Markets would be alarmed if it looked like bondholders would go unpaid for an extended period, and might even panic if any government checks were delayed. Many analysts think the administration would at least try to prioritize payments on the national debt, but Treasury officials say picking and choosing which bills to pay would be impossible. The first debt payments due after hitting the debt ceiling are on October 17, 24 and 31. The first of those shouldn’t be a problem, according the CBO analysis. But there might not be enough money for the payments due on the 24th or the 31st. – How would default affect the economy? It would sink like a stone. Once default began, the government would have to slash its spending overnight by about a third. The fiscal drag, if it lasted a full year, would be the equivalent of up to 4.2 percent of national economic output, according to calculations by Goldman Sachs. That doesn’t take into account the potential for a financial crisis. If investors lost their cool, stock markets could tumble, hitting pension funds and leading consumers to spend less of their money. Credit markets could freeze up because investors around the world might reassess the value of U.S. debt, which serves as collateral for trillions of dollars in loans and other financial transactions. The Treasury has warned a default could trigger the worst recession since the Great Depression.
Actually, the United States Has Defaulted Before
No matter what we spend on education it seems to be going in one ear and out the other, according to the study that was conducted by the Organization for Economic Cooperation and Development (OECD). While the world sends its best and brightest to enjoy the quality of a number of universities, these students seem to retain the information before returning to their countries of origin. Never mind that with a more progressive approach to immigration this could be avoided. But as long as a large portion of Americans remain afraid of Mexicans, Hondurans, and Guatemalans, dont expect that to change anytime soon. The study examines literacy, numeracy, and problem solving in technology-rich environments in 23 industrialized nations, and the results were just about what you would expect. Japan and Finland are powerhouse nations , coming in first and second respectively in all three areas. The U.S., however, scores below average on each of the three assessments and is near the bottom for math skills. I guess I was overly optimistic in hoping that middle of the road was what I would read as I went through the study. United States literacy rankings In literacy, the U.S. ranked 16th out of the 23 countries. A level-1 reader can get a single piece of information out of a simple text. A level-4 or 5 reader can pick multiple pieces of information out of lengthy or competing texts, and evaluate subtle arguments. Over 20 percent of people scored at level 4 or 5 in Finland and Japan. The United States managed only half that number.
Doom Kaufman predicted that interest rates would rise. They did. Turn-of-the-year cash management disrupted rates as 1978 became 1979. And rates spiked and fell in October 1979 when Paul Volcker announced that the Fed would target monetary aggregates rather than interest rates (the Saturday night special). The fourth big move was the day of the first default, when T-bill rates rose almost 0.6 percentage points (i.e., 60 basis points).Theres no indication this increase reversed in the days that followed (the vertical line on the chart is just a marker for the day of default). Indeed, using more sophisticated means, including comparing T-bill rates to interest on commercial paper, the authors conclude that default led to a persistent increase in T-bill rates and, therefore, higher borrowing costs for the federal government. The financial world has changed dramatically in the intervening decades. T-bill rates hover near zero compared to the 9-10 percent range of the late 1970s; that means a temporary delay in payments would be less costly for creditors. Treasurys IT systems are, one hopes, more reliable that 1970s vintage word processors. And one should take care not to make too much of a single data point. But its the only data point we have on a U.S. default. Not surprisingly it shows that even small, temporary default is a bad idea. Our leaders shouldnt come close to risking it. P.S.