Overnight Howler at the NYT's 'Room For Debate': 'Default Is Impossible'
On Monday, the New York Times assembled a panel of alleged experts in its Room For Debate section. Each weighed in on Monday's ratings agency outlook downgrade by Standard and Poor's in an item entitled "Is Anyone Listening to the S.&P.?" (Don't ask me why "the" is there. It shouldn't be; the item is about the firm Standard and Poor's, not "the" Standard and Poor's stock index.)
One of the contributors was Yves Smith. Ms. Smith "writes the blog Naked Capitalism. She is the head of Aurora Advisors, a management consulting firm, and the author of 'Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.'"
Wait until you read Ms. Smith's reaction to S&P's move after the jump (bold after title is mine):
S.&P. Should Be Embarrassed
The United States is simply not at risk of default. Default is impossible for a sovereign currency issuer.
The Standard & Poor's rating firm should be embarrassed. If there is any political judgment at work here, it is S.&P. falling for politically motivated scare mongering. But given its track record with mortgage securities and collateralized debt obligations, why should we be surprised to see a rating agency relying on conventional wisdom rather than analysis?
There you have it. We have nothing to worry about. The United States of American cannot possibly default on its obligations, because Yves Smith says so. Is there something in her use of "sovereign currency issuer" that renders the U.S. immune? I highly doubt it.
It must be my fertile imagination which found the following currency-issuing nations which have defaulted in the past few decades:
- Mexico, 1982 -- "In the wake of Mexico's default, most commercial banks reduced significantly or halted new lending to Latin America."
- "On August 17, 1998, the Russian government devalues the ruble, defaults on domestic debt, and declares a moratorium on payment to foreign creditors."
- "Argentina defaulted on part of its external debt at the beginning of 2002."
Then there are nations which have repudiated their debts. As seen here (go to the second page of the document), "Mexico (1914), Russia (1917), China (1949), Czechoslovakia (1952), and Cuba (1960) repudiated their debts after revolutions or communist takeovers. Some countries, such as Austria (1802, 1868) and Russia (1839), defaulted after losing wars; others, such as Spain (1831) and China (1921), defaulted after enduring major civil wars."
Repudiation, of course, is a form of default. Believe it or not, there are rumblings from certain quarters that we should consider doing the same.
Somebody should be embarrassed, but it's surely not S&P.
I addressed the finger-pointing on mortgage-backed securities in a previous post (at NewsBusters; at BizzyBlog).
Cross-posted at BizzyBlog.com.
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Comments
US has already defaulted twice
Submitted by Vonu on Wed, 04/20/2011 - 2:18am.
1933 and 1971 US government defaulted on gold obligations.
Typical liberal response
Submitted by motherbelt on Wed, 04/20/2011 - 7:13am.
Kill the messenger.
Denial
Submitted by johnsonl on Wed, 04/20/2011 - 7:20am.
is not just a river in Egypt. Liberals have no concept of reality. Would your college professors lie?
As long as the "annointed
Submitted by Beukeboom on Wed, 04/20/2011 - 10:16am.
As long as the "annointed one" is in orifice...er...office, the NYT is going to have an ever increasing amount of spin that will grow more and more absurd. Bank on it.
Our debts to China
Submitted by johnsonl on Wed, 04/20/2011 - 7:21am.
should be treated like war debts. Forgive them, China, or we'll set up a nice, long repayment plan. Say, 1,000 years? Okay then!
Read her statement very carefully...
Submitted by c5then on Wed, 04/20/2011 - 7:34am.
What she is saying is that the US (via the FED) could just print the money to payback the debt, That is the only difference between a "Soverign currency issuer" and anybody else.
She seems to be advocating hyperinflation as a means to pay off the debt, or at least reduce it.
This seems to be the Federal Reserve's plan also. QE2 (and the possible QE3) is primarily a way to get massive amounts of dollars into the hands of the banks at the expense of the US taxpayer. This isn't yet causing hyperinflation because the banks are not lending it out to consumers. They are investing it in the stock markets.
remember that if you use the formula for inflation that was used from the beginning of time up to 1980, we currently have between 9% -10% inflation.
The only way that the massive amount of dollars that the FED has dumped into the money supply over the last couple of years doesn't cause hyperinflation is if the stock markets crash and wipe it all away. Hmmmm...there is a cheery thought. Our two choices are hyperinflation or a depression with deflation.
Madison and Jefferson and Franklin built a Republic - Roberts killed it!
It is these kind of
Submitted by dscott on Wed, 04/20/2011 - 8:33am.
