Barnaby Was Right – U.S. Congressional Budget Office, China Central Bank Confirm

20 Jun

From Bloomberg:

A U.S. government default on its debts would be a “dangerous gamble” that could easily cost taxpayers billions of dollars, the head of the Congressional Budget Office said today.

Doug Elmendorf told reporters that if the investors who buy federal debt begin demanding even modestly higher interest rates, to compensate for additional risk, it could quickly add more than $100 billion to the interest payments the government must make on its debt.

“It is a dangerous gamble because any government that has borrowed as much as ours has borrowed, and will need to borrow as ours will need to borrow, cannot take the views of its creditors lightly,” Elmendorf said today…

Indeed. One certainly can not take one’s creditors views lightly.

And America’s #1 creditor has said the USA is “playing with fire” in even considering a “technical” default on its debts (from Reuters):

Republican lawmakers are “playing with fire” by contemplating even a brief debt default as a means to force deeper government spending cuts, an adviser to China’s central bank said on Wednesday.

The idea of a technical default — essentially delaying interest payments for a few days — has gained backing from a growing number of mainstream Republicans who see it as a price worth paying if it forces the White House to slash spending, Reuters reported on Tuesday.

But any form of default could destabilize the global economy and sour already tense relations with big U.S. creditors such as China, government officials and investors warn.

Li Daokui, an adviser to the People’s Bank of China, said a default could undermine the U.S. dollar, and Beijing needed to dissuade Washington from pursuing this course of action.

I think there is a risk that the U.S. debt default may happen,” Li told reporters on the sidelines of a forum in Beijing. “The result will be very serious and I really hope that they would stop playing with fire.”

Of course, the reality is that the USA is already defaulting on its debts.  By printing hundreds of billions of new dollars, they are devaluing the USD … meaning that holders of US Treasury bonds will be repaid in money that cannot buy as much as it used to.  2012 US Presidential candidate, and Chairman of the House Financial Services Subcommittee on Domestic Monetary Policy, Congressman Ron Paul has confirmed that this is exactly what is happening:

America is defaulting on its debts.  And the Chinese are not happy.

As a gentle reminder, here is what Senator Barnaby Joyce had to say about the US and its debts, almost 18 months ago (from the Brisbane Times, October 23, 2009):

The Nationals Senate leader Barnaby Joyce is openly canvassing an economic upheaval that would dwarf the current global financial crisis, triggered by the US defaulting on its sovereign debt within the next few years.

In unusually pessimistic comments for a senior political figure, Senator Joyce said the US Government was running such large deficits and building up so much debt that it was in a similar position to Iceland or Germany before World War II.

Senator Joyce insisted yesterday that the dangers to the global economy from the run-up in US private and public sector debt were real and should be debated.

”It is the elephant in the room,” Senator Joyce said. ”This is a huge risk that Australia faces. What is the game plan, what happens if it comes unstuck?

And from the Sydney Morning Herald, December 11, 2009:

The Opposition finance spokesman, Barnaby Joyce, believes the United States government could default on its debt, triggering an ”economic Armageddon” which will make the recent global financial crisis pale into insignificance.

Senator Joyce told the Herald yesterday he did not mean to alarm the public but there needed to be a debate about Australia’s ”contingency plan” for a sovereign debt default by the US or even by a local state government.

”A default by the US means complete economic collapse around the world and the question we have got to ask ourselves is where are we in that,” Senator Joyce said.

His warning came as the Rudd Government ramped up its attack on Senator Joyce as an economic extremist…

Senator Joyce said the chances of a US debt default were distant but real and politicians were not doing the electorate a favour by refusing to acknowledge the risk.

Barnaby was right.

100% right.

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