There Is Life after Default

There Is Life after Default

Great article about defaulting and the unwarranted fears associated with defaulting. Sure it will be a painful short term, but in the long term it will be good for us. Politicians need to stop thinking short term and focus on long term, because our near sightedness is going to destroy us in the end.

In following the debates over raising the US debt ceiling, I’m struck by the frequent claim that defaulting on public debt is unthinkable because of the “signal” that would send. If you can’t rely on the T-bill, what can you rely on? Debt instruments backed by the “full faith and credit” of the United States are supposed to be risk-free — almost magically so — somehow transcending the vagaries of ordinary debt markets. The Treasury bill, in other words, has become a myth and symbol, just like the US Constitution.

I find this line of reasoning unpersuasive. A T-bill is a bond just like any other bond. Corporations, municipalities, and other issuers default on bonds all the time, and the results are hardly catastrophic.

Good points raised here about the T-bills. We almost have some sort of reverence for these bond bills, but why? Because the talking heads and politicians tell us we need to. Many entities have defaulted on their debts before. Entities ranging from people such as you and I to businesses and even cities and states. Why is our federal government some sort of exception?

“What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom,” Adam Smith famously observed. Bankrupt firms, like bankrupt families, restructure their debt obligations all the time. The notion of T-bills as sacred relics to be once and forever “risk-free” seems more like religion than economics to me.

This is what I as saying earlier. We treat the T-bill as some sort of sacred artifact that needs to be preserved. Economics doesn't work that way. If you can't pay the bills, you default. End of story.

Default and even repudiation are policy options that have benefits and costs, just as continuing to borrow and increasing the debt have benefits and costs. Reasonable people can disagree about the relevant magnitudes, but comparative institutional analysis is obviously the way to go here. (Unfortunately, most of the academic discussion has focused entirely on the possible short-term costs of default default, with almost no attention paid to the almost certain long-term costs of continued borrowing.)

This is what I was getting at. Default discussion always seems to come down to the short term pain. Now I'm in no way trying to downplay the severity of the short term pain, it will be big. But it will be worth it. Just like a doctor who has to rebreak a leg that has healed wrong, the short term pain is immense, but in the end the long term is good because the person can walk correctly again.

Between 1841 and 1843 eight states and one territory defaulted on their obligations, and by the end of the decade four states and one territory had repudiated all or part of their debts. These debts are properly seen as sovereign debts both because the United States Constitution precludes suits against states to enforce the payment of debts, and because most of the state debts were held by residents of other states and other countries (primarily Britain). ...

In spite of the inability of the foreign creditors to impose direct sanctions, most U.S. states repaid their debts. It appears that states repaid in order to maintain their access to international capital markets, much like in reputational models. The states that repaid were able to borrow more in the years leading up to the Civil War, while those that did not repay were, for the most part, unable to do so. States that defaulted temporarily were able to regain access to the credit market by settling their old debts. More surprisingly, two states that repudiated a part of their debt were able to regain access to capital markets after servicing the remainder of their debt for a time.

Yes, even states have defaulted on their debts before. So again, why is the federal government defaulting such a catastrophe? Me thinks that the people on the idiot box are telling you that it will be much worse then reality. This is probably so that they can retain the status quo of screwing everyone over. The government would inevitably shrink on a large scale if we were to default on our debt. The government obviously doesn't want this and they make sure that the talking heads on the various news programs echo those sentiments.

Please read the whole article as I have only posted some bits of it for you. The author brings up some very good points and makes a good case that I agree with. We need to experience the short term pain so that we can prosper in the long run. Look at Iceland, they defaulted on their debt and are now better than ever.

One more thing, a deliberate default, in my opinion, would result in less short term pain than letting the debt default naturally, which it will do eventually when the interest payments become unpayable. This government shutdown is a key time that we can use to implement a fix to the economy that would you know actually FIX the economy instead of letting it limp along painfully.

reply to post by Krazysh0t

It is my hope that our tolerance for scare tactics has been significantly reduced over recent years. We are not the same fools we once were and we aren't going to fall for the 'banana in the tailpipe' again.

No one actually believes that we can pay the debt that we currently have no matter how you measure it. Even the most optimistic among us simply think that we can trick our way out of paying the piper. I know a lot of pipers and they are not particularly financially forgiving types be they uillean nor most especially not if they are highland.

We must recognize that the myth of magical treasury bills is in the process of being dispelled. However painful the truth is, when has admitting it caused anything but the beginning of the process of correcting the problems it reveals?

reply to post by greencmp


Exactly, the first step to correcting a problem is to admit that there is one. We need to acknowledge that this is a huge problem and that we need to come to terms with the real fix that needs to be done so we can get back on track.

