Our Nation's Risk of Default

Black Swan Events Becoming Routine

Our Nation has avoided the decline into the abyss that many have been predicting during the economic crisis. At the cost of approximately $13 trillion in government bailouts and guarantees, the system has been held together but at a very high cost that future generations will bear through higher taxes or a much lower standard of living.

Our “prosperity through debt financed spending” philosophy has deeply indebted every sector of the economy. Our leaders implore us to borrow and spend. The US budget deficit is projected to hit $2 trillion dollar this year and continue indefinitely.

What we cannot borrow, we can simply print in unlimited amounts, imperiously oblivious to the serious risks and consequences of such financial folly. Logical minds reject these unsound theories and realize that every nation has financial limitations, whether we like it or not. The risk of default by the United States, once considered unthinkable, is now a topic of debate by serious minds. Consider the following from The Financial Times.

America’s Triple A Rating Is At Risk

Long before the current financial crisis, nearly two years ago, a little-noticed cloud darkened the horizon for the US government. It was ignored. But now that shadow, in the form of a warning from a top credit rating agency that the nation risked losing its triple A rating if it did not start putting its finances in order, is coming back to haunt us.

That warning from Moody’s (MCO) focused on the exploding healthcare and Social Security costs that threaten to engulf the federal government in debt over coming decades. The facts show we’re in even worse shape now, and there are signs that confidence in America’s ability to control its finances is eroding.

Prices have risen on credit default insurance on US government bonds, meaning it costs investors more to protect their investment in Treasury bonds against default than before the crisis hit. It even, briefly, cost more to buy protection on US government debt than on debt issued by McDonald’s (MCD). Another warning sign has come from across the Pacific, where the Chinese premier and the head of the People's Bank of China have expressed concern about America’s longer-term credit worthiness and the value of the dollar.

The US government has had a triple A credit rating since 1917, but it is unclear how long this will continue to be the case.

For too long, the US has delayed making the tough but necessary choices needed to reverse its deteriorating financial condition. One could even argue that our government does not deserve a triple A credit rating based on our current financial condition, structural fiscal imbalances and political stalemate. The credit rating agencies have been wildly wrong before, not least with mortgage-backed securities.

One way out of these problems is for the president and Congress to create a “fiscal future commission” where everything is on the table, including budget controls, entitlement programme reforms and tax increases.

Recent research conducted for the Peterson Foundation shows that 90 per cent of Americans want the federal government to put its own financial house in order. It also shows that the public supports the creation of a fiscal commission by a two-to-one margin. Yet Washington still sleeps, and it is clear that we cannot count on politicians to make tough transformational changes on multiple fronts using the regular legislative process. We have to act before we face a much larger economic crisis. Let’s not wait until a credit rating downgrade. The time for Washington to wake up is now.

Our nation’s future is being risked by a ruling class that continues to refuse to tell us what we need to be told - I thought we were promised that it was time for a change?

Comments

[The Geoffster:]

We don't vote for people who tell us what we need to be told. We vote for people who give us what we want. Be careful what you wish for.

"Our nation’s future is being risked by a ruling class that continues to refuse to tell us what we need to be told - I thought we were promised that it was time for a change?"

May 13 09:14 AM

[Permacritical:]

Great and to the point

May 13 09:47 AM

[inflation:]

Bill, that post hits the nail on the head. God forbid they actually tell us the truth in D.C. The fact is that everyone is going to have to sacrifice for us to get out of this mess. I think every politician though has the image of Carter sitting in his cardigan telling us we need to turn down the thermostat burned in their frontal lobes. Remember how that turned out for him.

May 13 10:21 AM

[Deweyp:]

Herein lies the rub; Once elected, each rep and senator can make that position a career by giving the masses the programs that ensures his/her re-election and nothing is ever done to correct the long term problem that requires sacrifice. I firmly believe that a maximum of 2 terms for the House and 1 term for the Senate with an 8 year term is the only solution. This would prevent the career building that we see today at the expense of future generations. I also believe that "The rise and fall of the Roman Empire" should be a required course in all high schools because what we are doing today is what ruined the Roman Empire.

May 13 11:51 AM

[Fred Voetsch:]

I watch Judge Judy because she's a bee-otch who gives people what the deserve and because she is most often right as she uses simple logic and experience to come to her conclusions. JJ often says, "If something doesn't make sense, it's probably not true."

None of what I see in front of me makes, sense. We were warned last year via the stock market and now we can see the wave of issues that we must face to make our future brighter and yet we simply go about lying to ourselves and pretending that everything is fine instead of fixing the problems we face.

We applaud our corrupt leaders as they shovel taxpayer money to bail out incompetent losers at the expense of hardworking successes.

