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What happens if we default?

jat93
Posts: 1,440
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7/30/2011 9:31:20 AM
Posted: 5 years ago
Democrats say that defaulting would cause a global economic calamity. Some Republicans say it's being overdramatized, or that we're headed for rough economic times anyway and though defaulting is obviously far from ideal, raising the debt ceiling is just putting it off and making the inevitable economic calamity worse than it has to be. Ron Paul says that "we default every day" as it is, as the Federal Reserve continues to devalue the dollar thus eroding the purchasing power and inflating the savings of the American people. He too says that raising the debt ceiling will only allow for more government spending gone wild, and that this will only lead to a worse financial situation than the one we'd endure if we defaulted.

So who's got it right? Is the potential default as much of a threat as liberal Democrats make it seem, or is it being overhyped and a better alternative to raising the debt ceiling only to allow for more rampant spending, as many conservative Republicans contend?

(This is coming from an economic novice, so please use layman's terms in your answers.)
PARADIGM_L0ST
Posts: 6,958
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7/30/2011 9:42:32 AM
Posted: 5 years ago
Ron Paul is right, and has been right for a long, long time. We were all warned, long in advance, that this would happen if we didn't amend our economic principles.

The problem is that most of these people in Congress really, truly don't have an inkling about finance. There's people on DDO that I would have more faith in their economic abilities than 80% of Washington. And I'm being deadly serious about that.

Literally, if radical changes aren't made in the very near future, there won't be a future for us.
"Have you ever considered suicide? If not, please do." -- Mouthwash (to Inferno)
TheAtheistAllegiance
Posts: 1,251
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7/30/2011 3:14:55 PM
Posted: 5 years ago
We can't really know unless it happens, and to what degree that it happens. I believe the stock market is already sinking in response to the turmoil in Washington, and a lot is at stake in the game of investor confidence.

But, assuming the US doesn't raise the debt ceiling, and the US Treasury runs short for only a short period of time, less critical federal programs such as the Department of Transportation and what not will suffer reduced funding. This alone won't do much to disrupt the US economy and growth, but it will shake the market up and might downgrade the USA's credit rating, coupled with a rise in interest rates.

However, if the Treasury runs short for an extended period of time, then more fundamental programs will lose funding as well, such as defense payments, Social Security, and Medicare, which will be very disruptive to the economy and likely cause a pretty bad double-dip recession. And this is all assuming that the US defaults on actual debt payments last, which would be the worst-case scenario, followed by exploding interest rates and putting us into Greece's financial position.

Also, Ron Paul is actually wrong. Inflation =/= default.
Wnope
Posts: 6,924
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7/30/2011 3:17:32 PM
Posted: 5 years ago
We'll get a credit downgrade which will hurt our economic status internationally.

Not the end of the world, but sure as heck makes things harder.
innomen
Posts: 10,052
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7/30/2011 3:24:22 PM
Posted: 5 years ago
There are a lot of unknowns. So if the interest rates go up, we're at record lows now, so if they go up 1/4 of a point? Or maybe a whole point? We can deal with that. The stock market will probably dive, but i doubt it will be a long term deal; it will recover (eventually). Then the game begins on who gets paid: Apparently the president gets to determine this, and if he actually stops payments to key dependents, then it will be interesting to see how it's played in the upcoming election.
Wnope
Posts: 6,924
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7/30/2011 3:52:00 PM
Posted: 5 years ago
At 7/30/2011 3:24:22 PM, innomen wrote:
There are a lot of unknowns. So if the interest rates go up, we're at record lows now, so if they go up 1/4 of a point? Or maybe a whole point? We can deal with that. The stock market will probably dive, but i doubt it will be a long term deal; it will recover (eventually). Then the game begins on who gets paid: Apparently the president gets to determine this, and if he actually stops payments to key dependents, then it will be interesting to see how it's played in the upcoming election.

The biggest issue I see is long term. We need to keep America in tip-top shape when it comes to being dominant in terms of borrowing and the dollar.

If America is second to best in ratings, that means another large country (say...China) could snag the best rating. If the winds shift away from America, things would get very, very bad.
innomen
Posts: 10,052
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7/30/2011 3:59:23 PM
Posted: 5 years ago
At 7/30/2011 3:52:00 PM, Wnope wrote:
At 7/30/2011 3:24:22 PM, innomen wrote:
There are a lot of unknowns. So if the interest rates go up, we're at record lows now, so if they go up 1/4 of a point? Or maybe a whole point? We can deal with that. The stock market will probably dive, but i doubt it will be a long term deal; it will recover (eventually). Then the game begins on who gets paid: Apparently the president gets to determine this, and if he actually stops payments to key dependents, then it will be interesting to see how it's played in the upcoming election.