No going to lie, I was freaking out about this whole issue on defaulting on our debt.

I have a 6 month old little baby girl and she is everything to me. I just fear the chaos that would ensure as a result, if I have to defend my family I sure as hell will.

I have been stocking up on water and canned goods and have my solar panels on standby.

I sincerely hope it's not as bad as you say, another issue I guess would be china, what would their views on us defaulting be? they wouldn't go to war on something like this, would they? like demand something...like land? or maybe get something in return, like telling us to never return to the sea of china and let then handle their own issues, or take back Taiwan...whatever the case may be, I'm interested in what china would think about the default.

now that I think about it, a default would be a fresh start, but would just be dumb and continue down the same path that would eventually lead to another debt? or can we change?

The current leadership in Washington already has shown their incompetence, me thinks heads need to roll...

reply to post by Krazysh0t


THe thing you forgot to mention is who feels the pain and why they feel it differently, from how it affects different levels of the nation that defaults to how it impacts the loaners and their societies. Looking at this will clearly demonstrate why a failed system is still being artificially kept alive as it not only shifts the pain to different targets but even permits some (an insider minority) to escape feeling any pain at all, they can even profit from it...

The basic of the idea is simple, why do we have controlled demolitions ? the same logic is intrinsically the same of why we have a managed economical collapse...

reply to post by Arnie123


I think the China issue is blown out of proportion. I know this link is a few years old, but the debt has only increased by a few trillion dollars since then, the numbers reported for China should be about the same.

How Much U.S. Debt Does China Really Own?

In total, China owns about 8 percent of publicly held U.S. debt. Of all the holders of U.S. debt China is the third-largest, behind only the Social Security Trust Fund's holdings of nearly $3 trillion and the Federal Reserve's nearly $2 trillion holdings in Treasury investments, purchased as part of its quantitative easing program to boost the economy.

In actuality, it is China that is dependent on us. Here is another Forbes article about it:

China Is 175.6% Dependent on the U.S.

China’s overall trade surplus in 2011 was $155.1 billion, according to the Ministry of Commerce.

And how much of that surplus is related to America? Commerce Department figures show that, through the first 11 months of last year, China’s trade surplus against the United States was $272.3 billion. That’s up from $252.4 billion for the same period in 2010, a 7.9% increase.

So, you really don't have to worry about China coming and tearing down our borders if we default. Chances are their shaky economy will go bottom up just like ours will when we default.

reply to post by Panic2k11


Who matters not. Sure lower income people will be hit harder and richer people will skirt through this with less hardship. However, that is a terrible reason to avoid fixing the economy. The math is in, our economy is unsustainable. We WILL default eventually. Would you rather default now under our own terms and with a controlled fall allowing us to mitigate the hurt or just let everything crash on its own and cause unprecedented hardship?

reply to post by Krazysh0t


Okay cool!, thanks for the info I was curious about that issue, I always figured the amount of debt we owe to china wasn't the whole tamale, but a small bit.

I guess what we really have to do is figure out how to weather the storm then, if its a short period, just exactly how bad? It wouldn't come down to bugging out, doomsday style would it? I guess it wouldn't hurt to stock up on essentials anyways.

reply to post by Arnie123


How severe it will be in the short term is really anyone's guess. Stocking up on supplies is definitely something you should do here. But yes it all comes down to weathering the storm and it seems like everyone is terrified of the storm, but the calm afterwards will be so much better than the wild winds we have now. Of course they are rightfully terrified. It is a combination of a few things: the media keeps downplaying it like it would be the end of the world, the government does the same, and finally good old fashioned fear of the unknown. But sometimes you just need to make that leap and hope it all works out in the end.

reply to post by Krazysh0t

Sure lower income people will be hit harder and richer people will skirt through this with less hardship. However, that is a terrible reason to avoid fixing the economy

The only sense I can make of that sentence is that it does not make sense in light of what I stated earlier...

The simple facts are extremely simple, those the we define as TPTB belong to the haves (often they are simple puppets but are not part of the lower ranks of society, by design of the system and by subversion of it by the haves). So taking that fact as evident and indisputable and since TPTB are the by definition those in control why do you think that a) things where stewarded this way b) have no steps been made to "fix" it (consider that they will be fixing something that they see as not broken as if it was broken they had to take responsibility for the deed) c) not collapsed (since it was a constructed crisis, they have no intention of correcting it for the general benefit of all, they will take steps only so that they can benefit from it).

