Joe Six pack probably has no real idea whats going on, this is why you do not see people calling up people in congress and telling them to cut this out, or massive protests. So lets say on the 17th debt celling is not raised what happens? interest payments get missed? do all federal employees/contractors get sent home (ie FAA shuts down no more flights etc..) or is it business as usual? So what will happen and how will this impact Joe Six pack? and lets say the debt ceiling is not raised for days or months. how does this cause issues as time passes? Somehow the only way things get fixed is if it actually impacts the regular working stiff. The 1%ers are probably safe, via hedging etc.. or are they?
there will be no default. just like before the sequester the treasury told there are all sorts of creating waves keeping things paid for months. plus the fed would never let their money printing and lending franchise be destroyed by a default by America. they would just keep paying. they do not need debt to make money.
I have a strange and indirect answer. It's psychological so therefore a little abstract and may sound like BS, but I think there's an element or a lot of truth in it. I think Joe six pack (which made me lol very hard btw) WANTS the default to happen. In a recent poll over 50% of Americans said they were behind not raising the ceiling and allowing default. Why? Well, for starters most Americans don't really understand the ramifications of a default as you pointed out - and actually, I don't either, and probably no one does regardless of what they might say. Middle class American tea-party types and fiscal conservatives may say they don't want to raise the ceiling because Gov't is spending and wasting too much money. Then you have middle class liberals who will also say that our spending is really out of control due to conservative backed wars and too much spending on military. These are the reasons they give. I actually think though there's really a bigger idea and a different motive going on that the majority of people in both parties share (and not necessarily their representatives in any branches of Government). They also may not be saying it directly to their representatives but it's an underlying phenomenon going on that only a few dare say out loud. Basically, I think a default is kind of in a way a revolution against our now crony-capitalist system which most Americans believe is totally corrupt and rigged against them now more than ever. So, their logic is something along the lines of, well a HUGE or a small or any change from the way things are in this Country can't be much worse than how things are now: the average American has no assets, is working minimum wage, and has overly burdensome debt and they see no way out even with hard work. The "conspiracy theory" that a few rich and powerful people are ruling the Country has now become the mainstream view. So to them, the American dream is almost impossible if you're not in the "1%" or have an uncle who is. So, default is kind of a way for them to give the middle finger to all the powers that be, and also, possibly gives them a chance to reset and level the playing field. Another thing is they feel that the last time in 2008 when we did all the bailouts and everything, the American people were told these things were done because if they weren't there would be total collapse. Well, 5 years later all they see is that the 1% grabbed everything and things probably weren't anywhere near as bad as pundits and bankers and economists in the 1% made it out to be. So now, they're totally skeptical when they're told that a default would be the apocalypse. I think that's the psyche of "Joe six Pack". How would a default actually impact him? Who knows? But, can it get much worse for them economically than it is now? Do you really think things will totally crumble because we miss a payment to China? I don't. Maybe a default would be a great thing. Russia defaulted in 1998 wasn't long before their economy resurged. I mean, defaults have happened a million times before and countries bounce back. Yes, America is the only superpower in the world and we have the reserve currency so this complicates things a lot. But, "Joe six pack" will bounce back regardless IMO. Maybe it'll be a boon for him. Also, I'm long volatility and short the mkt so I may be talking my book a bit. But actually, I put my shorts on b/c this logic started to occur to me. Could be totally wrong. Anyway, default will come down to Boehner and Obama and other 1%'ers. They're pulling the strings. But I think what gives each of them their audaciousness to act the way they have is they know the average American doesn't really give a sh*t if we tell China to piss off. (And just as I'm writing this I see that Yellen is now officially nominated for next Fed chair - which is just another symbolic handoff of a continuation of the current system and administration that we've had for the last five years. Perfect timing too, volatility just went above 20 today for the first time in forever - "strange" timing.)
the default happens only if the creditors don't get paid. Geithner said last time... that there were creative ways to make sure the interest payment got made. and my statement is that even if treasury runs out of ideas... The Fed will just pay. The Fed can create the money to make the payments. They don't need bonds to be sold to create money. Hence even if both the dems and the rs wanted a default, the FED would still make sure our creditors got paid. Are there scenarios in which the fed would let a default happen? I am sure their are some very remote ones ... but the FED and Wall Street will make Obama and the dems will cave long before that would happen.
okay so lets say interestpayments get paid out. what gets cut? social security payments? Something has to give. http://www.morganstanley.com/views/...ml#anchor4aa28a8e-8075-11e0-b72c-c51383242534 Some have argued that the Treasury can manage its cash in a way that avoids default. For example, see the Wall Street Journal op-ed's by Senator Pat Toomey and former Treasury official Emil Henry. However, the approach that they are advocating does not seem at all workable to us. The Treasury's cash flows are too lumpy to simply prioritize one form of spending over another. For example, we would expect a significant political outburst if the Treasury withheld monthly social security checks at the beginning of the month (even though there was sufficient cash on hand to make the payments) just in case they needed this cash to make debt service payments at mid-month. Such a scenario is highly impractical - and probably not even legal. Norm Carleton, a former long-time senior Treasury official, has offered a similar criticism of the Toomey/Henry strategy. Debt prioritization is not a realistic option. It is being advocated by people who simply do not understand Treasury cash flows. While it is true that the government takes in a good deal more in receipts than it pays out in interest on the debt over the course of a full year, on certain days the government takes in much less than it pays out. For example, the Treasury has an interest payment of about $30 billion due on August 15. On that day, it will take in about $15 billion in tax receipts, so it won't even have enough to make the interest payment alone. Are the proponents of prioritization suggesting that the Treasury should withhold all of the $22 billion social security payment due on August 3, so it can cover a debt service interest payment that is due a couple of weeks later? If so, what is the legal basis for Treasury to do this?
Why cant our central bank along with all other major central banks step in and do whatever it takes? Imagine the moral hazzard if they said this before the actual default, or even after The default.
I agree with jem. The media is simply running around with their heads on fire for the sole purpose of fear mongering. To aid their dear leader of course. The government is still collecting more than enough revenue to make interest payments. Ergo no default. Now if the so called debt limit does not get raised then those buffoons in Washington will be forced to start balancing the budget. Given our government is I believe 20% of the economy that would have a trickle down effect obviously. So far it's not even a real "shutdown". Something like 83% of the government is open for business as usual. The Obama administration is making a full court press effort to make the "shutdown" as dramatic as possible for political gain. Truth is though it's really not that big a deal.
If they service debt payments, will they be able to service all other payments (ie social security etc..) or will there be abrupt non payments? and will the non payments escalate if short term interest goes up?
I don't claim to know exactly what those idiots in Washington will do when forced to. If they don't raise the debt limit or start printing money they will have to make cuts though. Who knows what they'll cut. Whatever it is, it probably will not make any sense.