If Interest Rates Go Up, US Will Default

[JMapleton]

About 85% through the video, Pulitzer Prize-winning journalist David Cay Johnston says if interest rates go up, the US will be forced to default.

http://finance.yahoo.com/tech-ticke...pulitzer-prize-winning-journalist-535634.html

Can someone explain to me how the government supposedly thinks we can continue to keep interest rates at zero indefinitely?

 

[fskimospy]

The US will never be forced to default, and cannot default unless we were to specifically choose to do so. We are the reserve currency of the world and the debts that we owe are in currency that we print; the idea the the US is the next Greece requires a staggering ignorance of that fact. Greece could default because they can't print more euros. We can print as many dollars as we want.

We might face inflation, countries might decide to go off the dollar as a reserve currency, plenty of bad things could happen, but the idea of a default is absurd.

 

[halik]

Err his numbers seems a bit steep, if nothing changes 1/3 of the gov't budget will go towards interest

http://money.cnn.com/2009/11/19/news/economy/debt_interest/index.htm

 

[Darwin333]

The US will never be forced to default, and cannot default unless we were to specifically choose to do so. We are the reserve currency of the world and the debts that we owe are in currency that we print; the idea the the US is the next Greece requires a staggering ignorance of that fact. Greece could default because they can't print more euros. We can print as many dollars as we want.

We might face inflation, countries might decide to go off the dollar as a reserve currency, plenty of bad things could happen, but the idea of a default is absurd.

Actually it isn't. See, we have a few issues with "inflation". First our entitlements are indexed to inflation so we would add a trillion dollars to the budget trying to inflate away the debt. Secondly, we happen to import a lot of stuff and some of that stuff we kinda need like energy. Turning on the printing presses full speed in order to prevent a default would put us in a death spiral with entitlements alone (entitlements go way up, we can't afford to pay so we print more, rinse and repeat.... trust me, we will pay grandma before bondholders). Then the issue of $10-$20 gas comes into play. That is assuming we can isolate our own food from the global commodity prices so we can still afford to eat.

Defaulting would be a better option. I agree that since we CAN print money we could never be "forced" to default by external forces but that doesn't mean it still won't be the best option available.

 

[Anarchist420]

I think that we should pay back like 20-30% of the Federal debt then default on the rest. There are two reasons why we shouldn't pay it all back. First is that we'd have to inflate. Then the 2nd reason is that not everyone is responsible for it, and future generations shouldn't have to pay for past generations.

We have a nearly 2:1 ratio of debt:dollars in circulation.

 

[fskimospy]

Actually it isn't. See, we have a few issues with "inflation". First our entitlements are indexed to inflation so we would add a trillion dollars to the budget trying to inflate away the debt. Secondly, we happen to import a lot of stuff and some of that stuff we kinda need like energy. Turning on the printing presses full speed in order to prevent a default would put us in a death spiral with entitlements alone (entitlements go way up, we can't afford to pay so we print more, rinse and repeat.... trust me, we will pay grandma before bondholders). Then the issue of $10-$20 gas comes into play. That is assuming we can isolate our own food from the global commodity prices so we can still afford to eat.

Defaulting would be a better option. I agree that since we CAN print money we could never be "forced" to default by external forces but that doesn't mean it still won't be the best option available.

As I said, there are plenty of bad things that can go along with it. (although few of them are likely) His post said that we could be forced to default, which was silly.

 

[Darwin333]

Err his numbers seems a bit steep, if nothing changes 1/3 of the gov't budget will go towards interest

http://money.cnn.com/2009/11/19/news/economy/debt_interest/index.htm

Thats if we "only" have normal increases in interest rates due to an economic recovery. If, for whatever reason, interest rates go higher then we are fucked. Like really really fucked.

That is what happens when you get an interest only 5 year ARM, that you can barely afford, at a time that interest rates are at historical lows. When the interest rates rise, and eventually the will, you be fucked. The problem is compounded when you are steadily adding to what you owe.

 

[Darwin333]

As I said, there are plenty of bad things that can go along with it. (although few of them are likely) His post said that we could be forced to default, which was silly.

Like I said, I wouldn't call it "silly". If you must have an operation to live, while you aren't literally forced to have it, I wouldn't say its silly to say you are "forced" even though you can always choose to die.

We are just parsing words here though, fact is we still be fucked regardless of how you look at it. I have been screaming about this for 2 years now. Eventually we are going to be in a serious bind and history says that it won't take long for us to get there unless the economy stays in the shitter which is just as bad.

