.), then I would hereby declare to the world:

We now have the Biggest, Baddest, Slimiest, Sleaziest, Most Criminal Deal in World History!!!

I really hope that we get a GOOD deal from the negotiations between the Rs and Ds and Obama.


But, the issue that I would like to explore with you is:

What happens if they fail to reach a deal, and we "default" in one or more ways?

Do we default on Treasury debt payments (with very bad consequences)?  Do we cut spending as Obama sees fit (ie, selective cuts at his own discretion)?  Will Obama find a (likely unconstitutional, but so what?) executive way to go beyond or extend the Debt Ceiling?

What will happen in the financial markets?  To gold?

1 comment:

  1. That's a great widget. I did some back of the envelope calcs last night. At a deficit (ignoring unfunded liabilities, etc.) of $1.5T per year, that $47,500 per person share will increase by $5000 in the next year.

    I think you are right about a deal that is primarily window dressing. A very few minor, but fundamental changes on the margin, a few token spending cuts, talk of biggish spending cuts (but in the out-years and just a reduction of projected spending), some tax-increases that are front-loaded and will turn out far more distorting that expected. But mostly smoke and mirrors.

    If there is no deal, Treasury will do a lot of check-kiting but will prioritize debt payments over other spending. Obama will freeze spending at his whim (which probably is his constitutional right within a fiscal year, though I am not sure of that) and will emphasize cuts to GOP sacred cows (with one or two small hits to Dem programs to show he is "balanced").

    I think they will look into grey-area extra-constitutional ways to do what they want (like the gull-faith and credit trial balloon 2 weeks ago), but won't do any as that would be a sure cause of impeachment, and the Senate likely will be in GOP control by the time it got to them.

    Markets will pulse downward and breach 11,000 briefly then bounce back to 12,000 and go sideways for a while.

    As to gold, it will surge upward above $1700, pull back to $1600, then resume upward march.

    I don't think the movements will be extreme but will continue the slow decline of US and the dollar.


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