In case of DEFAULT

larryB

I know I am the voice of pessimism around here and nobody knows what the worst might bring. Nonetheless I have read several articles in the last few days that speculate that Treasury Only Money Market Funds could suffer badly post default. I wonder what might be a reasonable substitute. 1. Prime Money Market, more diversity? FDIC HYS account? FDIC insured 90 day CD’s? Checking accounts at a too big to fail Brick and Mortar Bank? Under the bed? I have a relatively affluent friend who sheepishly revealed to me that he has cash buried in his yard but I wonder if he was pulling my leg. Suggestions please.

WABAC

Might be a great buying opportunity in equities if you can lay your hands on unleveraged cash.

Might need the cash if Social Security checks don't go out.

I don't think one money market would be much safer than another if the default persisted.

larryB

As far as equities go default will surely create a great buying opportunity. The question is where to keep the dry powder. Until the situation is resolved the upside is limited but the downside is very significant.

stayCalm

Nothing will be safe with an extended default by the US Govt.

msf

With just a quick search, I haven't found much on how Social Security could be handled if the debt ceiling is reached and extraordinary measures are exhausted. Here's one page that came up, referencing a 1996 law giving temporary authority for SS to borrow without it counting against the debt ceiling.
https://www.cpapracticeadvisor.com/2023/03/02/19/77341/

My off-the-top-of-my-head thoughts are that since SS is roughly 3/4 paygo, the government should be able to make payments of at least 3/4 of "normal" amounts without any impact on debt. That in turn should cover Medicare premiums - a secondary issue that I haven't seen mentioned. (If SS does not make payments, and Medicare premiums are still due, do participants have to come up with the cash themselves?)

The 3/4 figure is based on projections that when the trust fund is depleted, payroll taxes and such will be able to fund 3/4 of amounts due.

IMHO, and without careful thought, the question seems to be whether the SSA can draw money out of its trust fund to cover the other 1/4 as it normally does. As larryB points out, there is a question of what the Treasury will do about paying off Treasury bonds as they become due. The SS trust fund is invested in Treasuries, albeit of a special nonnegotiable type. So ISTM that there's a question of whether SSA will have access to the money in the trust fund.

larryB

@msf. Let us say that Treasury’s will not be paying their coupon and are not paying at maturity. And for the sake of pessimism let us say that Social Security payments are delayed. The question is where to keep funds liquid and safe until the repugs come to their collective senses? I obviously have no confidence in the speaker of the house and his band of crazies to do the right thing. Events could easily spin out of control. I am a self proclaimed pessimist but right now any path to a resolution is not evident.

msf

I was addressing WABAC's comment on SS only. Underlying the speculation that the Treasury would not pay off bonds is the expectation that the Treasury will not have cash on hand (including inflows from general tax revenues). That's a very reasonable expectation given that the Treasury cannot borrow to expand its cash on hand.

In contrast, SS payments are made from segregated cash flows (FICA taxes) and the SS trust funds. For this reason, it does not seem reasonable to expect SS payments to be significantly delayed. OTOH, since all checks from from "the Treasury", SS payments might lose priority once the SS cash is comingled in the Treasury's "checking account". Brookings discusses this (see below).

With respect to the Treasury paying off principal, when the Treasury does so it reduces the amount it has borrowed. So it can "reborrow" that money without breaching the debt ceiling.

[A]s securities mature, Treasury would pay that principal by auctioning new securities for the same amount (and thus not increasing the overall stock of debt held by the public). Treasury would delay payments for all other obligations until it had at least enough cash to pay a full day’s obligations. In other words, it will delay payments to agencies, contractors, Social Security beneficiaries, and Medicare providers rather than attempting to pick and choose which payments to make that are due on a given day.

https://www.brookings.edu/2023/04/24/how-worried-should-we-be-if-the-debt-ceiling-isnt-lifted/

I've said before that I don't see an obvious place to keep cash. Thus diversification seems appropriate now - banks, prime MMFs, brokerage cash, CurrencyShares - perhaps you have a yen for Yen (FXY). Planting money in the back yard is only as safe as the value of the currency; certainly it won't sprout a money tree.

Sven

@larryB, don’t think you are being overly pessimistic. Many of us have been thinking along the same line as well but haven’t voiced that directly.

Planting paper currency is the ground is pretty silly in light of wildfires and theft. Same goes for gold bullions. @msf gave a very reasonable approach to keep cash handy.

I've said before that I don't see an obvious place to keep cash. Thus diversification seems appropriate now - banks, prime MMFs, brokerage cash, CurrencyShares - perhaps you have a yen for Yen (FXY)

WABAC

Every time I read the title of this thread I think

Break Glass!

