From Citi:
Gradually now the questions are coming in. “What will happen if the U.S. government defaults on its debt after August 2?” It’s still nearly unthinkable. The exact date may not be as precise as advertised. Predictably, more of these questions come from distant shores. But the longer Congress lingers, the more frequently the question will be asked.
Some part of this question is in the realm of “what will you do after you commit suicide?” While conflicting in substance, rumblings from Washington in the past week suggested action could be imminent. Of course something seems likely to get done. But to take the question seriously, if the U.S. could spend only its revenues, spending would need to be slashed by about 40%, or over $100 billion per month. That’s about 8% of current GDP non-annualized. If all checks from the Treasury were cut in size but not eliminated, legal obligations such as Social Security Payments would have to be cut by roughly $25 billion per month, or $300 billion at an annualized rate1. This is money that is spent in the U.S. economy, as are the payments for military personnel salaries, federal contractor payments and pension contributions that sum to larger amounts.
We doubt that even the most extremist of policymakers believes that private economic activity will immediately fill the void left by so large a drop in these deficit-financed “income” streams. Their many constituents would let them know the personal impact whatever the perceived benefits (see figure 1). If the U.S. Treasury was determined to make U.S. interest payments on the notion that if it does not, the U.S. might be required to spend only its revenues for far longer, than other outlays would need to be cut nearly 50% rather than 40%.
A near immediate income decline of 8%-9% of GDP, and the uncertainty around policy, would weaken expectations priced in asset markets, reducing economic activity by an even larger amount before long. Such would be the likely case even if Treasury debt payments were maintained and “prioritized.”
In the event of a Treasury debt default, we would note that U.S. Treasuries are a key risk-free asset on bank balance sheets across the world and the single-largest form of loan collateral. The U.S. Treasury is the ultimate guarantor of bank deposits. The financial implications of an actual Treasury default, even briefly, could represent the largest financial shock in history, potentially creating a domino of defaults. As such, creating quantitative economic projections on a default scenario seems like a foolish errand.
Scared yet? Good. That is precisely Citi’s goal.
Unfortunately in the same note, Citi also shares some other charts, all of which indicate that no matter what happens this week, or at 11:59:59pm on August 2, the long-term fate of the world’s premier entitlement state is one which ends in disaster, and if history is any indication: war… Only this time everyone has the same just as destructive toys.
To wit:
The astounding growth rates for healthcare outlays both past and present – not matched by revenue streams – will unravel most any other structural changes in the budget given enough time (see figures 3-5 and “U.S. Budget: Why is a 9% Growth Rate for Healthcare Necessary?” April 25, 2011). As such, any long-term changes that matter will affect the health care budget.
Even the words “healthcare budget” seem at odds with the way Americans consumers and policymakers view healthcare – essentially “priceless.” It seems clear that a nation that spends double the developed country average on healthcare for sub-standard aggregate outcomes misallocates healthcare resources and almost certainly overspends in the process (see figures 6-7). As a practical matter for investors, one might want to question whether the long-term secular rise in the healthcare sector’s share of U.S. corporate profits will be allowed to continue unchallenged (see figure 8).
For short- to intermediate-term budgets, the latest three months of rising unemployment provide a reminder that it’s poor timing for macro tightening steps if there is any choice.Having at least a “down payment” toward significant long-term structural budget underway could help with flexibility in running large budget deficits for the time being. In observable modern times, the U.S. has never improved its budget position during periods of rising unemployment or below-trend economic growth (see figure 9).
Reread the last sentence from Citi as it delightfully captures the Catch 22 nature of the problem. In its overarching attempt to take sole control of the US economy, funded with ever cheaper debt, the US government has now become a central planning behemoth the likes of which the USSR could only hope to emulate even in its heyday. And the lifeblood on which this behemoth lives is one: exponentially more debt. Which is why, more than anything, nobody in DC can possibly demonstrate the political will, which also equates to immediate career suicide, to do the right thing – in this case just say no to more debt – as it would mean one thing and one thing only: putting the fate of their country over and above their own career prospects, as this will expose the biggest lie: the welfare state that is the United Socialist States Of America is more naked than any emperor in history.
And as is well known, no career politician has ever cared enough about their country enough to actually see their own future as merely secondary to that of the United States.
Replies
Kurt Nimmo
Infowars.com
July 17, 2011
It’s not enough to frighten Americans with personal financial disaster if the massive debt scam is not perpetuated. In order to send the message, the government has decided to stoke up the al-Qaeda threat.
According to counterterrorism experts polled by Homeland Security Today, a possible downgrading of the U.S. credit rating by Moody’s – and the mayhem in financial markets that would result – may inspire al-Qaeda to attack.
“So you can understand why Al Qaeda, or any other terrorist organization motivated by the jihadist ideology, would see that America is highly vulnerable right now – perhaps more than it’s ever been — to an attack or attacks the impact or direct effect [of which] would be further depression of the US’s economy,” a counterterrorism official told the homeland security affairs website.
The credit ratings company Moody’s has renewed its warning that if the United States defaults on its “debt obligations” after the deadline set by the Treasury, it may downgrade its AAA bond rating.
The debt is well over $100 trillion, although the government tells us it is a paltry $14 trillion. Obama, the Federal Reserve, and the bankers want to raise the debt limit from $14.3 to $14.5 trillion so Congress can borrow and spend even more money. Most of the budget is spent on killing people in foreign lands.
Obama threatened the most vulnerable last week. He said the government will stop sending Social Security payments to seniors if Congress does not agree to raise the debt ceiling. He didn’t say missing the deadline would shut down the wars in Libya, Afghanistan, Pakistan, and Iraq.
Gary Sasse, director of the Institute for Public Leadership at Bryant University in Rhode Island, told Fox News a downgrade by Moody’s would reach “down to every family in America.”
Fox said the ripple effect from a downgrade would be widespread and potentially severe, impacting everything from local municipalities and the neighborhood bank to home mortgages and student loans.
CNN: It’s your debt, you have to pay it. Stop whining.
But this threat is apparently not enough to scare Americans. Now the government is dragging a threadbare al-Qaeda out of the closet and waving it in our faces.
“Under Osama Bin Laden, Al Qaeda’s goal had been to find a way to attack us in a way that would hurt us economically – and I mean really hurt us. So if Al Qaeda still wants to slam us economically, now is the time to do it,” said one of the US counterterrorism official. “Certainly a catastrophic, mass casualty attack would have a dramatic impact on the economy, but so, too, would a coordinated small cell attack with automatic weapons at major amusement parks across the country.”
Laura Hains, a retired ranking Customs and Border Protection officer, warned that the scary cave dwelling and turban wearing terrorists may attack one of America’s most cherished institutions. “Can you imagine what would happen if Disney’s amusement parks in Florida were attacked? Florida’s economy would collapse.”