- My Forums
- Tiger Rant
- LSU Recruiting
- SEC Rant
- Saints Talk
- Pelicans Talk
- More Sports Board
- Fantasy Sports
- Golf Board
- Soccer Board
- O-T Lounge
- Tech Board
- Home/Garden Board
- Outdoor Board
- Health/Fitness Board
- Movie/TV Board
- Book Board
- Music Board
- Political Talk
- Money Talk
- Fark Board
- Gaming Board
- Travel Board
- Food/Drink Board
- Ticket Exchange
- TD Help Board
Customize My Forums- View All Forums
- Show Left Links
- Topic Sort Options
- Trending Topics
- Recent Topics
- Active Topics
Started By
Message
Can someone explain how failing to raise the debt limit will affect the economy?
Posted on 1/6/23 at 5:41 pm
Posted on 1/6/23 at 5:41 pm
Don't want this to get political. I just want to understand if we default on our debt, how do the ramifications of that flow through the economy and how will it affect the equity markets, bonds etc. Can somebody lay out the mechanics for me for educational purposes?
8
Posted on 1/6/23 at 5:55 pm to hikingfan
Someone more scholarly in the workings of international finance will have a better take on this But it seems Kinda like if you personally default on your loans. You become a deadbeat in the eyes of those who have money to lend. And if anyone is left with money to lend Your costs and opportunity to borrow increase tremendously. So, your standard of living becomes deflated. You are at the mercy of others. Collapse is the word that comes to mind. Hungry?
Posted on 1/6/23 at 6:13 pm to hikingfan
Theoretically, we cannot default on our debt bc Congress has the ability to raise taxes to pay it.
Posted on 1/6/23 at 6:32 pm to hikingfan
We wouldn't default. We always have money coming in and that would be used to pay obligations. We just wouldn't be able to incur additional debt for discretionary spending. Think of it like your credick card being maxed out. You can't put anything more on it until you pay it down or the bank raises your limit, but you can still spend your paycheck.
A lot of federal employees would get furloughed and wouldn't be circulating money through the economy until the issue got fixed. It would spook the markets, so you'd see your 401k and eTrade account tank.
A lot of federal employees would get furloughed and wouldn't be circulating money through the economy until the issue got fixed. It would spook the markets, so you'd see your 401k and eTrade account tank.
Posted on 1/6/23 at 9:28 pm to hikingfan
Practically speaking, it will never happen. The debt ceiling was put in place during the first WW to help regulate spending to avoid the budget running wild. It has been raised approximately 100 since then (some numbers suggest approximately 80 times). It is shocking when you consider the limit was $20 trillion in 2017 and ran up to $31 trillion while the debt ceiling was suspended from 2019-summer 2021 due to Covid (it has roughly doubled every decade from 3 trillion in ‘80s to 6 trillion in the ‘90s and 12 trillion in 2000s).
Theoretically, the government would default, temporarily suspending SS benefits, Veteran’s benefits and government employee salaries. Even if there was a default, there would not be a straight or across the board default, though, so some of that may still be paid. Interest rates on our bonds would go up while demand would likely go down. Currently, the US government is seen as a save bet to put money in around the world because we pay it. If that changed, the interest would go up, meaning it would cost us a lot more the maintain the same standards of living. The last time we were really close was 2011, which resulted in a sharp market sell off, but a relatively quick recovery once the ceiling was raised.l (20% down in a few months before recovering to end the year flat). interest rates would go up on loans and CCs as they are at least conceptually tied to Treasury Bonds.
Theoretically, the government would default, temporarily suspending SS benefits, Veteran’s benefits and government employee salaries. Even if there was a default, there would not be a straight or across the board default, though, so some of that may still be paid. Interest rates on our bonds would go up while demand would likely go down. Currently, the US government is seen as a save bet to put money in around the world because we pay it. If that changed, the interest would go up, meaning it would cost us a lot more the maintain the same standards of living. The last time we were really close was 2011, which resulted in a sharp market sell off, but a relatively quick recovery once the ceiling was raised.l (20% down in a few months before recovering to end the year flat). interest rates would go up on loans and CCs as they are at least conceptually tied to Treasury Bonds.
Posted on 1/6/23 at 9:57 pm to hikingfan
What happens to our country when our debt rating turns to shite?
What do you think happens to future debt obligations?
Do you think debtors may be more anxious to get their money back than if we haven't crapped on the debt rating?