It is these kind of statements that indicate Obama's plan IS TO devalue the currency as a means to cheat the bond holders who financed his spending spree. We all know the MSM shills for the Democrats and thus they are laying the ground work to tamp down all opposition. Now is the time to ratchet up the opposition to this destructive policy. Devaluation of the currency is an economy killer, we have only to look back to the Carter administration to see what happens.
Yes, you have hit on why we currently don't have hyper-inflation, what the Fed printed in dollars was only making up for the loss of wealth due to the incompetent policies of liberals in the mortgage debacle. In other words a stealth wealth transfer. Going forward, it becomes inflationary.
Okay, but every one of the defaulting countries I cited ...
Submitted by Tom Blumer on Wed, 04/20/2011 - 9:24am.
... "could just print the money to payback the debt."
But they defaulted.
So default is not impossible.
Default is yours
Submitted by richb313 on Wed, 04/20/2011 - 7:37am.
In the history of stupid statements this one will have a very special place. What if the debt holder decides he wants to be paid in another currency or a commodity. There is nothing that we can do about it. If China wants to be paid in rice because at least rice can be eaten and we could not provide that rice we would be in default. Issueing your own currency does not mean a thing. Every year Parker Brothers prints millions of dollars in monopoly money and the way the so called experts are running things it will not be long before monoply money will be worth more.
Rush Limbaugh said the same
Submitted by Satchmo on Wed, 04/20/2011 - 7:40am.
Rush Limbaugh said the same thing on his show yesterday: there is no danger of defaulting because the government still pulls in a couple of trillion of revenue. He went on to say that this whole notion of default is just another scare tactic of the Left. What do you think of that, Tom?
A scare tactic only in so
Submitted by dscott on Wed, 04/20/2011 - 8:40am.
A scare tactic only in so much as it relates to forcing a tax increase. However, yes we can default no matter how many trillions we have in revenue, it's called spending trillions more than you take in.
Satch, the danger here is the ultra low interest rates artificially created by the Fed via money printing. If you are buying your own bonds with printed money, obviously you can artificially meet the demand of the Treasury. Once we lose currency reserve status for the Dollar, all those dollars come flooding back because no one will use them anymore for trading. Interest rates will rise dramatically and thus the interest on the national debt of $200 billion will skyrocket to $1 - $2 trillion if rates go to 5% or 10%. Most of our debt is parked in short maturity bonds to take advantage of the low interest rates. The Dollar is merely a place holder for the trade and once that place holder status is no longer needed, the place holder becomes worthless. So yes, we will default on our debt IF we can not stop the madness now.
Spending more than you take
Submitted by Satchmo on Wed, 04/20/2011 - 10:16am.
Spending more than you take in is not defaulting. We've been spending more than we've taken in for years. The problem would come when we can no longer borrow, since borrowing is what we're doing to just pay the interest (what I mean is that only borrowed money is going toward the interest/debt, no tax revenues are going toward the interest/debt).
We're in agreement. The spending has to stop, the borrowing has to stop. I don't know if you agree with this or not, but the Fed needs to be stopped and disbanded.
There's a difference
Submitted by mustango on Wed, 04/20/2011 - 8:43am.
There's a difference between what Rush said and what Smith said, but you sort of have to want to see it. Rush said it's not going to happen, because in the real world, Congress -- even this Congress -- will put the brakes on spending rather than charge off the cliff into default. Raising the debt ceiling is NOT the only option to avoid default, in spite of what the rest of the media (save Ms. Smith) would have you believe.
Satchmo, or is it Incestmo?
Submitted by Tom Blumer on Wed, 04/20/2011 - 9:27am.
Rush was more than likely referring to the debt ceiling issue and not the long-term prospects of default.
This post is about what Ms. Smith said, and not what Rush said.
Stay on topic.
Exactly right, Tom. He wasn't
Submitted by Newsbusterbrown on Wed, 04/20/2011 - 9:48am.
Exactly right, Tom. He wasn't in any way advocating the insanity Smith was spouting.
“There are no easy answers, but there are simple answers. We must have the courage to do what we know is morally right.” - Ronald Reagan (1964 Republican Convention)
He said "Going into default
Submitted by Satchmo on Wed, 04/20/2011 - 10:06am.
He said "Going into default is impossible. It's a scare tactic." He also said that there is revenue coming in at about $2 trillion/year, and because of it, we can't go into default.
And as the transcript shows,
Submitted by Beukeboom on Wed, 04/20/2011 - 10:19am.
And as the transcript shows, you're misrepresenting what Limbaugh actually said.
Very mature, Tom. I listened
Submitted by Satchmo on Wed, 04/20/2011 - 9:56am.
