The title quote is from a college student that I’ve known since his elementary school years and encapsulates what I think that many are now starting to think. Ron Paul just opined about the possibility and it’s making the rounds of the internet. Just default and let’s get this over with. Now. But what precisely is meant by default on August 2?
Let’s consider this from a micro level, the level at which millions are operating when they have to decide whether to pay the mortgage, buy food, or continue to provide the electric and gas for the everyday life. The United States Government is about to get a glimpse of life for the average Joe and Jane who are struggling to make ends meet since they had their jobs outsourced to China and India, and judging by the verbiage, they are terrified.
Good. The members of the Congress and Executive Branch deserve to be scared.
First, there is still money flowing into the federal household but with the way that the bills and payments are hitting, there’s going to be a cash shortfall. The federal household has a large amount of less-liquid assets – Rolexes, fine china and a monster set of exercise equipment – but there’s no longer any federal money market account on which to rely and the emergency fund is exhausted. They could sell the assets but anybody who recognized the need would take it for too great a discount and besides, it would both take too long as well as look bad. And if we got rid of all of the land that Great Uncle Teddy left us, it would be a tragedy. The creditors have continued to provide credit since the payments have been made to date but come August 2, the minimum payment due will fall on the same day that the cash flow is negative and all of the other bills are due. Barry and John have bickered and argued, yelling epithets at one another as they bang on the granite countertops and tossed the occasional cup of Starbucks at one another. So if there’s still some money available but a raft of bills, what to do?
Make a priority list of what has to be paid and then work through the various permutations. Let’s see, now. The parents exhausted their savings on educating us and we’ve got to help them each month with a monthly stipend. The kids have all of their various activities as well as the stuff that we have to provide for them, such as food, shelter and the medicine cabinet full of medications. There are the multiple club memberships, dues and charities which we support and God knows that some good comes from that. Don’t forget the security that we pay for since the neighborhood has gotten a bit rougher and seedier; we need to have access to strong security. So how do we cut?
In the real world of repo’d cars, terminated utilities and food stamps, people would at one time have considered missing some credit payments. But the cash flow is so weak and the choices so stark, that more people are unwilling to let the credit go. The business community has noted for the first time that folks will willingly let go of the mortgage while continuing to pay the monthly credit card bill and it’s recently reported by a Data collection agency that more of the monthly revolving credit – nearing 10% – to pay for necessities instead of discretionary items. But like Frank Herbert’s Planet Arakis, the spice must flow and people now believe that credit must flow as well. What does happen if we miss the revolving credit payment?
We’ll certainly get a nasty letter and probably a phone call from the bank since we missed. The tone and content of the discussion will be ugly and it’s going to be embarrassing in the extreme. The bank in turn depends on us for it’s own asset quality and dividends to large number of investors, but we’ve never missed a payment until now and besides, what else is out there in the world of credit quality? No, we’re safe in our own house and the security devices and service will keep us from being evicted. But what will happen is that our interest rates will go up appreciably since the bank is going to ratchet up the pressure on us; after all, it’s not like there are a lot of solid creditors around nowadays, either. The value of our intangible assets will also take a massive hit so that our good name and reputation are sullied in the eyes of everyone else that could provide credit for us and with no new income streams – it’s not like royalties manufacture new income streams – our cost of borrowing there will also go up and do so significantly. The impact upon our neighbors will also be considerable since everybody has depended upon our spending to keep themselves in relatively decent shape – the domestic help, the coffee shop and don’t forget the personal chef. Net basis, we can get through but we’re going to finally have to make some decisions about how we allocate money to the creditors, our parents and the kids. Otherwise, if we stiff the creditors again, they’ll truly cut off the funds and we’ll be screwed. As ugly as it is, what else is there to force us to make the decisions that must be made?
That’s an idea of what goes on at the personal level and there’s acknowledgement that the Federal Reserve is working with the Treasury Department to likewise determine what the priorities are and whose check is honored when the default arrives. But what interests me most is the order of priority and which payments are honored. Do our servicemen receive their pay and will the elderly continue to receive their benefits? Will our 45 million recipients of SNAP benefits be able to continue purchasing food? Or will the foreign creditors be paid at the expense of the citizenry? Talk is ultimately cheap and it’s these actions that will indicate what the politicians truly believe and hold most dear. What do we owe each of our constituent groups – foreign and domestic? What else will finally force us to make the choices?
When Middle child and I spoke of this earlier this evening, I remarked that no matter what happened, the sun would rise and set and we’d manage to continue having food upon the table. What I didn’t say was that if we didn’t default and finally deal with the issues, we’d probably have food on the table but it was increasingly unlikely that he’d be able to put food on the table for his own unborn children.