We applaud as the stock market goes higher even as earnings drop and come in UNDER expectations, - www2.standardandpoors.... "455 issues (90.98% mkt val) rptd: initial good reports long gone, actuals are -18% off ests (see Energy note), and -36.1% behind last year" - threatening even higher valuations than the historically high ones we now face.

May 13 02:12 PM

[Living4Divi...:]

If the U.S. found itself being unable to turnover it's debt, or pay the interest to lack of cash, this would constitute a default. However, the Federal Reserve could easily print new money because U S Government debt is denominated in dollars, and the U.S. controls the quantity of currency issued. This is not the case in Italy, Ireland.

If the U.S. defaulted it would roil world financial markets. It would be catastrophic to the global finance system. Thus defaulting is unthinkable on moral grounds. It would destroy the credit rating of the U.S. making future financing much more costly. Printing money - while inflationary and damaging to the value of the dollar - is the lesser of two evils. It is extremely unlikely that the Federal Reserve would allow a default to occur.

I believe that the various agencies or think tanks who put forth the idea of the U.S. losing it's AAA rating are doing so to make a political point or to score points.

May 13 07:01 PM

[Ravi Nagarajan:]

The government would monetize the debt rather than default. Very little of the debt is inflation protected and it is all denominated in dollars. Of course, inflating out of the debt would destroy the country's ability to borrow going forward and the US Dollar's status as a reserve currency would be destroyed as well. Furthermore, foreign relations would be harmed, perhaps permanently, as creditor countries like China are burned severely.

Warren Buffett's latest shareholder letter included a comment about the upcoming "onslaught" of inflation and both Buffett and Munger spoke about how treasuries are a terrible deal at current interest rates. I would not bet against their views on this point.

May 13 07:49 PM

[Thoughtful ...:]

Wow! "what WE NEED TO BE TOLD" I thought you had something going there until you totally fell in the pig sty with the last sentence.

You need to wake up, dude! It's NOT US that need to wake up - at least not all of us. I owe nobody on this earth anything - Zero Debt. I have investments far and wide and extensively varied. All this in spite of coming from a poor, yet hard-working thrifty Scots-Irish family.

Do people need to wake up? Yes, absolutely. But the time to wake up is before election day - so we can put these miserable, ignorant goons out on the street.

May 14 06:10 AM

[Bull Run:]

The only way the US debt would default would be it the US dollar lost it's world currency status,and it's coming..One thing I've learnt over nearly 60 yr.s is nothing lasts forever.Not even America's belief that they're living in a never ending story, the world will continue to lend them endless amounts of credit, and allow them to print worthless dollars to repay those laons.

May 14 10:05 AM

[Obi-Wan:]

My take on what's needed: constitutional amendment with some teeth in it that says fed budget must be balanced, or Congress loses their job AND fat pension, perks, etc. They need to be held to a way higher standard. Like any business growing old and stale with folks in place who think they have a job for life and spend wrecklessly, the 'old school' needs a makeover with new ideas and bold thinking. Sack the cronies and get in someone who will do the job and take fiscal responsibility seriously. If the voters wont do it (which is likely given who's in there now), then it has to be constitutional.
Change is good but only when it's change for the better. Change for the sake of change is just spitting in the wind.....

May 14 10:23 AM

[Gregman2:]

"One way out of these problems is for the president and Congress to create a “fiscal future commission” where everything is on the table, including budget controls, entitlement programme reforms and tax increases." The problem is--which is why the U.S. is now in this mess--politics. Any commssion will surely be politicized.

May 14 11:10 AM

[DrZero:]

A commission? That's going to fix things? I don't think so. Anyone with a brain who cares to knows this stuff. Bush and his team understood these problems. Obama's team does to. So do the 5% of the population that can read things like this article. The other 95% will remain focused on Paris Hilton, American Idol and vote for whoever the media tell them to every four years.

A Constitutional Ammendment? Not gonna happen. The ERA could not get passed, for one thing. For another Congress ignores the Constitution every day in a million ways, so this would just be a fig-leaf, anyway.

As for default: no way. We will monitize the debt every time. We will print money like toilet paper before we default. That's never gonna happen.

People need to stop dreaming about saviors, commissions, new laws and mad plans and start visualizing the failure in more detail. The major inflation meme is a good one. One can invest using that.

May 14 11:29 AM

[Marc Courtenay:]

Right on Bill, and thanks for having the courage to tell the truth!

May 14 06:35 PM

[User 305589:]

Buying CDS-protection against a default of the US is a pure casino-style gambling trade of the greater fool variety. You solely depend on others who buy that protection at a later date from you at a hopefully higher price. Because if the US was really to default on its debt, I seriously doubt there would be anyone left standing at that time to really deliver the promised 'protection' . Of course, this won't stop banks and hedge funds to still gamble with these CDS. After all, haven't they learnt that if things go sour, the taxpayer will just again bend over to pay for the insanity of greedy bankers?

May 15 03:30 AM