What does it mean we default on Jun 1

[mspart]

The US government runs out of money to spend or runs out of money to pay interest on bonds?   Or does it mean they run out of cash on Jun 1?

If it is the former, the spending goes to interest on bonds period.   Then back off spending on other items as necessary to have sufficient cash.  No default. 

If it is the latter, then everyone is in deep doo if that is the case.   Default. 

mspart

[Plasmodium]

Everything but congressional salaries is in jeopardy.

[Wrestleknownothing]

2 hours ago, mspart said:

The US government runs out of money to spend or runs out of money to pay interest on bonds?   Or does it mean they run out of cash on Jun 1? It means they will not have enough money to pay all of their obligations, but they are not specifying which will get paid and which will not if the debt ceiling is not raised.

If it is the former, the spending goes to interest on bonds period.  TBD. Then back off spending on other items as necessary to have sufficient cash.  No default. There is a concept called cross default. If I have multiple obligations and I default on one it is considered a default on all. I do not know if Treasury credit default swaps (a way to bet on the credit worthiness of an issuer) has cross defaults or not.

Beyond the legal definition of default is how markets react.

If it is the latter, then everyone is in deep doo if that is the case.   Default. 

mspart

 

[Mike Parrish]

Strategically, interest rates for US debt will skyrocket, making debt service an even larger part of all budgets going forward.

This mean far fewer dollars available in the future for absolutely zero gain for the US.

[mspart]

Hence the reason to rein this in now and start paying it down.  

mspart

[Mike Parrish]

Engineering a default is the best way to do that?

 

[mspart]

No it is not.   But it brings the mind into focus.   But with the attention span limited these days, I trust the focus will be fleeting.

mspart

[Mike Parrish]

The people claiming Democrats spending is out of control, just paid $100,000 for a used chapstick in congress.

[Offthemat]

That we would default is a lie.  Enough money is taken in every month to pay all our interest payments.  June 1st is an arbitrary date for when the government would have to begin to shave the amount of money spent on stupid programs the last congress voted for.  
 

Social Security, Medicare, and Medicaid are all funded separately through separate payroll deductions and would not be affected unless directed by the president. 

Edited May 23, 2023 by Offthemat

[mspart]

Yes, this is what I have been thinking.   As long as the debt is serviced, we don't default, and the feds should have plenty of cash to handle that. 

mspart

[Offthemat]

47 minutes ago, mspart said:

Yes, this is what I have been thinking.   As long as the debt is serviced, we don't default, and the feds should have plenty of cash to handle that. 

mspart

Plenty. 

[Wrestleknownothing]

1 hour ago, Offthemat said:

That we would default is a lie.  Enough money is taken in every month to pay all our interest payments.  June 1st is an arbitrary date for when the government would have to begin to shave the amount of money spent on stupid programs the last congress voted for.  
 

Social Security, Medicare, and Medicaid are all funded separately through separate payroll deductions and would not be affected unless directed by the president. 

 

58 minutes ago, mspart said:

Yes, this is what I have been thinking.   As long as the debt is serviced, we don't default, and the feds should have plenty of cash to handle that. 

mspart

The issue is that not enough money will be taken in to pay all obligations: interest payments, principal payments, and other bills (there are 100 separate withdrawal sources on the Daily Treasury Statement - also FICA is the largest deposit on a normal day). So, choices would be made on which payments to make. A default is still possible in that case. The Treasury had $636 billion of cash on hand at the start of the year. It had $57 billion as of May 19.

BTW, I was able to confirm that there are no cross default provisions for Treasuries. So the Treasury can selectively default, or selectively miss interest payments without it affecting other bonds.

[Mike Parrish]

Watch the pandemonium when Social Security checks stop.

[Offthemat]

9 minutes ago, Wrestleknownothing said:

 

The issue is that not enough money will be taken in to pay all obligations: interest payments, principal payments, and other bills (there are 100 separate withdrawal sources on the Daily Treasury Statement - also FICA is the largest deposit on a normal day). So, choices would be made on which payments to make. A default is still possible in that case. The Treasury had $636 billion of cash on hand at the start of the year. It had $57 billion as of May 19.

