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In all seriousness (no zombies or Mad Max) - is anyone concerned that we might default
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Anonymous
| or does everyone believe that this is just brinksmanship? Moody threatening to downgrade this morning and China saying, basically, "this is not funny anymore" - with Obama walking out of talks (to return today) and Cantor saying my way or the highway - and no majority willing to compromise, how is this mess going to be resolved? And are we in for it again during the next round of budget talks? |
Anonymous
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Well the last time we came very close to default, there was still a short delay in paying bonds. A researcher calculated that the stunt cost us 0.5% in long term future interest rates. So even brinksmanship is dangerous.
But no I really am worried, because the Republicans are stuck in an impossible situation. They have made taxes an absolute non-negotiable, but everything has to be on the table. They are so desperate to get out of this situation that they are even trying to cede the debt ceiling power to the President. That shows the depth of their bind. |
Anonymous
| OP here - are you doing anything besides worrying? When Lehman collapsed and the malls were empty and credit dried up, I'll admit, I took some cash (a couple thousand) out of our savings "just in case" we needed access and couldn't get it. The cash went back in about 6-8 months later (when we remembered that we still had it sitting in an envelope at home). This sounds like it could be even more catastrophic - plus, if SS checks don't go out, we have parents that will need to be cushioned from the blow - and that would require money from savings. Do I just worry or do I proactively take cash out? Is anyone else doing anything or is everyone basically hoping? |
Anonymous
No, first of all I said it is not just brinksmanship. But I don't know if a deal will be cut or not in the end. I do think the Republicans have a decent shot of compromise, but they really have put themselves in a bad political situation. One side will put everything on the table, and the other has sworn a blood oath not to do taxes. But recent polls say that 80% of Americans, and even 74% of Republicans, believe that increased taxes should be part of the final solution. Second, I don't see the point in timing the market. Every investor has the same information on the possible default, and so I don't think I am going to be any smarter in predicting the effect on each piece of my portfolio. However, it is always wise to have a certain amount of liquid investment. Even in this unusual situation, I would think that money markets would be able to provide some cash back out, but I guess you could hold it in true cash if you had an immediate definable need like your parents' SS checks. There was a money market fund that broke the buck during the financial crisis (ie was unable to pay 100 cents on the dollar) and briefly there was a fear about money markets being underwater. That was fixed when the government made a guarantee to prevent a run on money market funds, but of course another such guarantee would be worthless if we default. |
Anonymous
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Yes I'm very worried, and pretty surprised that it's not garnering more attention in everyday conversations. I keep trying to imagine what I would do as a Chinese investor in US bonds in case of default.
I would think it's probably good for us that the EU is in such turmoil right now because that makes their bonds less attractive as an alternative. Even so, if I had a choice between a supposedly safe debtor that now refuses to pay up and a lot of junk bonds, I might still transfer some of my money to junk bonds, to spread the risk, as it were. If I'm sitting on tons of US dollars that I have to reinvest in something, and don't want US bonds, I might start splurging on foreign asset purchases. Except I'm not sure I'd plow much back in the US due to dismal growth plus prospect of high inflation, so maybe I'd ramp up purchases in emerging markets and purchases of natural resources all over the globe? And as the US, my main export market, slumps into stagflation if not a double-dip recession, I would spend more developing my own market? What think ye? |
Anonymous
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I was getting a little worried, but then the Republicans started backpeddling with McConnel's proposal. Boehner also has softened his words. Finally, I listened to some right wing radio this morning and even the host was saying how the republicans may have to back off in order to save the country...oh, and if they don't back off they would guarantee Obama's reelection.