 

[Darwin333]

I think that we should pay back like 20-30% of the Federal debt then default on the rest. There are two reasons why we shouldn't pay it all back. First is that we'd have to inflate. Then the 2nd reason is that not everyone is responsible for it, and future generations shouldn't have to pay for past generations.

We have a nearly 2:1 ratio of debt:dollars in circulation.

Why pay any of it back then? If you are about to go through bankruptcy you don't liquidate your 401K just to be a nice guy.

 

[Siddhartha]

About 85% through the video, Pulitzer Prize-winning journalist David Cay Johnston says if interest rates go up, the US will be forced to default.

http://finance.yahoo.com/tech-ticke...pulitzer-prize-winning-journalist-535634.html

Can someone explain to me how the government supposedly thinks we can continue to keep interest rates at zero indefinitely?

No one expects interest rates to stay as low as they are now. As soon as the economy starts showing enough growth that inflation could become an issue, the FED will raise the rates. In the last thirty plus years, the FED has shown an intense concern about inflation and has been willing to push the economy into recession to control it. Anyone remember the FED raising interest rates in 1999 - 2000 in response to Wall Street's excessive jubilance during the Dot com era and drove the economy into recession?

The fact the FED has maintained rates at these low levels points to how much trouble the US and global economie have been in for the last three years or so.

 

[Darwin333]

No one expects interest rates to stay as low as they are now. As soon as the economy starts showing enough growth that inflation could become an issue, the FED will raise the rates. In the last thirty plus years, the FED has shown an intense concern about inflation and has been willing to push the economy into recession to control it. Anyone remember the FED raising interest rates in 1999 - 2000 in response to Wall Street's excessive jubilance during the Dot com era and drove the economy into recession?

The fact the FED has maintained rates at these low levels points to how much trouble the US and global economie have been in for the last three years or so.

Will they raise the rates if that means completely fubaring the US Federal budget? I don't think you have a grasp of the problem we are talking about. The Fed will be in a serious pickle when it comes time to raise rates but even if they don't that doesn't mean bond prices will positively stay as low as they are.

We are talking about very easily seeing 1/3, or more, of the Federal revenue being spent on interest alone in the next few years. That would mean that all the money the Federal government takes in will NOT even cover its "mandatory" expenses.

 

[piasabird]

Just default on SS and Medicare.

Then people will start to die at a faster rate.

If we cant pay off on our bonds, then we will our ability to raise capital, because no one will buy them. Then if we defaulted China would be on the hook for trillions of worthless US Debt. When other countries have faced this kind of problems they have internalized like socialist and communist countries. I imagine it would be like living during the depression era. Sure we would survive. Others have survived also.

 

[Jhhnn]

trust me, we will pay grandma before bondholders

I doubt that. I figure we'll have bluehairs living in refrigerator boxes before we default on a nickel owed to the financial elite.

They'll still vote Republican, however...

 

[Craig234]

Will they raise the rates if that means completely fubaring the US Federal budget? I don't think you have a grasp of the problem we are talking about. The Fed will be in a serious pickle when it comes time to raise rates but even if they don't that doesn't mean bond prices will positively stay as low as they are.

We are talking about very easily seeing 1/3, or more, of the Federal revenue being spent on interest alone in the next few years. That would mean that all the money the Federal government takes in will NOT even cover its "mandatory" expenses.

A statistic from Johnston (see my sig) in the link is that almost half of all income tax *now* is used to pay interest on the debt.

Among other things, that means those who are wealthy enough to be lending the government are being enriched by a *huge* amount of everyone else's wealth.

Forget for a second that it's 'debt' and 'interest', and just note, half of what everyone pays in income tax is going to lenders. What does that do to wealth in society?

This is a map for plutocracy, how to impoverish most Americans, just as it has impoverished many third-world countries.

Look at countries who are pressured to take on excessive debt - perhaps with plenty of 'incentives' for those in power to do so - and then as the country is unable to build infrastructure, to pay for schools or public health or infrastructure or a safety net, some paying 80%+ of their budget on foreign debt, all they can do is work cheap for foreigners.

The US isn't following exactly that situation, but it is doing far worse for the people that it would without this crazy situation.

Now, that's not about the short-term debt we need to fix the economy, rather about bad policies that enrich the rich with money we can't afford.

 

[Craig234]

Err his numbers seems a bit steep, if nothing changes 1/3 of the gov't budget will go towards interest

http://money.cnn.com/2009/11/19/news/economy/debt_interest/index.htm

He said almost half of all income tax goes to interest, not half the budget.