There Is No Plan

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More from the Debt Ceiling Dumbass…

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I’m probably digging myself an even deeper hole here, but hear me out.

Look at the fluctuations in 10 year bond rates in this chart from Krugman’s blog, and note that interest rates on those bonds are at historic lows. Remember, Krugs is always banging on about mythological “bond vigilantes”.  And you have to wonder, if things were so bad in the US, wouldn’t the interest rates on these bonds have spiked by now?

Now consider Bruce Bartlett’s Armageddon scenario if we miss the debt ceiling cut off on August 2.

The bond-rating agencies have repeatedly warned that any failure to pay interest or principal on a Treasury security exactly when due could cause the U.S. credit rating to be downgraded, which would push interest rates up as investors demand higher rates to compensate for the increased risk.

J.P. Morgan recently surveyed its clients and asked how much rates would rise if there was a delay in payments, even a very brief one. Domestic investors thought they would go up by 0.37 percentage points, but foreign buyers — who own close to half the publicly held debt — predicted an increase of more than half a percentage point. Any increase in this range would raise Treasury’s borrowing costs by tens of billions of dollars per year.

Now add in Dean Baker’s analysis that the people who will really get pounded by a market run on crossing the debt ceiling will be Wall Street, and it all adds up to some food for thought to temper the Armageddon scenario.

While the country will still be left standing after a debt default, there is one important sector that will not be standing: Wall Street. A debt default would almost certainly make all the major banks insolvent as they would have to mark down the value of U.S. government debt, which had been held as a completely safe asset. The loss of value would also apply to all the assets backed by the government, such as the mortgage backed securities issued by Fannie Mae and Freddie Mac.

Even when the economy revived, the U.S. financial sector would never hold the same place in the world as it does today. Without the ironclad financial backing of the U.S. government standing behind them, the Wall Street gang could never again be the dominant actor in international financial markets.

In short, Krugman’s chart says interest rates on 10 year bonds fluctuate wildly and are all time lows. Bartlett says that 0.5% would be a decent place to start in determining the price we’d pay for missing the deadline – which seems like a blip on Krugman’s chart, and Baker’s analysis tells us that Wall Street may not like the idea of trashing their own safest assets just because the Government delays a few payments.

Again, I’m a debt ceiling dumbass who don’t know nothing, but I just can’t help thinking that maybe the President is working the debt ceiling card so much the meltdown might just become a self-fulfilling prophecy.


Written by coolrebel

July 10, 2011 at 4:18 am

Posted in Business BS, Washington

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