These guys are looking for the exits and it is fun to watch. Only, Cantor is keeping the harsh rhetoric, but that may be his role in this political drama. He will keep the dream alive for the Tea Party Repubs to fight some future fake battle. This is all theatre. I will only be disappointed if Obama saves their butt with some stupid compromise. |
Anonymous
| Do NOT kid yourself that all investors are equal in this. Us peons are. Others aren't. I bet some group out there is triple hedging risk right now to make billions no matter what. We live in very dishonest times. |
Anonymous
I agree with this - private equity funds are a black box, and the amount of money they have to invest is staggering. |
Anonymous
I don't get this. Why should I take cash out of the bank "just in case"? Just in case what? Is my bank going to hold onto my money and refuse to let me have it? Will there be 1920s style runs on banks if the Federal Government defaults? This sounds so paranoid! I can't imagine this scenario happening in a few weeks, whether or not the government defaults. Am I being naive? What exactly will happen if the debt ceiling is not raised? Is default inevitable? And what are the consequences of default? |
Anonymous
| PP, that's right. Have some cash. If there is a run on EVERY bank at the same time, who knows what happens. PROBABLY the feds step up and say "don't worry," but maybe not. I waited MANY years to get my PRINCIPAL (no interest) out of Community Savings & Loan which went with the S&L scandal years ago. Right now, FDIC and Feds have been funding bank failures enough to fund the "run on the bank" that happens when a given bank closes (and there have been many). If all have a run -- even the "too big to fail" ones -- there will be cashflow problems. Ergo, keep some cash under your mattress. |
Anonymous
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FWIW, yields have been steady for 5/10 year Treasuries and dropping on 3 month Treasuries. There's no panic among the bondholders as yet -- of course how much the Fed is able to put their thumb on the scale is up for debate. Keep in mind that panic can express itself in a massive flight AWAY from Treasuries as well as a massive flight TO Treasuries, such as what happened in September 2008 when yields on Treasuries reached levels not seen since the Depression.
The worst case would be multiple top ten banks all failing at once. In that case, banks might be closed for a week or two at the most. The FDIC will insure that everyone gets their principal back -- whether that principal is worth anything after inflation spikes to 10% is another matter. If the FDIC reserves aren't up to the task, the Fed will issue new debt and immediately monetize it to cover the FDIC reserves. Simply put, 8-15% inflation as could possibly result is a lesser evil than banks imploding and depositors getting less than the full amounts guaranteed by law. Having $100-$5000 in cash (as your financial situation permits) laying around is not a bad idea, really, but that's more for power outages/weather disasters or other situations where there is a temporary, regional disruption in civil/corporate authority (e.g. post-Katrina where USD were still accepted in NOLA and certainly accepted outside of NOLA, and you might have had a 7-10 period of trouble getting your banking or other things in order.) If you place those on hand cash reserves anywhere near the cornerstone of your financial planning, you may as well get your 100 acres in Montana now. However, I suspect that: (1) the banks have sufficient reserves on hand to run a couple months in the case of US Treasury default and (2) after a few days, the banks would bring in Boehner, McConnell, and the other Republicans whose alternate reality is in sight of our own and say, "Raise the debt ceiling. Or else we're backing the Democrats in 2012." Then a bill will pass 350-80 and 85-13 and be signed by Obama within 24 hours. With that said ... aren't the GOP actions leading to uncertainty here? I thought Barack the Terrible was making businesses all a-flutter about hiring, since they simply just don't know what to do! |
Anonymous
I have been worrying about what to do. I work for a government contractor and my emergency money is in an IRA in US Treasuries, which I switched to during the 2008 crash because they're supposed to be the safest. But what I'm wondering now is - maybe government contractors won't get paid and I won't be able to get to my emergency fund for the same reason. But is it any safer if I move it to money market? But who knows? Maybe it will all get sorted out. At any rate, I wish Eric Cantor would get over himself! |
Anonymous
Yup. And remember, if they bet wrong, in steps the taxpayer to bail them out. And of course, the income hedge fund managers are receiving is taxed at about half of what you income is. The system is broken, unemployment is at 10%, and of course, the base of one party is incredibly concerned about the possibility of inflation. Just amazing. |
Anonymous
I'm not following this. Why would the taxpayers bail out hedge funds? The base of which party is concerned about inflation? |
Anonymous
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I think Boehner is kind of scrawed. His right flank/Tea Party hosed him after the FY2011 budget deal for not humiliating the Democrats then. If he doesn't give them a big chunk of red meat this time, I think he loses his speakership. IMHO, I also think he's the kind of decent guy who will do it for the good of the country (may be naive here). But, I'm not sure any of us would like what comes next if he gets pushed out either.
Sadly, it seems there's just some blind rage going on out there in the country and people have stopped caring if they cut off their nose to spite their face. It's all about who wins, total victory. When I started in this business 20 years ago we used to look for partnerships across the aisle all the time, especially within our region. The ideal was to be able to say something was bipartisan and the product of a regional delegation. Now, it seems there are fewer and fewer "everybody wins" scenarios and bipartisan is a dirty word. Anything one side gets means the other side lost and every loss must be met with vengeance and retribution. We've turned into the Hatfields and the McCoys and even when the very future of the country is at stake, we cling to this ridiculous us-them frame. Not being an historian, I can't say if the U.S. has ever gone through periods like this before or if it's "normal" politics and the cooperation I saw as a young person was the oddity, but it is a frightening development from my perspective. |