To the common citizen there is no benefit in waiting as most of us have no way to escape the pain now or in the future but the delay is intentional so that they can not only squeeze the last of drop but guarantee that they a) will escape punishment b) return to power as soon as possible after the collapse...

Would you rather default now under our own terms and with a controlled fall allowing us to mitigate the hurt or just let everything crash on its own and cause unprecedented hardship?

That is a false preposition since I have no control and can't chose any terms only those in power can. To me personalty the benefit would be to reform it as soon as possible (even by negotiating the default, like some European nations did and in part Grece managed in form or "air cuts") and default now guaranteeing that those that benefited from the shenanigans would be those that felt the worst pain (like Iceland) this managed collapse is being done only for the benefit of the haves...

reply to post by Panic2k11


I think this post explains your reasoning a bit better than your last post. I agree with you that the postponement of the crash is being done to benefit the haves, but that doesn't mean we can't brainstorm solutions or voice our opinions on the matter. In fact, it kind of makes sense to voice the opinion. If you can convince more people to agree with you then maybe we can get a push. The haves may have a vice grip on the government but as evidenced by the Syria debacle, the American public when united can still make its voice heard on an issue. Even the "infallible" Obama had to step down from his rhetoric and try a different course of action.

reply to post by Krazysh0t

but that doesn't mean we can't brainstorm solutions or voice our opinions on the matter.

I'm having a hard time framing what you say, take the phrase above, I never stated otherwise.

If you can convince more people to agree with you then maybe we can get a push.

In this respect I think it is so obvious that there is no real decent from what we are both defending, so there is no one to convince, of course this leads to the obvious conclusion that nothing is done because we have not the power to do it and those that have it will not do it. It is like tempting to warn people that that sun will rise tomorrow, they already know...

The obvious thing about all this is that the system is rigged, that there is no real escape without a violent conflict and even then there will not be a guarantee that we will get any improvement. Things need to get really really bad and chaotic as to permit at least one amongst the ranks of the haves to take the opportunity to go beyond messs with the have-not to also mess with the haves, this has always been the pattern.

reply to post by Panic2k11


I think you are having a breakdown in understanding me because you think I am opposed to your opinion. I am actually agreeing with you.

Just because trying to implement change seems futile, doesn't mean it shouldn't be undertaken. All daunting tasks appear futile at the beginning, however history shows that some of the smallest events by one or two individuals can enact large change. So while it may appear futile to talk about letting the economy default because the decision is out of our hands, there is still the possibility that someone reading this thread is in a position to influence tptb and does so. You never know and without trying nothing will change with 100% certainty.

reply to post by Krazysh0t

I think you are having a breakdown in understanding me because you think I am opposed to your opinion. I am actually agreeing with you.

No, I clearly notice that we only partially in agreement, you still have notions that you can do something about it...

Take for instance a more generalized problem like a state government, people especially the have-not are alienated by design from participating it requires resources that they as a default have a scarcity from time to information.

All daunting tasks appear futile at the beginning, however history shows that some of the smallest events by one or two individuals can enact large change.

That is a myth, all social movements requires a backing of at least above 10% to start to have an effect (there are studies about it) and the more complex the subject is the more fragmented that backing starts to become as people will argue about the details.

You never know and without trying nothing will change with 100% certainty.

I grant you that truism but one needs to be realistic about what type of actions that can generate the necessary reactions. I doubt that posting on ATS will serve anything more than round the corners of some ideas and mostly serve as a repository for future generations.

no it means every single city in the entire US will turn into detriot!

reply to post by Panic2k11


I know all this... I just try to stay a bit optimistic in light of the depressingness of our world. It truly seems like the optimistic in our world are just ignorant of the truth as once you learn more and more about the world, it just becomes more and more depressing. Pessimism seems to be the end result of knowledge of our world. Puts new meaning to the phrase ignorance is bliss.

I was talking to my mom once about my opinions and she told me I was far too young to be as pessimistic as I am. I countered that I'm not pessimistic, just a realist. Unfortunately, with all the problems of the world, the distinctions between these two words blurs.

Even the answer to the problems of the economy in my OP is kind of a pessimistic look (though if looked at it correctly would be more of a realist approach). No one wants to go through the hardships that will happen when we default.

In the end, all I can do is keep trying and not give up. Who knows, maybe things will get so bad for the public that they will be forced to adopt the position for us to default on our debt? Though admittedly when it gets that bad, it will probably be too late anyways.

reply to post by Krazysh0t


Take names, build a list and document the deeds you may still be alive to seek retribution of some of those that have blame in the matter...