If America defaults?

fadetogrey

Seeing as there seems to be a few people here knows,help someone who doesnt by telling me why is it important the US does a deal on borrowing?To my mind if I owe £100,000 and have no way of paying it back surely borrowing another £1,000 will make no difference?and also a question I posted last week but couldnt get an answer.Who are moodys and why are they so influential?

Ark_Welder

fadetogrey wrote: »

Seeing as there seems to be a few people here knows,help someone who doesnt by telling me why is it important the US does a deal on borrowing?To my mind if I owe £100,000 and have no way of paying it back surely borrowing another £1,000 will make no difference?and also a question I posted last week but couldnt get an answer.Who are moodys and why are they so influential?

First things, the USA does have a way of paying back what it owes, which ultimately, is through a growing economy. But one of its problems is that it is borrowing large amounts for the wrong reasons: too much for paying bills and not enought for investment (i.e. infrastructure rather than the stock market!). It's a bit like me getting a loan to buy a TV or go on holiday instead of buying a car that would enable me to work further away from home.

If the US's borrowing ceiling is not raised then it cannot pay those day-to-day bills - which are increasing - when they are due, So it does need to borrow more to be able to do so in the immediate future. Hence the debate over there about reductions is spending and raising taxes. Doing both of these should bring down the level of borrowing. The 'debate', though, is how to do it, and how soon.


Moody's, along with S&P and Fitch are the main credit ratings agencies. They give a rating to a debt (such as a gilt, US Treasury, corporate bond, etc) which is an indication of how risky that debt is, i.e. whether it is very likely to be repaid, or whether there is a chance of a loss. But a debt does not always have the same rating thoughout its life: it can be upgraded (i.e. the outlook of the debtor has improved), or downgraded (the outlook as got worse - as in the case of Greece).

Some institutional investors can only buy into debt that has a good rating, i.e. it is seen to be good quality. Debt that is of lower quality is usually refered to as high-yield, or junk bonds. So if a debt is downgraded then they must sell any existing holdings and cannot buy any more. When a sovereign country or a corporation that has been downgraded then comes to issue more debt, it will generally have to pay a higher rate of interest (known as the 'coupon'). So more revenue then has to be spent on paying the interest instead of being used for useful (investment) purposes.

So, the credit ratings agencies have an affect on how much interest the USA - and the UK - might have to pay on future debts: a higher credit rating means lower rate of interest, a lower credit rating means a higher rate of interest.

[edit]
P.S. There are other type of debt that may be given a credit rating, but not something that needs to be mentioned here - unless someone else wants to give it a go!

erdd2

ChiefGrasscutter wrote: »

Well, the US government would have to decide who it pays first, who it pays second and who it doesn't pay.
If I was them I'd default (ie not pay) on some internal social secuity payments. The USA is not going to default on payments of Treasury bond under any circumstances short of the entire world being hit by an asteriod.

Although the current debt limit is fixed by law - it apparantely does not apply to the production of hard coinage. Therefore it seems to me the obvious way out is to mint a special "1 Trillion dollar coin" and promptly deposit said coin at the Fed' -where it would be simply added into the balance held - job done!

There is an opening for chiefcoincutter at US treasury, following link for apps https://www.chiefcoincutter.co.usa/savetheworld

sabretoothtigger

That link doesnt work :mad:

why is it important the US does a deal on borrowing

They need to stay solvent. A gradual reduction over at least a year would be sensible but grand gestures are how life works?
You are quite right about the rest hence the arguing, theres a small number in politics who want to stop any borrowing

A larger budget empowers politics to more importance, none of these guys want to vote themselves out of a job.
Its a case of self bias or ego impaired judgement and I think anyone here might do the same in their own job. Everyone likes an expense account etc

Submitted February 1, 2010
Submitted by Barack Obama
Submitted to 111th Congress
Passed Passed, Public Law 112-10
Total revenue $2.17 trillion (estimated)
Total expenditures $3.82 trillion (estimated)
Deficit $1.48 trillion (estimated)

300 billion debt interest is part of that expenditure I think
levied on 14 trillion of debt

The default on debt is only 7.8% of the obligation really.
The rest of the other spending is basically about losing votes, lots of people would dislike not getting paid

FATHEROFTWO_2

the 14th amendment of the American constitution will be used by the president to raise the debt ceiling at the eleventh hour if congress/senate fail to raise it themselves.

No way will Obama allow the US to default on its debt.This amendement was used by president Trueman in the past to force up the debt ceiling.

Its just political gamesmanship

sabretoothtigger

The main point is they will not be forced to default. They will just have to stop using money on certain projects. Alot of the spending is optional as far as I know and the debt interest is minor to that

Trying to place the optional spend over the obligated is politics yep

China places the US on eBay!
http://t.co/7VA7xBW

atypical

FATHEROFTWO wrote: »

the 14th amendment of the American constitution will be used by the president to raise the debt ceiling at the eleventh hour if congress/senate fail to raise it themselves.

As Obama said: "“I have talked to my lawyers, they are not persuaded that that is a winning argument.”

It's definitely not clear-cut:
NY Times
LA Times
The New Republic

Not that it matters now...

MoneySaverLog

The White House’s official position is that President Barack Obama has no intention of invoking the 14th Amendment to the United States Constitution in order to raise the debt ceiling.