New IMF Head Says US Must Raise Debt Limit, or Face 'Nasty Consequences'

fysdt writes with this from an article on ABC News: "The International Monetary Fund's new chief foresees 'real nasty consequences' for the U.S. and global economies if the U.S. fails to raise its borrowing limit. Christine Lagarde, the first woman to head the lending institution, said in an interview broadcast Sunday that it would cause interest rates to rise and stock markets to fall. That would threaten an important IMF goal, which is preserving stability in the world economy, she said. The U.S. borrowing limit is $14.3 trillion. Obama administration officials say the U.S. would begin to default without an agreement by Aug. 2."

Comments

Cheap theater

[bradley13]

We all know they are going to raise the debt limit. Every time this comes up, whichever party is in power votes to raise the limit. Whichever party is not in power delays the vote to the last minute, using the occasion for political grandstanding.

It would frankly be wonderful if enough Congresscritters had the chuzpa to not raise the limit. Force some fiscal responsibility, even if it is probably too late. But, no, this is the Congress that still hasn't passed a budget for 2011 - they just gave up, and there is every sign that there will be no official budget for 2012 either.

Re:Only in America

[fahrbot-bot]

can people expect to wage 2 ground wars, and 1 air war, while giving tax cuts to the wealthy.

Obviously, the wealthy do. I believe this is the first time that the US has participated in an extended war w/o raising tax rates. During WWII, the income tax rate reached 94% on income over $200k, from Income tax in the United States, History of top rates:

• During World War I, the top rate rose to 77% and the income threshold to be in this top bracket increased to $1,000,000 ($16 million 2007 dollars); after the war, the top rate was scaled down to a low of 24% and the income threshold for paying this rate fell to a low of $100,000 ($1 million 2007 dollars).
• During the Great Depression and World War II, the top income tax rate rose from pre-war levels. In 1939, the top rate was 75% applied to incomes above $5,000,000 ($75 million 2007 dollars). During 1944 and 1945, the top rate was its all-time high at 94% applied to income above $200,000.

Hitting the Debt Limit doesn't mean Default

[billstewart]

The US Constitution says the government isn't allowed to default on the debt. But the Debt Limit Law isn't in the Constitution - it's just a law that says that Congress doesn't authorize borrowing more than $X, and requires some actions if we hit that limit, including not spending more money than we're taking in. It's questionable whether it really even applies, because Congress has passed a budget law since the last Debt Limit Law update, and that budget says they're going to be spending more than they're taking in so they're going to be in more debt.

So what can the Executive Branch do when they hit the debt limit?

• - They could stop paying back debts that come due, but that's not only unconstitutional, it's not going to help the deficit problem any.
• - They could stop paying Federal employees (not sure if that's big enough to help.)
• - They could stop paying Social Security checks, and try to make the Republicans take most of the blame for your grandma being thrown out on the streets, hoping that the Democratic Party leaders don't get stomped in the next election by upset Democrats.
• - They could cut all the Republican Party's favorite programs, especially most of the military contracting boondoggles. (Unfortunately, some of those can't be done instantly, especially shutting down the wars, and Obama doesn't want to be accused of losing the wars for political reasons, and he seems to like the TSA and Homeland Security.)
• - They could declare that the most recent Budget supersedes the older Debt Limit law.
• - They could close the Washington Monument!

I'm guessing that they'll probably do a combination of politically unpopular spending cuts and Federal pay cuts and try to blame the Republicans, plus the Washington Monument's going to be doomed until there's a solution. I don't think they'll default on the debt, not just because it's unconstitutional, but because it seriously degrades their chances of borrowing any more money in the near future, which they want to be able to do - Obama's threatening that, but I think it's more of a political game of chicken.

the Shadow Banking System and Lehman 2.0

[decora]

there are massive hordes of credit default swaps against US debt out there right now.

credit default swaps are almost completely secret. nobody knows how many are out there. there could be a hundred billion, there could be 10 trillion.

if you allow the US debt to default, it will make the Russian and Asian defaults of 1997/1998 look like a kids birthday party.

When Lehman went under, the money market funds started to crash, and then the credit system started to crash. Yes, McDonalds was going to have problems meeting payroll.

the US government is like tens of thousands of Lehman Brothers, not in its operation but in the tentacles it has to every other financial product and financial system on the planet. credit default swaps against US debt are just the tip of the iceberg - and they are completely secret. we have no idea how many other products and institutions of the 'shadow banking system' are linked to US debt, or what the repercussions would be.

we would see currency devaluation on a massive scale. we could see entire companies disappear overnight. we could see entire countries central reserves emptied, overnight.

it could make the AIG bailout look like a child asking for 5 cents for a gumball.

it would be like taking a cigarette lighter and throwing it into a fireworks factory.

----

some people want to see the factory blow up. yes, it would be awesome, and serve the factory owners right for running such a sweatshop. but it is completely irresponsible to allow it to happen.

the only safe way to take apart the fireworks factory is brick by brick, slowly, over time. not in a massive explosion that will destroy an entire quadrant of the city.