Some questions on the debt ceiling... and then some more

[luzribeiro.livejournal.com]

Frankly, I haven't stopped watching this counter for a few minutes. It's mesmerizing:

U.S. National Debt Clock: Real Time

Alright. Now that all most of the hubbub surrounding the shenanigans on Capitol Hill has subsided somewhat, time to get back on topic, i.e. "Speculative Scenarios". And the topic I'm gonna occupy you with, is again... the debt ceiling! :)

Anyone know for sure what would've happened if Thursday came and went and Congress was still stuck at an impasse without being able to raise the debt ceiling? It's not like the US won't arrive at exactly the same point next year, right? Sure, we already know that, simplistically put, not raising the debt ceiling would mean the government would no longer have the authority to borrow money to pay its bills. Sounds bad at a first reading, that's for sure.

But what next? What would be the longer-term consequences? Could someone more well-versed in the financial matters spell it out to me, step by step? 'Cause, from what I've been able to gather from the various talking-heads on the media, it all sounds like a nightmare scenario. The government no longer being able to pay the interest on the debt, financial markets sinking, social security checks being delayed, and ultimately, another recession? Am I on the right track?

What exactly is the idea behind a borrowing limit? What's the rationale behind it? For a time it seemed to me-the-layperson that the US had deliberately put a system of obstacles and traps in its own path, relying that it'd never even consider stepping into them (deliberately) - only to realize that yes, yes it's perfectly possible to step into your own traps (as seen in the recent days). Or shoot yourself in the leg. Or stick a muddy rug inside your own throat. Etc.

And, since the national debt limit had already been reached once in May this year, isn't any subsequent measure that's been taken by the Treasury only an effort to postpone the inevitable, and treat cocaine addiction with increased cocaine intake? (Or as the PC term is, "extraordinary measures"). It's all starting to look more and more like an inflating balloon which can't go on pumping up forever.

Just one more thing I may not be competent enough to grasp. Couldn't the president just, you know, ignore the borrowing limit? From the 14th Amendment: "The validity of the public debt of the United States, authorized by law ... shall not be questioned". So does he or does he not have the authority to do that? Is "authorized by law" = "sanctioned by Congress"? And even if not so, would any investor buy bonds issued without congressional approval?

And while we're about the markets, ultimately, how would investors meet the news that the government of the world's presumed economic superpower has been compelled to prioritize among its payments, giving precedence of some of its obligations but falling behind on others? And all that said, in these circumstances why should anyone be surprised that governments around the world are already seriously considering shifting away from the US dollar as a reserve currency? How many more countries would have to be threatened of being bombed after having done that step, before a critical threshold is reached where national treasuries worldwide would start abandoning the increasingly worthless main US export (namely: green papers), regardless of the potential repercussions for such a bold/crazy action?

I know. These are probably too many questions. But, see, we furrinners have been compelled to listen to this stuff over and over for many many days now, so, methinks you guys do owe us at least some small explanation, even if it comes in the form of funny macros. I'm all ears/eyes!

Comments

[meus-ovatio.livejournal.com]

From what I understand, American treasury bonds are still considered the safest, rock-solid debt-investment instrument in the world. So people buy them by the billions. Because we're a nation of 315 million with a gigantic, technological economy, and as long as the government can raise taxes, collect taxes, and make payments, people will keep giving us money for bonds until the cows come home or the sun explodes. If you had a billion dollars, and you wanted to protect that money, you would definitely put a large chunk of it into American bonds, you wouldn't put it all into equities (that would be crazy). So, since our bonds are so great, their interest remains pretty low so it's very very cheap for the government to borrow money (even free at times). A deficit represents stimulus. Whatever the government borrows to spend into the economy, represents, basically, a subsidy to businesses and rich folk, which is why we will always have deficits, because deficits represent a wealth transfer to the 1 percent. The total amount of debt is almost irrelevant as long as bond holders get paid on time, every time. You can float a multi-trillion dollar debt level until the cows come home or the sun explodes.

[sophia-sadek.livejournal.com]

Please, please, you are making the Koch brothers jealous.

[rowsdowerisms.livejournal.com]

I'm with everything you're saying except, "Whatever the government borrows to spend into the economy, represents, basically, a subsidy to businesses and rich folk, which is why we will always have deficits, because deficits represent a wealth transfer to the 1 percent."

At 0% or negative real interest rates, how is this the case? At best, isn't it a wash for the wealthy and an influx of cash for the proles?

[meus-ovatio.livejournal.com]

Not if the government keeps paying contractors with debt money. That makes people at the top rich, at least those who need those dollars. So basically it recoups taxation at the higher levels in the form of direct payments back to their companies.

[rowsdowerisms.livejournal.com]

I see what you're saying, but with private contractors at ~14% of the federal budget, around ~24% of GDP, that comes to 3.2% of GDP. Deficits in 2012 were running 8.7% of GDP. That's a difference of around 800 billion that was financed with real negative interest rates. If the deficit is financed by the well to do, and they're recouping their 3.2% GDP bond investment in business contracts, but paying a negative interest rate, then how doesn't the remaining 800 billion + their negative interest transfer from, not to, the wealthy?

[meus-ovatio.livejournal.com]

Because banks are making money on taking Fed money and giving it back to the Treasury for a small premium.