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If the GOP drags the country into default Obama will have to do something.  As a slightly Right-Centerist I suspect he will do the minimum to avert catastrophe.  Consols are too out of the mainstream for his economic advisers.  The $1 trillion coin is too weird for ditto.

His optimax solution is for the GOP to cave on the debt ceiling and the shutdown.  I don't seem them doing that, so it's up to Pelosi and whatever GOP House Reps she can dredge up to do the job.  My feeling is a GOP Rep voting to raise the debt ceiling will also be a vote to end the shutdown.  Once they vote for one there's no further downside to voting for the other.

Caveat: the above assumes rationality on the part of some GOP members.  With the pluts going berserk about the shutdown and threat to the derivatives markets I submit it's accurate-to-reality.

 

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sun Oct 13th, 2013 at 03:05:33 PM EST
[ Parent ]
Alternatively, the default can be selective, targeted only at the Fed's holdings. Call it the non-default default.

It would kill some of the kabuki theater around monetization, and denude the Fed's "independence," but it would be functionally harmless. And since the ratings agencies are basically Pravda and Izvestia with a cheap paint job, they would probably roll over and declare the default to be a not-default, because it only happens within the consolidated government sector. That might provide sufficient plausible deniability to not unduly rock any boats that the Teabaggers' owners do not want rocked.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Oct 13th, 2013 at 04:17:12 PM EST
[ Parent ]
Alternatively, the default can be selective, targeted only at the Fed's holdings.

Unless Obama is in league with the Tea Party in this Kabuki why would it be advantageous to selectively default only on Fed holdings? That would only validate their rhetoric that defaults don't matter. It would seem better to just direct the Fed and Treasury to cancel bonds that the Fed holds. That would reduce the debt and give some room without an actual default. And the re-issuance of bonds at a super-premium could extend this indefinitely. Default off the table Obama could hold out on signing a bill, leaving the government shut down, until he got at least part of the sequester, preferably all of it, eliminated. Then tell the Tea Party that, if they want to change the laws, go out and win majorities in the House, Senate and take back the White House. The Republicans would be challenged just to hold the House after this recent string of events and their party would be a five alarm fire.  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Oct 13th, 2013 at 04:37:45 PM EST
[ Parent ]
Unless Obama is in league with the Tea Party in this Kabuki why would it be advantageous to selectively default only on Fed holdings?

Because an across-the-board haircut would be an event of such magnitude as to shake the entire American trade system in its foundation. Not end it - that ultimately comes down to carrier task forces, and how the default is structured doesn't matter to that question. But shake it.

It would seem better to just direct the Fed and Treasury to cancel bonds that the Fed holds.

Better, but unfortunately illegal under present law.

And the re-issuance of bonds at a super-premium could extend this indefinitely. Default off the table Obama could hold out on signing a bill, leaving the government shut down, until he got at least part of the sequester, preferably all of it, eliminated. Then tell the Tea Party that, if they want to change the laws, go out and win majorities in the House, Senate and take back the White House. The Republicans would be challenged just to hold the House after this recent string of events and their party would be a five alarm fire.

And if the Dems had the requisite foresight, the populist instincts, courage of their convictions, and suitable convictions to begin with, then that is what would have happened a years ago during the first debt ceiling blackmail game.

But they don't, so it didn't.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Oct 13th, 2013 at 05:38:38 PM EST
[ Parent ]
How is it illegal for the US government to cancel bonds it issued that it currently holds?
if the Dems had the requisite foresight, the populist instincts, courage of their convictions, and suitable convictions. But they don't, so it didn't.

Far be it from me to defend the Obama Administration, but there is always the possibility that they have learned something since the last time and they have the fact of an existing shutdown that is grinding the Republicans to dust already in place. Issuing super-premiums now would take the threat of default off the table for the time being and get them to the 2014 election which they might fight on more favorable terms. But then Obama might again be faced with his nightmare scenario of having total control of House, Senate and Administration and having to prevent anything really progressive from happening.


"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Oct 13th, 2013 at 07:26:52 PM EST
[ Parent ]
The least "weird" would be 10 year premium notes with 100% coupon rates. After all, selling securities at par or discount to face value is just a Treasury rule, and even if the market punished them and bought them at 5% yield, $1,000 face value 100% coupon notes would have a value of $8,300, so rolling over $8,000 in maturing bills with 100% coupon 10yr note would reduce the debt ceiling by $7,000.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Oct 15th, 2013 at 09:16:44 AM EST
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The trillion dollar coin would be a myth slayer (regarding what money is or is not) that I don't think any society on this planet could handle without fairly disruptive consequences from both the elites and the everyday folks. It would also "confirm" what all the racists think about Obama - "look at this black guy who thinks he can just cheat his way out of debt."

you are the media you consume.

by MillMan (millguy at gmail) on Tue Oct 15th, 2013 at 09:17:01 PM EST
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