See Paul Kasriel's Us Debt Ceiling - If Cooler Heads do Not Prevail here http://www.biiwii.com/analysis.htm (3rd item). Very important reading. I only question the highlighted area:
"What would be the immediate effect on interest rates of a sudden balancing of the budget? Because the Treasury in all likelihood would pay the interest due on its debt, there would be no immediate default-risk-induced increase in interest rates on Treasury debt. With the sharp contraction in U.S. GDP, there would, however, be an increase in the default risk on private-sector debt. This would lead investors to adjust their portfolios away from private-sector debt toward U.S. Treasury debt. This increased demand for Treasury debt at a time when the supply of Treasury debt was falling would drive down the yields on Treasury debt as the yields on private-sector debt would be rising.
I would insert another probability: That with interest rates driven down and the 'continuum' remaining intact amid economic degradation, Ben Bernanke would have more than enough mandate and imperative to go it alone, Congress and the Administration be damned.
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"What would be the immediate effect on interest rates of a sudden balancing of the budget? Because the Treasury in all likelihood would pay the interest due on its debt, there would be no immediate default-risk-induced increase in interest rates on Treasury debt. With the sharp contraction in U.S. GDP, there would, however, be an increase in the default risk on private-sector debt. This would lead investors to adjust their portfolios away from private-sector debt toward U.S. Treasury debt. This increased demand for Treasury debt at a time when the supply of Treasury debt was falling would drive down the yields on Treasury debt as the yields on private-sector debt would be rising.
We would not expect the federal budget to remain in balance for long. Seeing the havoc inflicted on the U.S. economy from this, we would expect that legislation raising the public debt ceiling would be passed quickly by Congress and signed into law by the president."
I would insert another probability: That with interest rates driven down and the 'continuum' remaining intact amid economic degradation, Ben Bernanke would have more than enough mandate and imperative to go it alone, Congress and the Administration be damned.
http://www.biiwii.blogspot.com
http://www.biiwii.com
Follow @BiiwiiNFTRH
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