Quote:
Originally Posted by aceventura3
Right. I clearly stated what I thought about Obama's false 8/2 deadline and why. That as a given, to me it is obvious that the response to me would be to present information to change my view.
|
I'm not so much concerned with convincing you of anything. You're pretty steadfast. My aim is more to convince anyone who may be reading the things you write and finding themselves persuaded by your logic that you are wrong.
Here's what might happen on 8/2:
No raised debt ceiling + no long term debt management plan = likely ratings downgrade for the US, plus likely default.
A ratings downgrade tarnishes US treasury bonds as an investment instrument by putting very serious question to the notion that they are risk free (whether they are or not doesn't matter, as far as the market is concerned, they are). This risk-free assumption is important, because it gives investors a datum, a point of comparison. Say you want to know how much to pay for an annuity that pays x for y years. You get to your price by figuring out the present value of a set of treasuries that pay out at the same time as your annuity then you fine tune for risk. The idea is to ask yourself this question "How much would I pay for a set of treasuries that paid out like this annuity?" Since this annuity is at the very least as risky as a treasury (but very likely more risky), if I pay more than the present value of this hypothetical set of treasuries, I'm paying more for more risk, which is generally a bad idea.
If treasuries are no longer free of credit risk then there will likely be a fair amount of volatility while the market figures out how to price things. You yourself have lamented the effects of market uncertainty (mainly as a cover for the obvious monumental failures of supply side economics) so I know that you know that uncertainty is no good.
If the treasury defaults, well, then the shit has really hit the fan. Treasuries are nice because of their superior liquidity. This liquidity will likely be substantially reduced if the US defaults. Another likely consequence will be seen in 401ks. The ones which are heavily invested in treasuries and agencies lose even more value than they would for just a ratings downgrade. This will eventually put more strain on the social safety net as people's retirement funds rapidly lose value, which will end up costing us either more money or quality of life down the road.
Raised debt ceiling + no long term debt management plan = word on the street is that the US credit rating will get a downgrade even if the debt ceiling is raised if there isn't a long term debt management strategy included in the plan.
Raised debt ceiling + long term debt management plan = probably the best scenario (unless you're Ron Paul). Probably no one gets what they want, but we can avert some pretty large problems in doing so.