Debt Ceiling Catastrophe?

August 2, 2011 is the date given by when the federal government will run out of money to pay all its obligations – including social security checks, government employee salaries, interest on borrowed money, etc.  The message has been that without the ability to borrow more to pay the obligations by raising the debt ceiling, catastrophe awaits.  Foreign countries holding  U.S. government bonds have been wagging their finger at the U.S. to not default or else.

If a borrower is about to default, no one in their right mind would want to lend to such a scammer.  Greece, which will inevitably default for sure either this year or next, is able to tap money by offering a 16 percent interest rate (which in my view is a sucker bet since Greece will not pay what is promised).  As for the U.S., the government borrowing rate is still very low.  The U.S. can borrow at a 0.35 percent interest rate on a 2 year loan and 2.9 percent on a 10 year.  These rates are at near-historic lows.  However, given all the talks of impending doom and with Washington politics not getting any closer to a budget deal, are investors continuing to be unconcerned about a U.S. default?

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Perhaps the investors, including the Chinese — one of the biggest purchasers — only talk the talk but are not willing to walk the walk.  That is to say, global bond purchasers are very content to lend at low interest rates to the U.S. government and are not a bit apprehensive about not getting the money back and with the specified interest.

Let’s take a look at what might happen.  If August 2nd comes around and the government defaults, will the Chinese investors panic?  Or would they trust that the U.S. will eventually honor the obligation at even if the payment deadline is delayed a bit?  Based on the current appetite for U.S. bonds, global investors are saying that they are perfectly fine with delayed payments, provided the principal and any accrued interest are paid at some point in the future even if the date is unspecified.  After all, most global bond purchasers have been simply recycling money back into the Treasury once the maturity date arrives.

My guess, therefore, is that come August 2nd there will be no panic or economic chaos.  Standard and Poor’s and rating agencies will squawk about downgrading the U.S. to a lower rating, but who is listening to them anymore after they gave top, AAA ratings on just about every subprime mortgage collateralized debt obligation that went bust?

However, if the debt default was to continue on for two to four months and truly raise uncertainty in the global investors about when they will get their money back, then a major economic headache is possible.

In other words, don’t panic in August.  But do start to worry in October.

Lawrence Yun, PhD., Chief Economist and Senior Vice President

Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.

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Comments
  1. Good article. I agree totally.

  2. It seems that all we can do at this point is wait… and cross our fingers.

  3. Donna

    I think that this debt ceiling issue is one of many that are affecting the real estate market and many Americans negatively. We elect officials to represent us and have our best interest in mind when they create and vote on bills. Hopefully this ideal will motivate them to do the right thing.

  4. Jack

    Remember this fiasco at the polls. The GOP is trying to hold the US……maybe the entire world hostage by protecting the income of their rich donors. I’m not saying that the Democrats are blameless, but I truely can’t understand why any poor or lower middle class (most of us) would ever vote for someone who is trying so hard to brush them into deeper poverty and our infrastructure….roads, bridges, levees, etc., are steadily eroding. Without spending cuts AND increased revenues in the form of taxes or eliminiation subsidies to the wealthy we might as well all start talking Greek.

  5. Max

    Can you imagine China foreclosing on the US. No way..All will be better- Good article!

  6. Richard Tarbox

    I do not understand how reducing Social Security payments can help the National Debt?

