IMF ponders the improbable: Will U.S. default?

[Master Shake]

Will the U.S. government ever default?

It's not a pleasant thought for anyone holding some of the roughly $9 trillion in U.S. government bonds and notes currently in public hands - or for anyone hoping the global economy can stay on an even keel.

But the economists at the International Monetary Fund are paid to ponder the improbable, and in papers published on Wednesday fund staff examined where the U.S. and other developed countries fit on a continuum between easy living and disaster.

We're farther along than you might think.

Using a concept known as "fiscal space" - basically how much latitude a country has to borrow before markets will shut off the spigot by demanding unsustainable interest rates - the IMF staff drew a bright red line through five nations it considers to be running out of room: Greece, Iceland, Italy, Japan and Portugal. Of the 23 developed nations it analyzed, four others, including the U.S., received a yellow caution flag.

Does it mean default is imminent or inevitable? Hardly - and in companion articles the fund discussed the steps being taken to control public debt, and broadly discounted the chance of an outright sovereign default among any of the advanced countries.

But consider the U.S. The IMF estimated a series of probabilities regarding the amount of increased debt a country might be able to sustain without hitting its projected point of no return.

In the case of the U.S., the fund said the odds were roughly three out of four that the country could increase its total debt to some degree without being penalized by investors -- logical considering that the debt is steadily increasing and interest rates remain low and steady.

However that probability falls to an even 50-50 if the amount of new borrowing were to exceed fifty percent of GDP - or about $7 trillion given the current, $14 trillion size of the U.S. economy.

That might seem like plenty, except for the fact that under current Office of Management and Budget projections the "fiscal space" may fast disappear. The OMB projects total U.S. debt to jump by about $4.7 trillion in the next five years, leaving little room after that.

Better than expected growth, of course, could add fiscal "space," but another recession could shrink it. As IMF researcher and report author Jonathan D. Ostry said, it is best to be cautious.

"Markets may give little or no warning," Ostry said, pointing to the recent troubles in Greece. "The debt limit is the point at which you bounce off to infinity. It is a point that you want to strenuously avoid."

http://voices.washingtonpost.com/pol...bable_wil.html

[jpatter666]

Re: IMF ponders the improbable: Will U.S. default?

Well, so long as the US can continue to borrow in its own currency, default is just about impossible. The currency might get debased to nothing, but no chance of actual default.

[dbarberic]

Re: IMF ponders the improbable: Will U.S. default?

Well, so long as the US can continue to borrow in its own currency, default is just about impossible. The currency might get debased to nothing, but no chance of actual default.

Exactly. There will never be a day that the US does not pay on its debt. It will always pay. The better question is, will those receiving the interest payment stream receive dollars worth any value?

[ThePythonicCow]

Re: IMF ponders the improbable: Will U.S. default?

Well, so long as the US can continue to borrow in its own currency, default is just about impossible. The currency might get debased to nothing, but no chance of actual default.

A couple of points.

First be careful with the word "default". Sometimes it is used to mean "not pay anything", and sometimes it is used to mean "pay less, or under less favorable terms."

Second, to say the U.S. will always pay (at least in nominal value) is to ignore something I figure is rather obvious. All empires end. Somehow, someway, someday, the U.S. too will fall. I might even live to see that day, and I'm no spring chicken.

Third, the IMF is not an unbiased observer here. Their public role is, as it has been for a half century, to push the downside, the austerity side, of overly indebted nations. They make sure that the Banksters interests come first, that more wealth is transfered from the ordinary citizens of a failing nation to the wealthy elite, via various increases in taxes, decreases in services, austerity and privatization schemes. The IMF is warming up in the bull pen to do unto the U.S. as it has done to so many other nations. Now we (and most everyone else) thought that the IMF was a puppet of powerful American interests. I think we will come to see that the interests of Americans and the interest of the international powerful elite cabal behind these actions of the IMF are not the same.

In short, proofs that it can't change are really just explanations as to why the change must be more difficult than considered.

[Ben]

Re: IMF ponders the improbable: Will U.S. default?

Also, developed nations do sometimes just choose not to pay rather than debase the currency. It just depends on what they regard as less bad.

[Starving Steve]

Re: IMF ponders the improbable: Will U.S. default?

Also, developed nations do sometimes just choose not to pay rather than debase the currency. It just depends on what they regard as less bad.

I never thought that I would see the day when zero interest rates would arrive.

The zero interest rates arrived in Canada when my provincial bonds that were supposed to pay me 5% nominal return were--- returned to me. It was not quite a default, rather it was a refusal to honour the agreement of the bonds. The term in Greenspanese for this is that my provincial bonds were "called" by the Provinces.

So Starving Steve starves.

My oil and gas trusts never quite defaulted, but their stock prices sharply declined as their dividend rates were cut. All this as the Bank of Canada reduced the lending rate to banks to near zero.

I think the issue here is that the sovereign (the Bank of Canada) never told anyone about this ZIRP plan, so we could not plan for it. All of a sudden, interest rates dropped to zero, and everything crashed.... Hence, I put some of my retirement money into improving my own log home, which in hindsight was not such a bad idea...... But buying more gold would have been an even better idea.

Senior citizens learned many lessons in the Great Depression of the 1930s, and those hard-learned lessons were told to me as a kid. Now, senior citizens are having their heads handed to them again, and new bitter lessons of this Great Recession will be told to our grandchildren in the years to come..... This assumes that we will come out of this mess someday, which is strictly an optimistic assumption at this point in time.

Lessons already learned by SS: Deficits do count. Deficits compound. Kick-the-can is a con-game played by governments. Interest rates can go to zero, and stay there, maybe forever. The word of the sovereign in a bond deal is about as good as a turd in a toilet because they default on a bond agreement by calling your bonds back. Home-made soup is a great way to extend the food dollar. Spaghetti makes many meals too.