I detest Barack Obama as much as the next patriotic, heterosexual American and I think his fiscal policies are obscene and irresponsible, which is an understatement, but I'm with the White House in disagreeing with any potential downgrade in U.S. debt from AAA to anything else.
Besides the fact that the United States has made good on all its debt since 1776 (235 years), through years of limited taxing authority, through civil war, world war, depressions, recessions, etc. and the fact that the United States still has enormous excess taxing authority, this chart shows the approximate breakdown of ownership of U.S. debt.
http://www.ritholtz.com/blog/2011/01/is-china-rea…
8.1% of the debt is owed to federal retirement funds--Congress has the authority to re-write the rules of pensions. 42.2% of debt is owned by U.S. institutions and individuals, and more than half of that is owned by the Federal Reserve, which basically means that the federal government owes itself interest payments (Ron Paul wrote an article pointing out that the federal government could legally and literally cancel out a quarter of its debt because it's owed to the Federal Reserve and, in turn, the U.S. Treasury.). 17.9% is owned by the Social Security Trust Fund, which Congress has the authority to manipulate and change.
In sum, something like nearly half of U.S. federal debt is directly or indirectly owed to itself and a quarter of America's debt is LITERALLY owed to itself! And something like 2/3 of U.S. debt is owed to some American or American organization. And Congress has the authority to levy taxes whenever it chooses on individual American owners and institutions of U.S. debt. Starting from a base of 0% tax rates gives Congress a lot of taxing authority.
The idea that U.S. debt would be downgraded to anything other than AAA smacks me as absurd in its highest. In one fell swoop, Congress and the president could cancel a quarter of its debt, re-write the rules for another quarter that its owed, and start taxing interest proceeds on another quarter of the debt. And it could do this all without defaulting on a single penny.
I think inside info about the downgrade caused the 6 % DJ drop and the whole "markets on crack" behaviour we observed for past week.
No, I don't think that had much to do with it. This leaked yesterday (Friday) & the markets were pretty flat at the end of the trading day.
We're going to see how much this wasn't factored into the markets when they tumble Monday..
If we cancel out our debt like that it will be an even more blatant signal that our ability to repay is shit.
agree
Every option you mentioned is essentially selective default. S&P is pricing the risk of default. Hell, Japan got downgraded around the same debt-to-GDP ratio that we did. I think it was necessary to finally get the politicians asses in gear for real fiscal responsibility. I mean look at Italy. They are finally getting their stuff (or spending it up) because of the mess they were in (repetitive downgrades, crashing markets, failed bond auctions)
It's not selective default at all. For example, Congress re-writes pension rules all the time. Re-writing rules with regard to Social Security liabilities (IOUs) is no different than raising the retirement age ex post facto. And the idea that it's "default" if the federal government were to cancel out debt owed to its own Treasury is--well--it's absurd in that it shows the absurdity of our financial system and it demonstrates the absurdity of the claim that it would be a default.
US credit would significantly deteriorate. Who would buy US debt if they knew they would just get screwed over for holding it whenever shit hits the fan?
Huh? That doesn't even make sense. First of all, the federal government would be "screwing"...itself, not any other holder of debt, by canceling out the debt...that...it...owes...itself. Second of all, governments in general get strong credit ratings---because they have the ability to manipulate the rules, tax at the barrell of a gun, and change things ex post facto. You don't think governments get AAA ratings because they have pristine balance sheets, do you?
I think people are missing the point. Let's say John borrows $250,000 from his mother, Jane, with an official, legally binding note to pay. Before John pays Jane back she dies and John inherits $1 million in net worth from Jane, but included in that net worth is a $250,000 note from John to pay back the estate of his mother, Jane. Now, is John defaulting on the note by saying that he no longer owes the estate $250,000? Of course not! But let's say that John decides he wants to continue to pay the note because it will force him to save. But one day John loses his job and he has to decide between making his mortgage payment and making his note payment to the "estate". Well, obviously John will pay his mortgage first. This demonstrates that, in practice, there are actually different tiers of debt owed by the federal government.
A similar (not an exact, but a similar) situation applies to the federal government. Now, it's not to say that the federal government will or should cancel out the note, but when looking at the federal government's ability to re-pay its debt--i.e. not default--an honest look at the situation requires one to say, well, worst case the government will "default" on the money it owes itself in order to free up cash to pay off REAL investors. In this case we have "super debt", or debt that has preference even over other Treasuries.
Our external debt is denominated in our own currency so we would never have to default in nominal terms. What we are doing is much sneakier -- defaulting by inflation.
By that account we should have been downgraded in the 1970s. S&P was 40 years too late.
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