BTW, I think any threat to SSI payments would result in playing the 14th Amendment card.

MikeM

I just can't imagine a prolonged default as is suggested in this post. At worst, I see a 6 month or a 1 year kick-the-can down the road. A prolonged default, to me, would be seen as an act of political terrorism or even sedation by most Americans and corporate doners. There would, I believe, be a revolt against the right-wing terrorists. Even joe-the-plumber Trump supporters would not except such pain to their pocketbook... would they?

larryB

@mikeM. Virtually all Trump supporters and for that matter most repugs vote against their pocketbooks. So to answer your question “would they?” Why wouldn’t they now?They always have. Their culture war issues matter more than anything to them. Even their pocketbooks.

rforno

larryB said:

@mikeM. Virtually all Trump supporters and for that matter most repugs vote against their pocketbooks. So to answer your question “would they?” Why wouldn’t they now?They always have. Their culture war issues matter more than anything to them. Even their pocketbooks.

They will chose to burn the village down if it means they can 'win' or claim 'victory' over their opponents. Full stop, that's their platform and philosophy.

sma3

@rforno

I think that applies to less than a majority of the GOP, maybe 20%. They hold influence because only 50% of people bother to vote

When your bank closes and the ATM is empty and your SS check doesn't arrive, I suspect people will notice.

The GOP will try to blame Biden, but whether this will work remains to be seen.

I still do not understand why the debt ceiling is not unconstitutional.

rforno

sma3 said:

@rforno

I think that applies to less than a majority of the GOP, maybe 20%. They hold influence because only 50% of people bother to vote

When your bank closes and the ATM is empty and your SS check doesn't arrive, I suspect people will notice.

The GOP will try to blame Biden, but whether this will work remains to be seen.

I still do not understand why the debt ceiling is not unconstitutional.

I agree. It's just another example of 'minority rule' disrupting the good workings of this country.

I don't think that blaming Biden for a default would stick, either. And I've read this morning that the WH hasn't removed invoking the 14th Amendment from the table ... or letting it go into the courts and let SCOTUS ultimately rule that a default is a constitutional violation -- which would also give Biden cover since it's not *him* or the D's that are making the decision here, it's the judiciary, such that it is.

larryB

@sma. “ when your bank closes ,,,,,,” my friend will just go his his backyard and dig up another few hundred bucks. Maybe he is not so dumb after all. At the end of the failed negotiations,,, will it be the 14th amendment, the trillion dollar coin or chaos? When the country is being held hostage by crazies it’s hard to see a solution.

sma3

@rforno

"The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."

I would assume the problem with the 14th amendment is it would take time.

But why can't the Treasury just announce that it will continue to print money needed?

If it did not "the debts of the United States would be questioned" and therefor the amendment authorizes it and essentially telling someone who disagrees to take them to court.

Yellen seems to want to have her cake and eat it too and at least at this point is unwilling to commit.

"All I want to say is that it's Congress' job to do this. If they fail to do it, we will have an economic and financial catastrophe that will be of our own making, and there is no action that President Biden and the U.S. Treasury can take to prevent that catastrophe," Yellen replied, later saying, "I don't want to consider emergency options."

Interesting that she does not categorically rule it out.

https://abcnews.go.com/Politics/14th-amendment-solve-debt-ceiling-crisis-good-option/story?id=99140989

43 GOP senators say they will not vote for cloture without spending cuts, claiming that raising the debt ceiling allows additional spending.

This is untrue. The Debt ceiling only allows the Treasury to pay debts that are already incurred.

davidrmoran

LTribe today, worth reading:

https://www.nytimes.com/2023/05/07/opinion/debt-limit.html

Observant1

I fully agree with the Laurence H. Tribe's statement:
"The right question is whether Congress — after passing the spending bills that created these debts in the first place — can invoke an arbitrary dollar limit to force the president and his administration to do its bidding. There is only one right answer to that question, and it is no."

Mr. Tribe's proposed solution seems reasonable:
"As a practical matter, what that means is this: Mr. Biden must tell Congress in no uncertain terms — and as soon as possible, before it’s too late to avert a financial crisis — that the United States will pay all its bills as they come due, even if the Treasury Department must borrow more than Congress has said it can."

larryB

One can hope!

TheShadow

Here is an article concerning SS"

https://money.com/social-security-debt-default/

rforno

If only we lowly little people could be empowered to manage our money like Congress, life would be totally awesome....

Anna

sma3 said:

I still do not understand why the debt ceiling is not unconstitutional.