The biggest issue I see is long term. We need to keep America in tip-top shape when it comes to being dominant in terms of borrowing and the dollar.

If America is second to best in ratings, that means another large country (say...China) could snag the best rating. If the winds shift away from America, things would get very, very bad.

It is a price to pay for bad behavior by our government. Japan had their credit drop when they went through their crisis, they did recover, but it took time. Besides, China's currency is dependent on our currency, so as ours goes, so shall theirs. Understand that this isn't about avoiding a crash, it's about delaying it.
Wnope
Posts: 6,924
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7/30/2011 4:58:01 PM
Posted: 5 years ago
At 7/30/2011 3:59:23 PM, innomen wrote:
At 7/30/2011 3:52:00 PM, Wnope wrote:
At 7/30/2011 3:24:22 PM, innomen wrote:
There are a lot of unknowns. So if the interest rates go up, we're at record lows now, so if they go up 1/4 of a point? Or maybe a whole point? We can deal with that. The stock market will probably dive, but i doubt it will be a long term deal; it will recover (eventually). Then the game begins on who gets paid: Apparently the president gets to determine this, and if he actually stops payments to key dependents, then it will be interesting to see how it's played in the upcoming election.

The biggest issue I see is long term. We need to keep America in tip-top shape when it comes to being dominant in terms of borrowing and the dollar.

If America is second to best in ratings, that means another large country (say...China) could snag the best rating. If the winds shift away from America, things would get very, very bad.

It is a price to pay for bad behavior by our government. Japan had their credit drop when they went through their crisis, they did recover, but it took time. Besides, China's currency is dependent on our currency, so as ours goes, so shall theirs. Understand that this isn't about avoiding a crash, it's about delaying it.

I assume you mean raising the debt ceiling itself is about avoiding default for the moment. I quite agree. Just raising the debt ceiling isn't enough, as credit agencies have also said.

However, when the dust settles, China's dependency on us will decrease substantially if they can draw loans especially while America crashes.

I also think there should be budget cuts that go far beyond what most Democrats, certainly liberals, think.
innomen
Posts: 10,052
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7/30/2011 5:05:27 PM
Posted: 5 years ago
At 7/30/2011 4:58:01 PM, Wnope wrote:
At 7/30/2011 3:59:23 PM, innomen wrote:
At 7/30/2011 3:52:00 PM, Wnope wrote:
At 7/30/2011 3:24:22 PM, innomen wrote:
There are a lot of unknowns. So if the interest rates go up, we're at record lows now, so if they go up 1/4 of a point? Or maybe a whole point? We can deal with that. The stock market will probably dive, but i doubt it will be a long term deal; it will recover (eventually). Then the game begins on who gets paid: Apparently the president gets to determine this, and if he actually stops payments to key dependents, then it will be interesting to see how it's played in the upcoming election.

The biggest issue I see is long term. We need to keep America in tip-top shape when it comes to being dominant in terms of borrowing and the dollar.

If America is second to best in ratings, that means another large country (say...China) could snag the best rating. If the winds shift away from America, things would get very, very bad.

It is a price to pay for bad behavior by our government. Japan had their credit drop when they went through their crisis, they did recover, but it took time. Besides, China's currency is dependent on our currency, so as ours goes, so shall theirs. Understand that this isn't about avoiding a crash, it's about delaying it.

I assume you mean raising the debt ceiling itself is about avoiding default for the moment. I quite agree. Just raising the debt ceiling isn't enough, as credit agencies have also said.

However, when the dust settles, China's dependency on us will decrease substantially if they can draw loans especially while America crashes.

I also think there should be budget cuts that go far beyond what most Democrats, certainly liberals, think.

But since there is no true sustainable solution in our midst, and neither side have the political balls to do what is necessary a crash is imminent. I don't see how China will lose dependence on us anytime soon, both as their lendee, and as their principle customer.
seraine
Posts: 734
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8/3/2011 8:35:33 AM
Posted: 5 years ago
At 7/30/2011 4:58:01 PM, Wnope wrote:
I also think there should be budget cuts that go far beyond what most Democrats, certainly liberals, think.

+1

But that's probably just because I'm libertarian...

So many federal programs produce a negative effect, waste substantial amounts of money, and are unnecessary and/or could have the same job done a lot better by the private market.