Saturday, July 16, 2011

Congressional Insanity

An interesting take on the debt ceiling over at Reuters by Felix Salmon pointing out the potential consequences of insanity.

" The base-case scenario is, still, that the debt ceiling will be raised, somehow. But already an enormous amount of damage has been done: the US Congress has demonstrated clearly that it can’t be trusted to govern the country in a responsible manner. And the tail-risk implications for markets are huge. Think of the speed with which the Egyptian government collapsed earlier this year, or the incredible downward velocity of News Corporation right now. When you build up large stocks of mistrust and ill will, nothing can happen for a very long time. But when something does happen, it’s much quicker and much worse than anybody could have anticipated. The markets might not be punishing the US government at the moment. But the mistrust and ill will is there, believe me. And when it appears, it will appear with a vengeance."

Now will the world end if the August 2 deadline is missed, probably not but a lot of bad stuff will happen. The US has defaulted before in 1933 and in 1979

"You hear lot of people say, 'The government never defaulted.' The truth is, yeah, they did. … It might have been small, it might have been inadvertent, but it happened," said Terry Zivney, a finance professor at Ball State University who co-authored "The Day the United States Defaulted on Treasury Bills."

That had consequences America.

" The study by Zivney and Dick Marcus found that even a brief interruption in paying obligations has consequences, the Post said. It said the "series of defaults resulted in a permanent increase in interest rates" of more than half a percent that translated into billions of dollars in increased interest payments on the nation's debt over time.

"The impact is smaller at first because only new debt is affected," they wrote. "But over time, as the older debt matures and becomes refinanced at higher rates, the entire cost of the default is realized."

Are the Republicans aware of this ? I doubt that the credit rating agencies are going to give America much longer. This isn't rocket science which makes me wonder about the sanity of the Republicans, wreaking your economy isn't smart politics in my view. At the moment America can roll over debt as the markets still trust  America but the Republicans are taking you down a road that you really don't want to travel, take a look at Greece and the problems happening in the wider Euro zone. When markets won't lend  you are stuffed.

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