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YOU THINK THE GOVERNMENT SHUTDOWN IS BAD? WAIT TILL YOU SEE WHAT HAPPENS IF THE U.S. DEFAULTS ON ITS DEBT OBLIGATIONS (COULD HAPPEN ON OCT. 17)

By DAN VALENTI

PLANET VALENTI News and Commentary

(FORTRESS OF SOLITUDE, TUESDAY, OCT. 8, 2013) — The so-called shutdown of the U.S. government has a week or more under its belt, and no one’s noticing. That’s because the government is so lousy at what it’s supposed to be doing (provide for the national defense and help secure the conditions that leads to the welfare of all). The sun has still come up every morning, people are still going to the Laundromat, and Mayor Dan Bianchi is still doing the hard work of leadership: cutting ribbons and handing out certificates to Boy Scouts.

Some shutdown — our jackass lawmakers on Capitol Hill passed a measure that will provide back pay to all federal workers enjoying what has, in essence, become an additional taxpayer-funded vacation. You think many of the federal workers are eager to put their muzzles back in the feedbag of their jobs when they can come away with the same dough for doing absolutely nothing? Don’t count on it. What a country! What a “shutdown!”

THE PLANET hasn’t missed the government one bit since it allegedly “shut down,” but we and everyone else on the planet will surely take notice in a big way if Uncle Sam defaults on its debts, something that will happen on Oct. 17 unless our heroes in Washington act. If they do, they will, again, raise the debt limit, which is like raising the ceiling inside a submarine when the ocean is pouring inside the hull. Raising the ceiling provides some temporary relief, but it only forestalls an eventual visit by The Big D Himself.

THE PLANET hates raising the debt limit, since it only allows the crooks in Washington to run up more debt, a number that is already into the comical trillions. Raising the debt limit is not a solution. It’s an immature postponing of the inevitable. Increasing the borrowing capacity only postpones the day when the bunco collapses and the bill comes due. By then, it will be too large to pay, the global economy will collapse, and the world will enter into a Greatest Depression that will make the Great Depression of the 1930s look like hippety-hop-to-the-barber-shop. It comes down to a choice, then: Raise the debt ceiling again so that we who are alive today won’t feel the pain (tough peppers to those who will follow us, however) or not raise it and suffer the consequences now (in other words, take one for the team).

Given these two bad choices, THE PLANET would rather take the medicine now. Get it over with, and that is the only responsible “answer” for those who wish to preserve what’s left of a future for this country.

Here to explain what a default will look like is THE PLANET’s guest columnist, Matt Nesko from breakout.com.

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By MATT NESKO

Special for PLANET VALENTI News and Commentary

As we close out the first week of the government shutdown, a bigger and even more toxic disaster is creeping into the fray that could make the contentious budget battle look like a slap fight. The Treasury Department said Uncle Sam will be broke by October 17th unless something is done. Treasury secretary Jack Lew hammered home that point Thursday by releasing an unusually ominous statement that warned of catastrophic risks to the economy.

House Speaker John Boehner has said he won’t let the government default on its debt, but until steps are taken to raise the nation’s debt ceiling, the possibility of default is still theoretically alive.

“If they seriously default on the debt, what we’re really talking about is a depression,” says veteran financial sector analyst Richard Bove, VP of research at Rafferty Capital Markets. In the attached video he explains how the fallout would be a lot worse than the recession suffered in 2008 and the aftershocks would be felt for at least a decade.

“The first thing you have to do is look at who holds the debt,” Bove says of the $16.7 trillion of bonds the U.S. currently has outstanding. “The first, biggest owner (of U.S. debt) is the social security fund, so you’d have all of these people who are receiving social security payments who now have to question whether they’ll get their payments.”

Clearly, that would cause a huge disruption to millions of Americans. But Bove says that is only the beginning since the second biggest holder of Treasuries (at about 12% of the total) is the Federal Reserve, which has “91% of its assets backed by U.S. government debt.”

If the value of those assets were to decline, which they indisputably would in a default, Bove says the net effect would be that “we have nothing of value backing the dollar.”

They’re actually “Federal Reserve Notes” as well as the number one asset of choice held in the reserves of governments and businesses all over the world. A plunge in Treasuries would also devalue the dollar, which would instantly make everything we buy more expensive, and in turn destabilize countries and economies all over the world.

“Eleven-percent of all U.S. debt is owned by the Chinese,” he says. “That $1.4 trillion represents about a third of the reserves of the People’s Bank of China, so what we’ve now said to the PBOC is, ‘Watch out, we may hit the value of a third of your assets and you can’t do anything about it.’”

And this isn’t even half of it.

As Bove explains, money market funds, which are used by virtually every person with a savings or investment account, are also “heavily loaded with Treasuries.” So are most bond funds and so-called balanced funds (growth and income funds). A default on U.S. debt would not only cause money funds to “break the buck” –not be able to pay 100-cents for each dollar invested)– but would also cause forced selling by countless other funds that are mandated to immediately sell any asset that has defaulted.

“That could easily put $750 billion of Treasuries on to the market” Bove says, inferring that rates interest rates would also spike, and normal borrowing/lending transactions would end.