Me either, but something tells me that, if it were to be challenged in court, we-the-people might end up wishing it could have been challenged before 2016. Constitutionality seems to sway in the wind sometimes. If it were deemed constitutional for some reason, things might get even worse than they are. I imagine the challenge has not occurred because of appearances (big spender) or the deadly outside chance of an unexpected result.

Observant1

The only other western country with a debt ceiling is Denmark.
Since their debt ceiling is so high, there are no recurring debates like we have in the U.S.
The closest that Denmark came to reaching the ceiling was 2010 - they doubled it afterward.
It appears this unnecessary nonsense only occurs in the U.S.!

LewisBraham

Worth reading: https://nerdwallet.com/article/finance/debt-ceiling

I wonder if McCarthy recognizes how stupid this sounds or does he think that using the words “Communist” and “Chinese” will ensure support among the benighted uber-nationalist base:

“The Limit, Save, Grow Act will limit federal spending, save taxpayers trillions of dollars, grow our economy, and lift the debt limit into next year,” said McCarthy in a prepared statement. “This legislation will make us less dependent on the whims of the Chinese Communist Party and curb high inflation, all without touching Social Security or Medicare — because no one is hurt more by inflation than seniors.”

hank

LewisBraham said:

Worth reading: https://nerdwallet.com/article/finance/debt-ceiling

I wonder if McCarthy recognizes how stupid this sounds or does he think that using the words “Communist” and “Chinese” will ensure support among the benighted uber-nationalist base:

“The Limit, Save, Grow Act will limit federal spending, save taxpayers trillions of dollars, grow our economy, and lift the debt limit into next year,” said McCarthy in a prepared statement. “This legislation will make us less dependent on the whims of the Chinese Communist Party and curb high inflation, all without touching Social Security or Medicare — because ”

Generally I’m weary of verbiage from many quarters that seems to contain the same robotic sounding hyperbole, diction and cadence, sounding like it was scripted by a highly skilled well paid Madison Avenue public relations firm for the explicit purpose of further polarizing the public. Are there any pols who still speak like common people?

Re - “no one is hurt more by inflation than seniors.” Nice of McCarthy to think of us seniors. Powell often uses a similar line of argument about how inflation hurts the “ordinary working class” - all the while seeking to raise the unemployment rate / throw people out of work with highly restrictive monetary policy.

LewisBraham

An excerpt:

On Tuesday March 7, Sen. Elizabeth Warren, D-Mass., chair of the Subcommitee on Economic Policy, held a hearing on the debt limit, in which experts assessed its economic and financial consequences. In prepared testimony at the hearing, Mark Zandi, chief economist of the financial services company Moody's Analytics, said a default would be "a catastrophic blow to the already fragile economy."

Zandi warned of consequences akin to the Great Recession, including a roiled stock market that would cause market crashes, high interest rates and tanking equity prices. He said even if the default is quickly remedied, it would be too late to avoid a recession. Waiting too long to act could cause severe economic turmoil with global impacts.

The testimony included Moody's simulations of what an economic downturn could be, should the government default, casting a bleak view of the prospect that includes:

• Real GDP declines over 4% and diminished long-term growth prospects.
• 7 million jobs lost.
• Over 8% unemployment.
• Stock price decreases by almost a fifth, with households seeing a $10 trillion decline in wealth as a result.
• Spiking rates on treasury yields, mortgages and other consumer and corporate borrowing.

Further, Zandi expressed skepticism that lawmakers would be able to resolve their impasse quickly, as evidenced in part by the difficulty House Republicans had in electing McCarthy as speaker of the House. It took 15 rounds of voting for McCarthy to succeed.

"Odds that lawmakers are unable to get it together and avoid a breach of the debt limit appear to be meaningfully greater than zero," Zandi said in the testimony.

What would happen if the U.S. defaulted on debt?

If the default lasts for weeks or more, rather than days, it could trigger a fire-and-brimstone, Armageddon-level financial crisis for the U.S. and global economies.

A report from the White House Council of Economic Advisors in October 2021 warned of the possible effects of the U.S. defaulting, which include a worldwide recession, worldwide frozen credit markets, plunging stock markets and mass worldwide layoffs. The real gross domestic product, or GDP, could also fall to levels not seen since the Great Recession.

The U.S. has only defaulted once, in 1979, and it was an unintentional snafu — the result of a technical check-processing glitch that delayed payments to certain U.S. Treasury bond holders. The whole affair affected only a few investors and was remedied within weeks.

But the 1979 default was not intentional. And from the point of view of the global markets, there's a world of difference between a short-lived administrative snag and a full-blown default as a result of Congress failing to raise the debt limit.

