Monday, October 7, 2013

Wishing for US debt ceiling train wreck

How long will it take for the US Treasury to run out of funds if the October 17th deadline comes and goes without an increase in the debt ceiling? The answer is - less than a couple of weeks.

Source: Barclays Research

Fitch Ratings: - A formal review of the rating with potentially negative implications would be triggered if the US government has not raised the federal debt ceiling in a timely manner prior to when the Treasury will have exhausted extraordinary measures and cash reserves. According to official comments by the US Treasury secretary, extraordinary measures could be exhausted by 17 October.

In such a scenario, the Treasury would be forced to dramatically cut back on current spending with adverse implications for the economic recovery. Even if it were to prioritise debt service - something the Treasury has repeatedly stated it has neither the legal authority nor logistical capability to do - it would likely incur arrears on a range of payment obligations and thus continue to incur debt, but in a disorderly and disruptive manner.
Amazingly, there seem to be countless Americans who are rooting for this to happen. Emails are pouring in arguing that a US default in fact is a good thing. They really believe this will magically solve the US fiscal deficit problem and/or somehow "punish" the Obama administration. They don't seem to realize that this is akin to wishing for another 2008, while US government deficit would only worsen as a result (with tax revenue collapsing while entitlement liabilities growing just as fast). Alternatively these people just don't seem to value their jobs, homes, pensions, and bank accounts - all of which will be at risk should the US government fail on its obligations.
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