A question to the financially literate people on the forum: could the US default on its xx-trillion debt it has incurred now due to the bail out package? And what if we head into a recession (most people seem to think that the US is already there) and tax income decreases?

I was googling this afternoon and it looks to me that other people think that the risk has increased (but it still looks incredibly cheep to my biologist eyes!) : from 7'000 $ to 31'000 to protect 10 million treasury bonds.

If Us was to default, what would our life in Europe look like?

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Why would US default? They can print more dollars. On a previous occasion Bernanke said he would go up in a helicopter and shower cash on everybody. That got him the nickname "Helicopter Ben" http://en.wikipedia.org/wiki/Ben_Bernanke

Many people wonder why the $700 bn bailout money is actually not spent that way.

A government and it's central bank can only do that for so long. Those dollars are 'backed' by more national debt. Neither individuals, nor governments, can borrow their way out of debt indefinitely. Eventually the debt must be either repaid or defaulted. Governments have the unique advantage that they can postpone the day of reckoning by inflating their money supplies with billions of freshly printed (and debt-increasing) 'money' which give the illusion that that 'solution' will always work. But history has proven that it doesn't — maybe several times over, but not always and forever.

Just how 'financially literate' I am remains to be seen, but IMHO an eventual US default is not out of the question. It would surely bring on hard times for all Western economies in at least some measure. How 'hard' would depend on how much or how little stupid intervention is tried by each respective government.

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"Live every day as if it were going to be your last; for one day you're sure to be right." — Harry Morant

While you might be joking, there's reason why it's not spent that way. When a government inflates the money supply (as the US govt. is doing in this case), it is the first holders of the new money (in this case the banks) who have the most to gain. Prices have not yet risen to adjust to the increase in the money supply, so anything they do with the newly received funds will be done at or close to prices not yet affected by the inflation that is taking place.

Each subsequent holder of the new dollars is at a progressively weaker position, as, over time, prices rise to accommodate the inflation of the money supply. The last people to touch the new money (i.e., 'Joe Public') gain little or no advantage from it, since its value has already gone down over time (through prices going up). Not only the 'new' dollars, but all their existing dollars are weaker (worth less) as a natural response of the market to the massive influx of currency.

So the 'helicopter method' (which might generally be more fair), is out of the question, since the government's aim is to give the banks an advantage over the public, whereas giving the new money directly to the public would have the opposite effect of making the banks among the last to get their hands on the new money.

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"Live every day as if it were going to be your last; for one day you're sure to be right." — Harry Morant

Agree with the above classical analysis. The trick may yet work for several years, like in Zimbabwe.

Presently, the Chinese, Japanese and Arabs are holding too many USD T-Bills. Presumably, they will gradually move out to EUR, CNY, JPY, etc. At that point, they will let the dollar plummet and the US closer to the default cliff.

I found a very interesting and scary article that indicates that if there isn't a major change in US fiscal policy that a collapse is inexorable.

http://market-ticker.denninger.net/a...lling-You.html

Note: The debt referred to in the article is total US private and public debt. See http://www.federalreserve.gov/releas...rent/z1r-2.pdf for the data.


I am curious what some other people's opinions are on this article.

At the moment, the National Debt clock is at:

$10,347,199,294,073.25

It looks like the last 3 months have shown the highest rate of increase ever.

But according to this chart, it will end in 2012.

http://www.cedarcomm.com/~stevelm1/USDebt.png

In case you didn't know, the Mayan Calendar ends on December 21, 2012 (12.21.12).

it is .... it is...

only thing is the helicopter just flies up and down Wall St

This NY Times article explains what is happening behind the scenes of Paulson's $700bln "handout".


Paul

Perhaps a problem with the tail rotor. It is quite unfortunate we are stuck with Joe the Plumber when we need Bob the Mechanic.

Probably

(Swissinfo)

Marc Faber is a maverick and voices sensational opinions. However he often has a point and has accumulated a fortune. He is Swiss and got a Ph.D. in Economics from Uni Zurich.

So the US is about to default on it's debt after all.

Impact and Risk Assesment, anyone?

Perhaps Switzerland will lend them some money

Source please ?

well, they could default on the debt, but why would they when they can print their way out?

the main risk at the moment is the impasse over the debt ceiling. as they juggle around the budget to keep under it, i wonder whether they could default as a result of political deadlock.

The market doesn't seem to think so - US 5Y CDS is relatively stable around 50-55bps at the moment.

But it's not really an "out" — it only buys time, not a remedy.

Radio 4. Congress can't agree on a financial package to repay the loans. Obama (of bob the builder fame) recently made a speech warning that unless an agreement was made within the month, that is exactly what would happen. No word on the republicans coming to heel as yet.

Ah, the joys of civilisation

Yeah, that's the market that thought house prices and US mortgage debt were great investments, and that the banks were all rock solid.

Hey, it says on Wikipedia that everything will be alright. And my mate Dave down the pub agrees, so it must be true.

Do some homework on your sources, my friend. Find out if they've had a reliable track record