How does it look when the debt rating turns to poop, not because we are unable to afford the debt, because we are too incompetent to raise it when we are maxed out.
For the record, the debt ceiling is the dumbest self imposed burden that our country has ever done to ourselves. All it has become is a negotiating play as a part of political games.
I hate the country's debt. I firmly believe that balancing the budget leads to more confidence in the economy and a shot of adrenaline to our capital. But having to "manage" the debt ceiling is retarded.
What do you think happens to future debt obligations?
Do you think debtors may be more anxious to get their money back than if we haven't crapped on the debt rating?
How does it look when the debt rating turns to poop, not because we are unable to afford the debt, because we are too incompetent to raise it when we are maxed out.
For the record, the debt ceiling is the dumbest self imposed burden that our country has ever done to ourselves. All it has become is a negotiating play as a part of political games.
I hate the country's debt. I firmly believe that balancing the budget leads to more confidence in the economy and a shot of adrenaline to our capital. But having to "manage" the debt ceiling is retarded.
This post was edited on 1/6/23 at 9:59 pm
Posted on 1/6/23 at 10:23 pm to hikingfan
quote:
I just want to understand if we default on our debt, how do the ramifications of that flow through the economy and how will it affect the equity markets, bonds etc. Can somebody lay out the mechanics for me for educational purposes?
The USD is a fiat currency, meaning it's value isn't derived from some good. The USD's value is basically derived due to how desirable it is and part of that desirability is the certain guarantee that the US government will pay its debts.
If the federal government misses a debt payment, this makes that guarantee less certain. The more payments missed, the less certain it gets. This loss of faith in the US government to pay its debts would express itself as a loss in value of the USD (ie: inflation, likely hyper-inflation, especially once it got to the point where countries moved away the USD as the primary reserve currency).
The problem with growing deficits feeding growing debt is that at some point the federal government will eventually have to make a choice between funding Medicare, Section 8, Dept of Education, infrastructure, etc. OR service the debt.
The debate about raising the debt ceiling or face peril is a strawman to avoid the real problem: a complete abdication of the federal government's duty of fiscal responsibility.
This post was edited on 1/7/23 at 10:43 am
Posted on 1/7/23 at 4:49 pm to Bard
Very well put, sir. 
Posted on 1/8/23 at 5:09 pm to Bard
Man y’all sound well informed! What do y’all think about this video The truth of money.
I think he says that our debt is money supply, and we don’t want to pay off the deficit, that paying it off takes away our ability to borrow. And then there are people who think US is sovereign thus solvent, I guess that’s MMT.
It’s all so convoluted.
I think he says that our debt is money supply, and we don’t want to pay off the deficit, that paying it off takes away our ability to borrow. And then there are people who think US is sovereign thus solvent, I guess that’s MMT.
It’s all so convoluted.
Posted on 1/8/23 at 5:40 pm to hikingfan
The US has always paid its debts and that is why our credit rating is at the high end
Defaulting will send the rating of our bonds down and thus cause the rate to increase
Consider what rate you would accept as a return for loaning someone money that has poor means to pay you back… the out of work friend that drinks and gambles a lot, has loans out to others but needs another 10,000 loan… what rate would you require on that loan?
So the more we’re allowed to borrow, and the less our ability to pay back those that borrow from us, the more risky the loans become and the possibility that our debt rating gets challenged.
Defaulting will send the rating of our bonds down and thus cause the rate to increase
Consider what rate you would accept as a return for loaning someone money that has poor means to pay you back… the out of work friend that drinks and gambles a lot, has loans out to others but needs another 10,000 loan… what rate would you require on that loan?
So the more we’re allowed to borrow, and the less our ability to pay back those that borrow from us, the more risky the loans become and the possibility that our debt rating gets challenged.
This post was edited on 1/9/23 at 7:36 am
Posted on 1/9/23 at 1:02 pm to Rust Cohle
quote:
What do y’all think about this video The truth of money.
Some truths, some things made fuzzy, some things just wrong.
-----------------------------------------
Who are the Fed stockholders, for instance. Despite the video's implication of shadowy individual stockholders controlling things, there are no individual stockholders. None. The Fed is actually 12 Federal Reserve Bank districts and the member banks in each district are the stockholders. Let me make sure I am clear on that, only banks can own stock in the Federal Reserve Bank. These stocks cannot be traded, transferred nor used as collateral. Each bank, regardless of the amount of shares, gets one vote in their meetings.
