Thursday, July 28, 2011

What a Default Looks Like, and Some Regret on the Part of the U. S. Chamber of Commerce

There Will Not Be Rioting in the Streets

It is possible that U. S. will reach a point between August 2 and August 12, 2011 in which it will not pay interest and/or principle on its debt.  This will be termed a default.

What will happen?

At first, not much.  The financial markets have shown relatively little concern about a default.  Business will take place as usual, with holders of U. S. debt expecting and probably receiving continued interest on unpaid principle.  The secondary market in U. S. debt will continue as before.  Interest rates may rise, but not significantly.

Over the long run, government will start to shut down.  Operations will go on furlough, but Social Security checks will like continue, indeed it may not be physically possible to program the computers to stop them.

The ratings agencies may downgrade the U. S. debt.  This will not be an issue.  Relative to the risk of other sovereign securities, the risk of U. S. Treasury debt will not have changed. 

Paul Krugman talks about the impact of a ratings decline and noted

the last time the raters downgraded a major economy’s government. Here’s the 10-year bond rate in Japan:

See the downgrade? (It was in 2002).

The point is that when S&P or Moody’s speaks, that’s not the voice of “the market”. 

The impact of a ratings downgrade is political as Republicans will accuse Mr. Obama of the additional sin of causing U. S. credit to decline.  If the jobs picture does not improve, though, they really won’t need that issue.

Oh, and remember last fall when the supposedly non-partisan U. S. Chamber of Commerce spent millions to elect Republicans to the House.  How’s that working out?  Well the Chamber

is struggling to convince the House it helped to build that the debt ceiling must be increased.

Phelan M. Ebenhack/Associated Press
The U.S. Chamber of Commerce
 spent $250,000 to help elect
Representative Daniel Webster.

The chamber and other business groups have pressed with increasing urgency for Congress to raise the maximum amount that the government can borrow. They have cataloged the consequences of default at meetings, parties and dinners and over drinks.

Maybe its just not enough drinking, have some more Chamber of Commerce.

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