Geithner Says Damage From Debt Default May Be ‘Irrevocable`

Discussion in 'Wall St. News' started by ASusilovic, May 14, 2011.

  1. U.S. Treasury Secretary Timothy F. Geithner said a default arising from failing to raise the debt limit could cause “irrevocable damage” to the economy, risk a “double-dip” recession and increase unemployment.

    “Default would not only increase borrowing costs for the federal government, but also for families, businesses and local governments -- reducing investment and job creation throughout the economy,” Geithner said in a letter dated yesterday to Senator Michael Bennet, a Colorado Democrat.

    Failing to raise the $14.29 trillion debt ceiling would “force the United States to default” on obligations such as payments to service members, citizens, investors and businesses, Geithner wrote. “This would be an unprecedented event in American history. A default would inflict catastrophic, far- reaching damage on our nation’s economy, significantly reducing growth and increasing unemployment.”

    http://noir.bloomberg.com/apps/news?pid=20601087&sid=azC.BvZt9tiM&pos=3

    [​IMG]
     
  2. Geithner is absolutely correct, defaulting on debt would crush the economy. But he gives a disingenuous reason - the cause would be an enormous anti-stimulus caused by removal of gov't spending. The elephant in the room is that, since Reagan, the US has an economy fundamentally based on gov't spending. It is as socialist as you'll find in the Western world.

    The real question isn't whether the economy is going to get crushed - that's happening no matter what is done - the real question is when, and can a pre-emptive, intentional nose dive allow for a smoother, more controllable descent and subsequent stabilization.

    If I was Obama, I would be saying the "right" things publicly, but in private, I would be telling the GOP "go for it", because the Republican Party is as opposed to massive spending cuts as is the Democratic Party.
     
  3. clacy

    clacy

    We cannot escape austerity. It is going to happen one way or another. It is just a matter of when, and how much pain we have to go through. Either we put policy measures in place that stop the insanity, or the bond market will force us to at a later date.

    The bottom line is that we are on an unsustainable course.
     
  4. Well stated and I completely agree with the last line. Both parties are opposed to spending cuts. The Repubs are simply paying lip service to the Tea Party element, but have no intention of actually following thru on cuts.

    Both parties are owned by their campaign contributors and would never have a chance at winning an election if not for the money that flows into their coffers.
     
  5. Military should be outsourced to lower-cost providers. Have the National Guard bring in a few divisions of Chinese mercenaries riding around in Tata tanks, that ought to narrow the gap.
     
  6. Perfect. Well said.

    This type of deficit-financed prosperity Americans have come to expect as "normal" is in for one hell of a shit storm. We are in serious trouble. Conservatively, the deficit and QE juice the economy by 13% GDP. That's 1.8 Trillion dollars in activity that doesn't naturally exist in the economy, today. IOW, American incomes can't afford that additional 1.8 Trillion dollars in consumption that we now associate with flat NFP and GDP numbers. That ought to shock the hell out of any financial literate. In reality, the equilibrium point for the American economy - where domestic consumption = domestic production - is at least 1300 basis points SOUTH of where we are now. And that figure doesn't include ripple effects. Government workers and their suppliers don't stuff their checks under the bed. They spend those checks into the real economy - cars, homes, vacations, education, medicine etc. The "knock-on" effects from a balanced budget would be at least 7%. That said, the true equilibrium point is about 40 million jobs south of where we are now. That's if you project the '08 losses onto a future default scenario. For perspective, the "Great Recession" erased 3.3% from GDP, peak-to-trough. Under a default, equilibrium point would be in the neighborhood of 20%. Roughly, 6 TIMES worse. Unemployment north of 25%. Catastrophe is an understatement.

    I agree, Regan started this bullshit vote-pandering by getting us hooked on borrowed cash. Problem is, over time, incomes (or GDP) naturally receded from successive bouts of inflation, offshoring and bubbles/busts. That meant it took greater and greater deficits to offset the decline in real incomes and churn positive growth. This is why academic circles are perplexed as to how stimulus seemingly lost it's effectiveness. Iow, why each round of deficit-fueled stimulus produces less and less GDP growth. And the simple answer to that: it hasn't. The truth is that the American economy has actually been in contraction for a long, long time. So, in the 80's and 90's, for each 3% deficit (expressed as % of GDP) it only produced 2% in real growth because equilibrium GDP had actually shrank 1%. In the early 2000's, we (borrowed) spent 5% and it only produced 2% in real growth because equilibrium GDP was actually -3%. Now, we spend roughly 13% GDP, get 0 growth, because the actual equilibrium point is -13%. And that doesn't include ripple effects. We're in deep shit.

    Just want to add, each President since Regan was faced with a certain downturn, unless they added more to the national debt. Since nobody wanted to jeopardize reelection, they continued the daisy chain. They added to the debt and passed the problem down the line to the next guy. And as each President inherited the problem, the problem kept growing because real incomes were progressively in decline and needed that much more stimulus (read: debt) to keep the economy at break-even. Now, we're at the end of the rope. The nations credit limit is nearly maxed out. And instead of the steady, moderate decline we should have felt since the 80's, we will now experience all of those very real recessions, in one sharp, devastating blow. We literally "saved up" all those recessions and they will hit us all at once. The deficit was merely a bandaid to a much deeper structural problem that was hidden - I argue, intentionally - from the American public, for a very long time.
     
  7. have 'we' reached the 'tipping point' ?
     
  8. Not yet, as China and Japan are holding more than 4500 bn USD in currency reserves. China needs the US and Japan needs the US. Where else to sell their products...
     
  9. rew

    rew

    Geithner is admitting that we are in a state of pure Ponzi finance. Why would not raising the debt ceiling, and thus *not* getting deeper into debt, destroy our credit rating? Because we can only pay the interest and principal on existing debt by rolling it forward to even greater amounts of debt.

    So yes, we have hit the tipping point. Maddof was an amateur.
     
    #10     May 15, 2011