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Thursday, October 10, 2013

What defaulting on the debt really means for you and me.

 "I think we had a debt downgrade (in 2011) because creditors are looking out long-term and realizing, “Huh, the U.S. just blinked again, they kicked the can down the road, they’re not solving the problem.”

-Senator Ron Johnson

Most experts and the journalists who follow the shutdown and understand the actual consequences have mentioned that the shutdown is more a nuisance than real destruction. That isn't to minimize that real people with jobs, mortgages, kids and lives on the line are getting hurt and will continue to feel that pain. They are feeling real pain. No doubt.
However, the real danger (for the big picture) is defaulting on the debt. It simply can't happen. Here is why.
What would happen if the U.S. defaulted on their debt? Well, in reality, they can't. It would mean that at the very least, the next time around they will pay a ridiculously higher rate of interest and basically never be able to get out of the hole (assuming you believe they still can, which I don't anyway) they are in now, which is getting deeper as we speak.
But what they can do, and might do, is delay paying the bondholders. That isn't defaulting per say. Default means you don't pay ever, and the debt has to be written off or assets seized by the bondholders to cover it. 

Like all people who loan money, you don't have a choice when that happens. You make a deal and you have to get paid when the debtor can pay. But it raises red flags and your credit rating goes down. People who might have loaned you money or bought your debt now might not because they view you as a much poorer risk. The U.S. still has that reputation of being a safe investment, unlike many countries like Greece, Spain, Portugal and countless others who appear not able to pay what they owe.
But here is the ultimate off-shoot and result of not paying on time. In the future, the people who loan the money will require penalties that are extremely stiff and enforceable if you don't pay on time. That means that the debt and deficit will get deeper and there won't be much discussion about the debt ceiling. 
The ultimate effect: America is going to have to face up to the fact that they can't make ends meet and pay their bills and people have to get used to getting less than they have come to expect they deserve. 

"And I, I utterly reject the administration’s claim that this isn’t about new spending, that we’re just paying off old bills. Well, well, the reason you have to increase the debt ceiling is because of new deficit spending. If we weren’t running deficits, if we weren’t spending more than we were taking in, there would be no reason whatsoever to increase the debt ceiling. So if you manage things properly – and listen, I’m a business guy, I’ve got to prioritize spending in all my business career to prevent my business from going bankrupt. The federal government has got to start doing that eventually as well."

-Senator Ron Johnson

 Now, I am not siding with the Tea Partiers. Ron Johnson is part of that. But, just because I don't side with their ideology and tactics, that doesn't mean they don't have a point and make sense. At some point, you have to stop increasing debt and start paying it down. Shutting down the government isn't the answer. But neither is continuing to build up debt when you can't pay the bills you have now without printing money.
Whether it is the President, the Congress, the Senate, Republicans or Democrats it won't matter. The worlds bankers and lenders will make that decision for them.
And if they are thinking they can just print money as a way out of this, they have tried that and we see where that gets them.
It is time to face up to reality. Get used to having less. That is what all this will mean no matter how is shakes out.
And if you think  I am wrong, just take a look at Detroit, who spent 40 years kicking the can down the road to the next guy until they couldn't turn the street lights on at night anymore and are hopelessly beyond bankrupt. 
That is what it ultimately means when you default.

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