BTW, I was able to confirm that there are no cross default provisions for Treasuries. So the Treasury can selectively default, or selectively miss interest payments without it affecting other bonds.

And during that period a substantial amount was refunded to taxpayers from last year’s collections.  There’s plenty taken in daily, depending on one’s definition of “obligations,” to avoid default, with quarterly estimates to boost deposits.  As I pointed out earlier, Social Security is not part of the borrowing and spending equation. 

[Wrestleknownothing]

1 minute ago, Offthemat said:

And during that period a substantial amount was refunded to taxpayers from last year’s collections.  There’s plenty taken in daily, depending on one’s definition of “obligations,” to avoid default, with quarterly estimates to boost deposits.  As I pointed out earlier, Social Security is not part of the borrowing and spending equation. 

Though Social Security does flow through the Treasuries cash account. I am not sure what legal restriction they face.

[Mike Parrish]

The United States' credit rating will be permanently damaged.

Borrowing money will be at a forever higher rate.

[Offthemat]

There is a plan on the table that both increases the debt limit and curbs spending to something we can better afford.  

[Wrestleknownothing]

10 minutes ago, Mike Parrish said:

The United States' credit rating will be permanently damaged.

Borrowing money will be at a forever higher rate.

Very doubtful.

Argentina has very famously defaulted (and not a technical default) multiple times. Yet they were able to issue a 100 year maturity bond just 1 year after their last default.

The US is still the best credit available. As a matter of fact, you should not be surprised if the prices on Treasuries goes UP in the event of a default. As counter-intuitive as that seems that is what has happened in past debt ceiling crises as "flight to quality" causes people to buy more Treasuries in the face of a Treasury default.

From JP Morgan:

"but in the unlikely event of a technical default, we think Treasury yields would decline and the curve would steepen. This seems unusual in the context of a default, but Treasuries have rallied into the latter stages of other serious debt ceiling debates in 2011 and 2013."

Edited May 23, 2023 by Wrestleknownothing

[BobDole]

The Republicans will blame the Democrats and the Democrats will blame the Republicans.

[Plasmodium]

14 minutes ago, BobDole said:

The Republicans will blame the Democrats and the Democrats will blame the Republicans.

And they will both be correct.

[Mike Parrish]

45 minutes ago, Wrestleknownothing said:

Very doubtful.

Argentina has very famously defaulted (and not a technical default) multiple times. Yet they were able to issue a 100 year maturity bond just 1 year after their last default.

The US is still the best credit available. As a matter of fact, you should not be surprised if the prices on Treasuries goes UP in the event of a default. As counter-intuitive as that seems that is what has happened in past debt ceiling crises as "flight to quality" causes people to buy more Treasuries in the face of a Treasury default.

I can't find a single source that agrees with this interpretation.

[mspart]

38 minutes ago, BobDole said:

The Republicans will blame the Democrats and the Democrats will blame the Republicans.

 

23 minutes ago, Plasmodium said:

And they will both be correct.

Yes, and yes.

mspart

[Wrestleknownothing]

18 minutes ago, Mike Parrish said:

I can't find a single source that agrees with this interpretation.

I quoted one above. JP Morgan.

[Mike Parrish]

1 minute ago, Wrestleknownothing said:

I quoted one above. JP Morgan.

Thanks. I was looking for a link and skipped over that.

[Wrestleknownothing]

14 minutes ago, Mike Parrish said:

Thanks. I was looking for a link and skipped over that.

One area that has the potential to get very messy is collateral. Treasuries are used as collateral for every kind of trade everywhere in the world. If interest payments are missed it does not affect the ability to move Treasuries (i.e. post them as collateral), but if a principal payment is missed the issue is removed from FedWire (i.e. cannot be used as collateral). 

Another collateral based issue is that many systems will not allow defaulted bonds to be used as collateral (they have a price for collateral purposes of zero). Most large institutions have war gamed these scenarios (after all this artificial debt ceiling silliness has been around for a long time), and hopefully have the protocols in place to handle this. But what happens if a smaller participant trips up on this? Or what happens if the war gaming missed a scenario? No one really wants to find out.