The district banks are considered private entities but apparently are still subject to FOIA requests on ownership: New York Fed stock owners
------------------------------------------
Does the Fed create money from thin air? Sometimes.
The Fed buys US securities and makes money on the interest generated. It also lends money out to financial institutions and makes money on that interest. This is the Federal Discount Rate. The current Discount Rate is 4.5%
The other rate the Fed is in charge of, the one the news references when they say "the Fed raised/lowered rates" is the Federal Funds Rate, aka the FedFund. It's the rate lending institutions charge each other to borrow money. The current FedFund Rate is 4.33%
Because financial institutions aren't in the business of lending money at a loss, you're not likely to find loan rates lower than what the Fed has set their rates at.
-------------------------------------------
So that's one thing the video has wrong and one thing it made fuzzy.
quote:
I think he says that our debt is money supply, and we don’t want to pay off the deficit, that paying it off takes away our ability to borrow.
In accounting and finance, you always want a little debt. In the industry it's referred to as "leverage" and it's used to portray that an entity can pay off debts because it is already engaged in proving it can do so. There's a point of diminishing returns (where too much debt becomes a sign of a poor risk to loan to), but generally think of it betting on marathon runners by looking at how often they run and their run times. If someone hasn't run a marathon in a decade but then shows up to run, there's little data to determine odds on where they will place (or if they'll even finish the race).
I'm not a big fan of the philosophy, it used to be that a person or business wanting a loan had to show responsible and continued earnings and that lack of constant debt was a plus. While there have been positives (increased home ownership, for example) I think the shift in view has been done to keep give the lending industry (especially credit cards) flush. I also think it's a major contributor to the problem Americans have with not being able to save much and instead living paycheck-to-paycheck while holding large sums of credit card debt, owning too much home for our income, owning cars too expensive for our income, etc.
To your point though, the US will always have SOME debt because our debt is highly valued due to our record of paying off those securities when they come due. The problem is that we've taken on an ASTOUNDING amount of debt over the last 20-ish years and the annual new debt (the deficit) continues to increase. We haven't paid the debt down since around 2001, but have only increased it. This means we're also increasing the amount of payments needed just to service the debt (ie: pay only the interest on it). We're currently paying ~$500B-$600B per year in just debt servicing. When you're paying only the interest on your debt while simultaneously accruing more and more debt (especially in large annual deficits like we've seen pretty much 2002, when looking at inflation adjusted dollars LINK), there's a mathematic certainty you will crash your economy eventually.
With some of the USD's value tied up in leverage, paying down the debt becomes paramount in times like this where we have high, sticky inflation. Instead though, Congress has just said "frick it".
quote:
And then there are people who think US is sovereign thus solvent, I guess that’s MMT.
It is indeed MMT and those people are called "morons". These are the types who think history didn't begin until the day they were born and anything new they dream up must be better than "that old stuff"; thus, it obviously has never been done before because no one else ever thought of it and/or tried it. It's the monetary theory of people who thought they were the first ones to ever think of sneaking out of the house as kids.
This post was edited on 1/9/23 at 4:47 pm
Posted on 1/9/23 at 1:50 pm to hikingfan
Want to clarify some things.
Not raisint the debt ceiling is NOT the same as a default. Two completely different, unrelated items.
The problem is we, as a country, spend more than we raise in tax. If we lose the abilityt to borrow more money, then we have to reduce our spending down to our level of revenue, or we have to raise our level of revenue, or some measure of each.
Reducing our spending means laying off government employees / spenidng less on contracts, which lays off private sector employees.
Raising taxes is what it is.
Not raisint the debt ceiling is NOT the same as a default. Two completely different, unrelated items.
The problem is we, as a country, spend more than we raise in tax. If we lose the abilityt to borrow more money, then we have to reduce our spending down to our level of revenue, or we have to raise our level of revenue, or some measure of each.
Reducing our spending means laying off government employees / spenidng less on contracts, which lays off private sector employees.
Raising taxes is what it is.
Posted on 1/9/23 at 5:32 pm to Bard
Man, what’s it like being so smart? This must be your career? and I think what kind of person has this knowledge, and then to be able to express it very well.? Do all people that have finance degrees, economic degrees or even heads of smaller local banks understand this?
My next question is who has the influence over the Fed Chairman? Are their top people at each of those banks? Those people probably have way more influence then the president?