  7. Verne Whittaker III

    With all due respect, I think you are grossly understating the impact of a lenders response when a borrower is late on a payment. The US’s fiscal policy is irresponsible.  The US has a huge debt load and to make matters worse, $.40 of every dollar paid for bills is BORROWED. The US has historically low borrowing rates as you stated. However, our interest payment still makes up 25% of our budget!  If rates go back to normal levels and double plus, so does our interest payment. 
    If a homeowner is late on their mortgage payment, it starts a domino effect with all their lenders.  Interest rates go up, credit lines get frozen, credit scores drop, and debt becomes unavailable. This could happen to the US as well. It’s how the lender/borrower relationship works. 
    I don’t suspect Moody’s is bluffing when they have said the US is facing a downgrade if our government defaults OR doesn’t cut the budget by 5 trillion dollars.  If the US gets downgraded, it may be the trigger for the International Monetary Fund to initiate its proposed plan to drop the US Dollar as the reserve currency and go to a weighted “bucket” of dollars. That would be an unprecedented blow to our nation and economy.  The US economy is not invincible. We need to protect her. 
    The point is, if we all have an Attitude of “everything will be ok” and don’t do anything about it… then passivity is our response and everything will NOT be ok. 
    Fellow citizens, if you love your country, take 15 minutes and call your representatives in Washington and tell them we NEED a balanced budget!  
    No one can run their households or businesses like our government is without eventually going broke. Unless our leaders implement difficult dececisions to balance the budget and reduce our debt, our nation will have a day of reckoning… just like the millions of US households that have gone broke. 

  8. Our president’s attempt to scare the public with threats about social security checks not being sent etc. is deplorable. Since we have budgets and manage our money it should not be too much to ask the government to do the same. I copied and pasted an interesting quote from our president when he was in the senate and voted against raising the debt limit in 2006. Perhaps he should take his own advice and reign in spending and balance the budget.

    “The fact that we are here today to debate raising Americas debt limit is a
    sign of leadership failure. It is a sign that the US Government can not pay
    its own bills. It is a sign that we now depend on ongoing financial
    assistance from foreign countries to finance our Governments reckless fiscal
    policies.

    “Increasing Americas debt weakens us domestically and internationally.
    Leadership means that the buck stops here’. Instead, Washington is shifting
    the burden of bad choices today onto the backs of our children and
    Grandchildren. America has a debt problem and a failure of leadership.
    Americans deserve better.”

    SENATOR BARACK H. OBAMA, **MARCH 2006

  9. Pretty good fair assessment article, but none of us really know what the deal is between the US and it’s investors in the event of late or no payments. Some of the blogs get it and some still do not. The fact is that the US does NOT have a revenue problem. It has a SPENDING problem and it’s in Washington. Our president never turned in his homework on a yearly budget, it’s 2 years late to date. So we don’t know how much he thinks he needs, but I have looked it up and the US takes in over 70 trillion in revenue each year! If they can’t pay the bills with that there truly is a criminal issue entangled. S.S is supposed to be tax dollars that went into a separate Trust Fund to be paid to people no matter what happens to the government. Shut down, on vacation, whatever, the funds go out do not need an appropriations bill from the president to release them. BUT, the president is the only person that can stop the funds from going out. We do not need and should not borrow any more money to pay our bills. They need to cut the discretionary spending. Not ss and medicare. Think about it. If we were forced to give a private company a portion of our earnings every paycheck for 20, 30 years, then we retire and call it in. They say sorry we don’t have all the money. ??WE would have them in court on criminal charges. Why is the government allowed to get away with that but no one else can? Bad idea to borrow more money from a hard socialist country that is known to support our enemies with weapons and ammunition. Wake up people. Tell washington to cut their BS and leave our stuff alone. There are so many other places in the form of trillions that they could cut out other then ss & medicare. They have a small slice of it but no where near what we need. It has been reported that the 2.5 trillion Obama is seeking to raise the debt ceiling is only to get us through to the end of 2012. Which means he has it spent already. They want to cut maybe 1.7 trillion over 10 years. Do the math! It is insanity. We will all meet again at the end of 2012 to figure out how much more we need to borrow to get through the next year I guess. Why even have a ceiling? As Realtors, when have you ever seen the mortgagor approve his own loan allowance?

  10. Lloyd Parnell

    Raising the US debt ceiling is nothing new. The fist fight is. This is what we get for voting for in the wrong candidates who are trying to take our nation to the ground. Our general economy (especially Real Estate) will suffer until we move in good experienced leadership. I believe the current leadership is capable of defaulting our economy rather than giving up the ability to continue to write the unlimited checks.

  11. If we default, China should foreclose! They can take over Washington and kick the self serving politicians out on thier collective butts!