Very mature, Tom. I listened to Rush's program yesterday, so I know what he said and what he was talking about. Obviously you didn't. I told you exactly what he said, not what you think he "more than likely" said.
Then I guess you're going to have to take it up ...
Submitted by Tom Blumer on Wed, 04/20/2011 - 9:58am.
... with newsbusterbrown, who obviously didn't hear what you "heard."
The problem with Satchmo quoting Rush Limbaugh....
Submitted by Kingfish17 on Wed, 04/20/2011 - 10:06am.
......is that there is a transcript of what Rush Limbaugh says.
Here is what Rush said regarding default of U.S. debt and how the talk surrounding default is a scare tactic related to the debt ceiling:
*****************
So you could pay the interest on the debt, you could pay 10% of the revenues and let the other spending go to hell. Snerdley, at what point are we going to put into action our theory that the spending has to stop? (interruption) Yeah, but if there's no limitation on it, we're at $14 trillion now, $14.3 trillion, so we got a new budget, it's a one year document that has a ten-year outlook, but at some point we're gonna have to get serious here and realize that lifting the debt limit is an invitation to spending that amount of money. They're throwing around this word "default," and we're not going to default. Let me take that back. There's something else I want to say before that. Even if in the practically impossible event that we would default, that would take six to eight months. It's not something that's gonna happen Monday or the day after the debt ceiling is not raised. There is revenue still pouring in at the rate of $2 trillion a year. We can't go into default. The United States is still collecting $2 trillion a year. Going into default is impossible. It's a scare tactic.
****************
So Rush actually said we could default in six to eight months, but it's "not something that's gonna happen .....the day after the debt ceiling is not raised."
"You can’t go take a trip to Las Vegas...on the taxpayer’s dime." Barack Obama
He was constructing a
Submitted by Satchmo on Wed, 04/20/2011 - 10:11am.
He was constructing a hypothetical, "Even if in the practically impossible event that we would default..." Not that default could happen in six to eight months.
If form holds, this is where Satchmo (or is it Incestmo?) ...
Submitted by Tom Blumer on Wed, 04/20/2011 - 10:12am.
... says "I told you so," even when proven wrong on substance -- Gosh, it happened while I was doing this comment.
Thanks for finding that, KF.
That would be about now
Submitted by Blonde on Wed, 04/20/2011 - 10:16am.
After providing proof positive, Incestmo declares "no, that's not right". *rolls eyes*.
Handy Reference Guide to Obama's Gaffes and Goofs ~ Currently Numbering 200 (and Counting)
I agree that default is impossible.
Submitted by acaiguana on Wed, 04/20/2011 - 8:08am.
It is impossible because when it comes to paying the debt versus maintaining payroll for 3-5 million Federal Employees; guess what?
We'll pay the debt.
QED
ACA
...
Quoted from: 'Acaiguana notes from the Underground' (Soon to be at theaters near you)
The difference between the US and the other countries
Submitted by troglodyt on Wed, 04/20/2011 - 8:44am.
you mentioned is that the US debt is largely in US dollar and thereby in its own currency. She should have phrased it better.
Perhaps you can explain ...
Submitted by Tom Blumer on Wed, 04/20/2011 - 9:29am.
... why that matters.
If a government can't pay its debts and decides that the electronic printing press has run its course, it's stuck with having to default or repudiate. Right?
It matters because
Submitted by troglodyt on Wed, 04/20/2011 - 9:51am.
Argentinia, Mexico and Russia weren't able to print foreign currency. That's why they had to default.
That is not to say that it is impossible for the US to default on its obligations. But it is not inevitable as it was the case with the countries above.
I think this whole issue is overblown:
1.) S&P didn't say anything about default, but credit ratings.
2.) Even if they downgrade the credit ratings, that doesn't necessarily mean that interest rates have to rise to unsustainable levels. Japan's rating was downgraded more than once since the 90's and they were still able to issue and sell bonds at rates the BoJ sets.
Well the bottom line is that ...
Submitted by Tom Blumer on Wed, 04/20/2011 - 9:54am.
... default is not impossible.
The only way Ms. Smith could have "phrased it better" is by saying "default is not impossible."
Iz remind funnee germanzee joke about Churliz Sheenz.
Submitted by The Vet on Wed, 04/20/2011 - 12:45pm.
You pop you butt Mizzer Blumer. iz hold on. iz troggiz trolliz seh diz ----_-_-
troggiz trolliz: Argentinia, Mexico and Russia weren't able to print foreign currency.
Churliz he seh "Duh, Vinnerz. USA can print foreign currenciez!" Ha! Told you. Where you butt Mizzer Blumer? Iz seh to hold iz.