My next question is who has the influence over the Fed Chairman? Are their top people at each of those banks? Those people probably have way more influence then the president?
Posted on 1/9/23 at 7:59 pm to Bard
quote:
It's the monetary theory of people who thought they were the first ones to ever think of sneaking out of the house as kids.
I understand what you’re getting at but it’s been an MMT world for about 300 years
This post was edited on 1/9/23 at 8:00 pm
Posted on 1/9/23 at 8:12 pm to Rust Cohle
quote:
Man, what’s it like being so smart? This must be your career?
Thanks, but not even close. I'm just an IT guy refreshing myself on economics and finance when the opportunity presents itself.
quote:
Do all people that have finance degrees, economic degrees or even heads of smaller local banks understand this?
Some do, some don't (see the comments about MMT). Most in those fields could run circles around me just from their day-to-day personal experiences.
quote:
My next question is who has the influence over the Fed Chairman? Are their top people at each of those banks? Those people probably have way more influence then the president?
Sort of.
Like most things to do with the Fed, it's a complicated answer...
The Fed Chair is nominated by the President and approved (or not) by the Senate. If successful, they serve a 4-year term. There is no term limit (both Bill Martin and Alan Greenspan served over 18 years each). Technically, a President should be able to remove a Fed Chair.
I say "technically" and "should be able to" because Section 10 of the Federal Reserve Act of 1913 specifies that Fed governors can be “sooner removed for cause by the president.” Also, what constitutes a “cause,” is not exactly clear but we can guess that it would have to be something criminal (being convicted of rape, for example) or a complete dereliction of duty. The Fed chair is also considered a Fed governor, meaning this provision likely extends to them as well. I use these not-quite concrete words because no President has tried removing a sitting Chair thus far.
Along with that, the seven Board of Governors of the Fed (all also nominated by the President and elected by the Senate, they serve 14-year terms and can be re-nominated/elected) always have a vote on Fed policy.
After that we get to the FOMC (Federal Open Market Committee, the group the newscasters usually are referring to when they say "the Fed met today to raise/lower/maintain rates"), this is composed of the Chair, the Board of Governors, four of the reserve bank presidents (those over the Fed districts, except for the NY Fed) who rotate 1-year terms on the FOMC and the NY Fed president (the NY reserve president position is a permanent seat on the FOMC). The FOMC mainly sets the overnight and discount rates (they officially meet 8 times per year, but can call emergency meetings when there is a true emergency, like 9/11).
Posted on 1/9/23 at 8:58 pm to Rust Cohle
quote:
well.? Do all people that have finance degrees, economic degrees or even heads of smaller local banks understand this?
The academic world is about 60 years behind the current system. Good news is most of what Wall Street does is getting you to transact so it’s not necessary to understand in that world.
Posted on 1/9/23 at 9:05 pm to wutangfinancial
quote:
I understand what you’re getting at but it’s been an MMT world for about 300 years
It depends on how you look at it.
Money is a vehicle for representing value. Prior to Bretton/Woods ending, currency was valued based on the price of a resource (often gold). You could exchange your USDs for gold at most banks because the USD was literally just a representative of gold and gold has been a staple of exchange for thousands of years.
This ended with Bretton/Woods when the value of our currency became determined by, essentially, how stable our country and economy are. Part of that stability is based on keeping the volume of currency balanced so as to not devalue it by simply having too much of it in the economy (see: stimmy checks).
The MMT being pushed by the AOC and Bernie crowd basically theorizes that the volume of currency has little to no impact (depending on who you are talkign to) on the currency's value, thus the government can never default on debt because it can always just print as much money as it needs.
Some who understand inflation argue taxation as a means of removing excess currency from the market (read: as a way to control inflation) AND as a means of creating value (since taxpayers have to pay in the specific currency, therefore that mandate is where the value creation begins). This all means they believe the federal government doesn't need to issue bonds to fund spending, but rather just print whatever money they need.
Here's what they don't seem to understand: that very ability to just print and spend however much you want necessarily devalues the currency before the currency is ever printed, the over-printing just adds to it.
If someone knows they can always access as much of something as they want, it's not going to hold nearly as much value as something they have to work to earn.
Posted on 1/9/23 at 9:08 pm to go ta hell ole miss
quote:
Practically speaking, it will never happen
Unfortunately this
Page 1 of 1
Popular
Back to top
Follow TigerDroppings for LSU Football News