A default could happen in two stages. First, the government might delay payments to Social Security recipients and federal employees. Next, the government would be unable to service its debt or pay interest to its bondholders. U.S. debt is sold to investors as bonds and securities to private investors, corporations or other governments. Just the threat of default would cause market upheaval: A big drop in demand for U.S. debt as its credit rating is downgraded and sold, followed by a spike in interest rates. The U.S. government would need to promise higher interest payments to justify the increased risk of buying and holding its debt.

Here’s what else you can expect to see if the U.S. defaults on its debt.

A sell-off of U.S. debt
A default could provoke a sell-off in debt issued by the U.S. government, considered among the safest and most stable securities in the world. Such a sell-off of U.S. Treasurys would have far-reaching repercussions.

Money market funds could sell out
Money market funds are low-risk, liquid mutual funds that invest in short-term, high-credit quality debt, such as U.S. Treasury bills. Conservative investors use these funds as they typically shield against volatility and are less susceptible to changes in interest rates.
In the past, investors have sold out of money market funds when the U.S. ran up against debt ceiling limits and signaled potential government default. Yields on shorter-term T-bills go up because they are impacted more compared with longer-term bonds, which give investors more time for markets to calm down.

Federal benefits would be suspended
In the event of a default, federal benefits would be delayed or suspended entirely.

Those include:
Social Security; Medicare and Medicaid; Supplemental Nutrition Assistance Program, or SNAP, benefits; housing assistance; and assistance for veterans.

Stock markets would roil
A default would likely trigger a downgrade of the United States’ credit rating — the S&P downgraded the nation’s credit rating only once before, in 2011 when it was approaching default. The default combined with the downgraded credit rating would in turn cause the markets to tank, the White House’s Council of Economic Advisors said in 2021.

If current debt ceiling talks continue for too long, the markets are likely to become more volatile than they already are.

Interest rates would increase

As debt ceiling negotiations linger, Americans could see rates increase on consumer lending products, including credit cards and variable rate student loans.

Credit lenders may have less capital to lend or may tighten their standards, which would make it more difficult to get credit.

Depending on the timing of a default and how long the effects are felt, rates could increase on new fixed auto loans, federal or private student loans and personal loans.

Tax refunds could be delayed

If the debt ceiling isn’t raised, it could take more time for tax filers to receive their refunds — usually within 21 days of filing. If the government defaults, those who file late run a risk of not receiving their refund.

Housing rates would increase

A debt ceiling crisis won’t impact those with fixed-rate mortgages or fixed-rate home equity lines of credit, or HELOCs. But adjustable-rate mortgage, or ARM, holders may see rates rise even further than they already have — more than four percentage points on rate indexes since spring 2022. Those in the fixed period of their ARM can expect to see rates rise when reaching their first adjustment.

larryB

@LewisBraham. Thanks for sharing that LB. Even for a self proclaimed pessimist Zandi’s report takes one’s breath away. I guess I am fortunate,,,,, I have no job to lose and no adjustable rate loans to go up. On the other hand medical providers might stop caring for medicare patients and I will have to start digging in the yard to replace my social security payment. If I can avoid repugs with assault rifles life will go on.

kings53man

MAGA Republicans want this - default would be "a catastrophic blow to the already fragile economy. They can then blame Biden for this and their chance of winning the next election - a strong possibility. I am waiting for this moment (default, need to do massive Roth conversion).

Sven

@LB, thank you for posting the excerpt.

If and when US defaulting does happened, it will affect these rich GOP donors and their pocketbooks too. The consequences are grave to many and they are needless. How can a small extremists hold the nation in hostage?

Observant1

From Heather Cox Richardson's Letters from an American (05/04).

"Meanwhile, the debt ceiling crisis has not gone away. Director of National Intelligence Avril Haines today told a Senate Armed Services Committee hearing on global threats that a U.S. default on our debts would enable both Russia and China to say 'such an event [demonstrates] the chaos within the United States, that we’re not capable of functioning as a democracy, and the governance issues associated with it.' She explained: 'It would be…almost a certainty that they would look to take advantage of the opportunity.'"

yogibearbull

I did a quick search on the 14th Amendment.

Its context was the Civil War issues and related debt and some links mention that explicitly in its title, although in its final form, there is no reference to "Civil War" debt. Several subsequent interpretations by Congress were rejected by the Supremes, and eventually, there wasn't too much court history on it. So, I suppose a new court fight could become a can of worms if reopened. I think that it may be best as a stick that isn't used.

14th Amendment with title, https://constitutioncenter.org/the-constitution/amendments/amendment-xiv
14th Amendment without title https://constitution.congress.gov/browse/essay/amdt14-S4-1/ALDE_00000849/