Ha! You remind troggiz trolliz germanzee wordz --- Meatloafen Sanvichez.
Is Pee Ess
Submitted by The Vet on Wed, 04/20/2011 - 12:53pm.
Nort Korea can printz foreign currenciez! Iz make ferry goot hunert dollahz billz iz what troggiz trolliz heah.
Also iz wanna go Argentinia. Where iz? Next to Chilia?
You are missing the point,
Submitted by dscott on Wed, 04/20/2011 - 10:18am.
You are missing the point, raising the debt ceiling endlessly leads only to printing more money to buy of your own bonds. That devalues the currency and drives away bond purchasers thus creating a vicious cycle in which the only way to finance the debt is to print more money.
Our situation is far worse than Japan's because the attitude of the politicians involved is delusional. Any down grading of the credit rating is going to increase interest rates OR we are back to printing more money to buy our own bonds. What you are describing is what we are in now, a catch 22 situation in which IF the Fed were to stop right now from printing money to buy bonds (without ending deficit spending altogether) the Treasury would be forced to raise interest rates in order to attract bond purchasers. SINCE the Treasury has been selling interest rate protected bonds, the effect would be to immediately INCREASE the interest rate on ALL existing bonds making the interest payments skyrocket to $1TRILLION PER YEAR. SINCE the budget can't handle that disasterous event, the Fed has no choice but to PRINT more money to artificially keep down interest rates. WE ARE BONED.
The ONLY way to engineer a soft landing here is to IMMEDIATELY stop ALL DEFICIT SPENDING. Politically, Obama has refused to accept this approach, even the half measure of the Ryan Plan. Both Obama's insane plan to spend wildly and Ryan's half measure plan is DOOMED because we are out of time. BOTH PLANS depend upon the delusionary idea of ultra low interest rates and that means the Fed has to print money. We all know where printing money leads...
Shred up some old denim
Submitted by Rusty Shackleford on Wed, 04/20/2011 - 9:23am.
Shred up some old denim jeans, press it into paper, get the printer warmed up and viola! $1 million, $1 billion, heck, $1 trillion: print whatever you want on those suckers! The sky's the limit when you create currency from paper!
So I guess Smith is right! We can never default on our debt because we can just print whatever we want. I guess S&P is wrong because they simply expect to invest X and get X+Y in return. Whether or not X+Y is actually worth more than the original X is irrelevant, right Yyyyyyyyeves Smith?
-----------------------------------------------------------------------------
Chris Matthews: The Joy Behar of MSNBC.
Bill Maher: The Joy Behar of HBO.
Paul Krugman: The Joy Behar of The New York Times.
Dollar Denominated
Submitted by Kingfish17 on Wed, 04/20/2011 - 9:56am.
Tom,
I really like your contributions at NB, mainly because of the financial emphasis, and find your articles to be well constructed, deeply thought out, and properly sourced. I don't understand some of your examples in this particular article, though.
Let's take the first example of the Mexican default of 1982. Mexico was a large borrower of U.S. Dollar denominated debt from United States banks. If the debt was denominated in Mexican Pesos, they could have just run the printing presses and paid off their loans. But no U.S,. banks would ever loan a country like Mexico a ton of money where Mexico would be allowed to pay back the loans in their sovereign currency.
I think a lot of people are just playing semantics, though, when it comes to "default". Since virtually all of the U.S. debt is denominated in dollars, we could just run the printing presses. But if we pay back debt in inflated dollars to a creditor, that is a type of default, but one that can only be measured in a matter of degrees, depending on the extent of the inflation. So we get individuals of all political stripes claiming that, "The United States will not default on our debt, because our bonds are denominated in dollars and we can just run the printing presses!" Technically this may be true, but if the dollar is worthless, it is a de facto default, none-the-less.
The United States is currently in a a position shared with a handful of countries that can issue debt that is accepted worldwide, denominated in their own sovereign currency. I think S&Ps warning is more about the United States continuing ability to issue that debt, backed in dollars, where it will continue to be accepted in the world wide markets.
"You can’t go take a trip to Las Vegas...on the taxpayer’s dime." Barack Obama
Thanks for the nice words. As to the post ...
Submitted by Tom Blumer on Wed, 04/20/2011 - 10:05am.
... I understand that there are different elements surrounding each default.
But the point is that Ms. Smith can't truthfully say that "default is impossible," even in the "traditional" sense. It is possible -- hopefully very unlikely, but not impossible.
And her "remedy," if you read on at her post, which is "to get private sector debt loads down via encouraging debt restructuring and write-offs, and using well targeted fiscal stimulus to offset the impact of those efforts," would increase, not decrease, the possibility of default.