Speaking of banks, the U.S. banking industry holds over a trillion dollars worth of Treasuries and another trillion dollars of government issued mortgage-backed securities, Bove says. If those bonds were to go down in value, he says the banks would also have to “write down the value of those assets and, in essence, wipe out their equity.” It would make the banks insolvent.

To summarize, Bove asserts that a default is unthinkable because it would trigger a huge reduction in the value of U.S. debt, which would go beyond disrupting social security payments. A default would upend money markets, destroy bond funds, slam the brakes on lending, cause interest rates to spiral, make our banks insolvent, and deal a blow to our foreign trading partners and creditors around the globe; all of which would throw the U.S. and the world into economic disarray.

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So in these difficult times, friends, let us all remember the words of the great ribbon-cutting mayor of Pittsfield, Mr. Bianchi, when he said, “The only thing I have to fear is Dan Valenti himself.”

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“Quiet this metal! / Let the manes put off their terror, let them put off their aqueous bodies . with fire. / Let them assume the milk-white bodies of agate. / Let them draw together the bones of the metal.”Ezra Pound, from “The Alchemist,” (1920).

“OPEN THE WINDOW, AUNT MILLIE.”

LOVE TO ALL.

13 Responses to “YOU THINK THE GOVERNMENT SHUTDOWN IS BAD? WAIT TILL YOU SEE WHAT HAPPENS IF THE U.S. DEFAULTS ON ITS DEBT OBLIGATIONS (COULD HAPPEN ON OCT. 17)”

  1. Russell Moody
    October 8, 2013 at 4:50 am #

    True humility is intelligent self respect which keeps us from thinking too highly or too meanly of ourselves. It makes us modest by reminding us how far we have come short of what we can be.

    Ralph W Sockman

    We can all use a shot of Sockman

    • danvalenti
      October 8, 2013 at 4:27 pm #

      Good advice for all.

  2. CarlosDanger
    October 8, 2013 at 8:26 am #

    Shutdown or not, Congress still gets paid, is still exempt from Obamacare, still gets their free cadillac healthcare plan, still gets their cushy pension.
    The problem is very easy to see.

    • danvalenti
      October 8, 2013 at 4:26 pm #

      CARLOS
      The time is getting closer for an uprising.

  3. Still wondering
    October 8, 2013 at 10:27 am #

    Actually, I don’t think a shutdown where 83% of the government is open is “bad” at all. And I don’t think the country will default. What I am not sure of is what the actual strategy of the House Speaker is.
    It seems to me that he’d like to see Obamacare delayed for at least a year. That would make it an issue for the 2014 election. A winner for the Republicans no matter how you look at it.
    And this “shutdown” and how little it affected anyone will be used as a lesson in how much of the federal government is not really needed.

    • danvalenti
      October 8, 2013 at 4:26 pm #

      SW
      Who needs 13% of the bums? Let it fail, Rev, let if fail.

  4. GMHeller
    October 8, 2013 at 12:06 pm #

    Mr. Valenti,
    You are falling for a lot of hogwash and hype including that of scare-monger Matt Nesco.
    Raising the debt limit is a bad idea, and if the US Congress chooses not to raise the debt ceiling, there is literally ZERO chance the US would be in the position where it would need to default on any of its debt obligations.
    There is plenty of money flowing daily into the US Treasury, way more than enough to cover any and all of those US debt obligations.
    Your’s and Nesco’s fear that the sky is falling does not make it so.

    • danvalenti
      October 8, 2013 at 4:24 pm #

      GMH
      Thanks for the comment.

  5. scott
    October 8, 2013 at 1:11 pm #

    Thanks GM. I have some organic seeds and my gat doe just in case.

  6. We Love Pittsfield
    October 8, 2013 at 2:05 pm #

    Debt obligations can’t be ignored they ultimately must be satisfied or go into default. As I read DVs comments, it sounds like he would favor default maybe as a way to wipe out the whole debt mess and start over. Good infor here no matter what you believe.

    • danvalenti
      October 8, 2013 at 4:24 pm #

      WLP
      Thanks for the input.

  7. Ron Kitterman
    October 8, 2013 at 2:49 pm #

    This afternoon was the most pathetic speech, I’ve heard from a sitting president since Jimmy Carter told us to put on a sweater during the oil embargo in the 70’s. I would trust William Shratner from Priceline before I would believe Obama. His examples of comparing not paying your mortgage until they threw in a wide screen tv and xbox were insulting at best, but no he didn’t stop there without throwing in another boneheaded example of negotiating the price of a home and threatening to burn it down if the owner didn’t sell it to you for your offer. Refusing WW11 veterans from crossing the barriers at D.C, but allows a pro-immigration rally at the same park land ? He’s about as flexable as our mayor.

    • danvalenti
      October 8, 2013 at 4:23 pm #

      I didn’t see the President’s speech, RON, but I do only too well understand the comparison. Perhaps the most important revelation about Bianchi’s character is his recalcitrance and his tendency to see everyone who doesn’t agree with him 1000% as “enemies.” Not healthy for the city.