Will the U.S. Default On Its Debt ... Even If It Raises the Debt Ceiling?

[European blood]

Many in Washington are warning that - unless a compromise to raise the debt ceiling is reached - the U.S will default on its debt.

Moody's has put the U.S. on a credit review for a possible downgrade due to the failure to reach a debt ceiling agreement.

Standard and Poor's said earlier this month that it would likely consider the Greek bailout plan to be a default. And see this.

But the American situation is different - both because we are the world's largest economy and because raising the debt ceiling is different from the Greek plan.

Right?

Hopefully. But as Zero Hedge notes:

China Daily has just reported that according to the notorious ... Dagong rating agency, "The US' sovereign credit rating is likely to be downgraded regardless of whether the US Congress reaches an agreement on raising its statutory debt limit. "If the debt limit is raised and the public debt continues to grow, it will further damage the US' debt-paying ability, which is a key factor in Dagong's evaluation, and we will consider lowering its ratings accordingly," said Guan Jianzhong, chairman and CEO of Dagong. "If the raised limit fails to pass and the US faces default, the rating will be immediately and substantially downgraded," he said. According to Guan, the downgrading is really just "a matter of time and extent".

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From China Daily:

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Dagong's rating was downgraded from AA on Nov 9 after the US government announced a second round of quantitative easing (QE2).
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"Raising the limit is just a legislative measure to allow the government to borrow more money, but it does not change the fact that the US lacks momentum for economic growth," Guan said, adding that if the inflation and unemployment rates remain unchanged, the US government might turn to QE3.

The fundamental problem is that the US' ability to generate wealth is far from compensating its increasing debt, and "paying debts by borrowing more is not a solution," he said.

"Neither the $2 trillion QE nor raising the debt limit is an effective measure. And the sovereign debt crisis will continue," Guan said, explaining that the US government spent huge amounts on consumption and social security, and had limited resources left for economic development


In fact, Dagong said last month that the U.S. had already defaulted.

Granted, Dagong is a Chinese rating agency which has a Chinese bias (just like Moody's, S&P and Fitch have a U.S. bias ... and they take bribes for higher ratings) and - as Zero Hedge notes in the above-linked article - Chinese and American rating agencies are in a war right now.

But a large German rating agency has also downgraded U.S. debt.

And S & P put the U.S. on a downgrade watch in April.

And as CNBC notes today:


A U.S. default isn't a matter of "if" but "when," David Murrin, chief investment officer at [UK-based] Emergent Asset Management, told CNBC.

"It's inevitable that the U.S. will default—it's essentially an empire which is overextended and in decline—and that its financial system will go with it," he said.

The question is: Does the U.S. default when it is forced to by the outside world, probably the Chinese, or does it take the option to default on its own terms in such a way that it may have a strategic advantage, Murrin said.

And, yes, the Federal Reserve could go bust as well.

http://www.washingtonsblog.com/2011/...ven-if-it.html

[joe blowe]

The debt ceiling approval means they will continue to inflate the US buck - this does not bode well for millions of people carrying dollars as reseve, about 55 trillion. It has already been inflated by 50% in the past decade.

Not approving means they will not have money for their commitment to provide entitlements to the populace. It will happen sooner or later because the US lives with an ever increasing debt, of great magnitude by any standards. Riots will ensue as people will go hungry in the US. We've had a taste of that in the past few months.

Yes they will default, hopefully by continuing the process of price inflation eroding the value of the dollar. It is a 'benign' solution that we should all hope for. But they DO need to stop printing...

These two problems run in parallel, the internal problem is imo unsolvable, leading to nasty consequences - especially if you happen to live in the large centers.

[miclebarbossa]

Without action, the United States risks defaulting on its debt obligations.unless a compromise to raise the debt ceiling is reached.

[SwordoftheVistula]

Riots will ensue as people will go hungry in the US. We've had a taste of that in the past few months.

The US is a food exporting nation. The US government issues this sort of currency which can only be spent on groceries called 'food stamps' aka 'SNAP' and 'EBT'. Unlike the other benefits programs, there's no limits to the people who can get on it, other than having not much income and no money.

The Federal Reserve also can't go bankrupt, because it prints its own money.

[Psychonaut]

We've had a taste of that in the past few months.

Really? There've been food riots in Canada?

[joe blowe]

Really? There've been food riots in Canada?

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Both the US & Canada have had a taste of riots in the past year.
What we saw in Vancouver had nothing to do with sports, it was a dress rehearsal for things to come. Also the G20 meeting.

[Psychonaut]

Both the US & Canada have had a taste of riots in the past year.

Would you mind posting some links to demonstrate that? I've seen nothing of food riots in the US or Canada.

What we saw in Vancouver had nothing to do with sports, it was a dress rehearsal for things to come.

Oh, come on. That's absurd.

[joe blowe]

These were not food riots of course. We spend 10% of our income in food, while in Tunisia and Egypt they spend over 40%. Any rise in food prices does affect them, and some say the riots there had as one of the factors, the cost of living.

The riots in N.America have been incited by unions, i.e. Madison, Wisconsin. The anti-globalists at the G20 in Toronto, and mostly lefties incited the one in Vancouver.

The Muslim Brotherhood has been inciting riots in Tunisia, Egypt, Syria, Yemen, Saudi Arabia.

There are a few factions wanting to play havoc with the West, just watch the show. For them, any excuse will do. Food shortage will be a very good one soon in many parts of the world.

[2DREZQ]

The ugly truth is that nobody really knows what happens next. I'm hoping that the right debtors (not bondholders or little old voters on medicare) are told they just have to wait for a check, it will be along directly...and they do.

Because the options are really limited. No sane westerner wants to see the near-total meltdown of the American economy, so accommodations will be made. Our credit rating might be downgraded, but the subsequent increase in interest rates might impose by force a fiscal discipline on Washington that no other force could.

I'm wondering what happens if, at the same time, oil starts trading in something other than dollars, or the renimbi gets de-coupled from the dollar.

[SwordoftheVistula]

It looks like they will have to compromise on a spending cuts program, since if they don't, they will be forced to cut spending by pure fact of running out of money to spend.