You are correct and thus have
Submitted by dscott on Wed, 04/20/2011 - 10:36am.
You are correct and thus have begun to realize how truly bad the situation has become. Yes, we can default because default means to NOT pay your interest payments. The choice of default is a political one, not just financial. In fact, the possibility of default becomes ever more probable as long as we continue to deficit spend. At some point Congress collectively will realize that simply printing money as a short term fix for paying those interest payments is even more destructive than telling the bond holders we can't sustain the inflationary effect anymore. How probable is that choice? IMO, extremely probable within 2 years IF Obama's policy were to prevail. YES, the situation IS THAT BAD.
So you either default by NOT paying your interest payments OR your bond purchasers default to NOT buy your bonds because the interest rate IS LESS than the devaluation rate.
Given the class warfare rhetoric coming from Obama condemning the banks and Wall Street, what makes anyone think he wouldn't default on those RICH countries/bond holders like China and Japan?
Is this along the same lines
Submitted by Beukeboom on Wed, 04/20/2011 - 10:14am.
Is this along the same lines of the lib lie of "they are too big to fail."
Maybe it had its origins long
Submitted by Satchmo on Wed, 04/20/2011 - 10:20am.
Maybe it had its origins long before, but I believe too big to fail was under the Bush administration, not that he was any conservative or Constitutionalist.
Americathon
Submitted by Beukeboom on Wed, 04/20/2011 - 10:26am.
Sometimes a movie or TV show will eerily predict the future. One such movie (albeit a fairly bad movie) is Americathon starring John Ritter released in 1979. A brief plot synopsis from IMDB reads:
"In a story told in narrative flashbacks, a young TV consultant is hired by the President of a bankrupt USA to organize a telethon in order to prevent the country from being repossessed by wealthy Native Americans."
The Wikipedia entry for the movie lists some of the "satirical predictions":
The People's Republic of China embracing capitalism and becoming a global economic superpower.
Cliques of Native Americans becoming wealthy (although in reality much of their wealth would come from the gaming industry, mostly from tribal casinos).
Nike becoming a huge multinational conglomerate (In 1979, their "Tailwind" running shoe was just starting to gain popularity).
Vietnam becoming a major tourist attraction among Asia's wealthy and powerful.
The continued existence and popularity of The Beach Boys in 1998.
The collapse of the USSR.
The depletion of US crude oil production, which, according to Hubbert's Peak theory, was already underway for several years at the time the film was made (Hubbert estimated in 1956 that the year of peak oil extraction in the United States would be 1970.).
Jogging suits becoming fashionable as "casual wear".
Reality television reaching absurd limits. (The telethon includes a boxing match between a mother and son. The son is played by Jay Leno.).
An America with a devalued dollar and heavily in debt to foreign lenders.
The United Kingdom relying heavily on tourism for income (In the film, England is the 57th state with London turned into a theme park named "Limeyland" and 10 Downing Street turned into a discothèque).
Network television dealing with previously taboo subjects accepted as normal. (Monty Rushmore stars in the sit-com, "Both Father and Mother", and plays a cross-dressing single father in the titular role. The film's narrative also mentions "The Schlong Show", a game show where contestants are judged by their reproductive organs.)
Smoking being banned.
A great increase in homelessness (Homelessness began to greatly increase in major U.S. cities during the recession of 1982 and the simultaneous cutting of the Section 8 program by the Reagan Administration).
BS Meter is in the red zone
Submitted by Tom Blumer on Wed, 04/20/2011 - 10:43am.
"Homelessness began to greatly increase in major U.S. cities during the recession of 1982 and the simultaneous cutting of the Section 8 program by the Reagan Administration."
Your flashback is otherwise pretty interesting, but as to the quoted contention: Prove it.
My understanding is that the increase in homeless is partially a chosen increase in awareness on the part of the media as an argument against Reagan administration policies (not including Section 8, which I don't think suffered the fate you believe it did), and partially because of the mistake of de-institutionalizing the mentally handicapped.
If you will note, I was
Submitted by Beukeboom on Wed, 04/20/2011 - 10:48am.
If you will note, I was quoting from the Wikipedia article about the movie so it is not my "flashback." You are mistakenly attributing things to me.
I am sorry ...
Submitted by Tom Blumer on Wed, 04/20/2011 - 10:51am.
... I did not get that the movie was 1979 until after I hit the "save" button to post the comment.
So they missed on the cause of "increased" homelessness, but they were pretty good on most of the rest.
Mistakes happen.
Submitted by Beukeboom on Wed, 04/20/2011 - 10:52am.
Mistakes happen. No biggie.