Mike Shedlock

Chris Whalen says “No Downside” to Not Raising the Debt Ceiling

Geithner Cries Wolf

The U.S. Congress has a little less than two months to raise the $14.3 trillion debt ceiling or possibly default on its debt. Treasury Secretary Timothy Geithner says not allowing the Treasury to raise the debt limit would be "catastrophic" for the economy.

Geithner is crying wolf according to Chris Whalen, a banking industry analyst and co-founder of Institutional Risk Analytics. Whalen argues Congress should vote against raising the debt ceiling unless they agree to major spending cuts. "Congress has the right to say 'no' and the people of the United States have a right to say 'no' we don't want to issue more debt," he tells Aaron Task in the accompanying clip.

What If the U.S. Treasury Defaults?
From the WSJ:

One of the world's most successful money managers, the lanky, sandy-haired Mr. Druckenmiller is so concerned about the government's ability to pay for its future obligations that he's willing to accept a temporary delay in the interest payments he's owed on his U.S. Treasury bonds—if the result is a Washington deal to restrain runaway entitlement costs.

"I think technical default would be horrible," he says from the 24th floor of his midtown Manhattan office, "but I don't think it's going to be the end of the world. It's not going to be catastrophic. What's going to be catastrophic is if we don't solve the real problem," meaning Washington's spending addiction.

The Upside and Downside

To suggest there is "No Downside" is a bit inaccurate. A better way of phrasing the setup is there is "no NET downside" to not increasing the ceiling without significant budget cuts.

The downside is a temporary default. Interest rates may go up if that happens. Some parties maybe harmed in the process. Thus, the downside is a temporary delay in payments and the small mess that might entail.

The upside is a potential permanent reduction in US spending. From my perspective, that is a massive upside potential, for a bit of short-term downside.

Risk of Greek-Style "Solution"

It should be crystal clear that Congress and the administration need to do something about budget deficits before the market imposes a "Greek-Style" solution on the US.

I mentioned that possibility in my recent Yahoo Finance video appearance: Debt Ceiling Discussion on Daily Ticker with Mish, Aaron Task, Henry Blodget: Will the Bond Market Eventually Force Congressional Hands?

Ron Paul Predicts GOP Cave-In

Please consider this interesting interview by Bloomberg columnist Al Hunt with Ron Paul on the debt ceiling, big government, and military spending.

Link if inline video does not play: Ron Paul Interview on Debt Ceiling

Select Interview Highlights

Al Hunt: Do you think Congress will pass an Extension.

Ron Paul: I do. This will go up until the last minute, then they will raise the debt ceiling.

Al Hunt: Your speaker John Boehner says he will absolutely insist on a dollar of spending reduction for every dollar the debt ceiling goes up. Do you take that seriously?

Ron Paul: I don't take that seriously. President Reagan wanted 2 dollars of cuts. The deficit exploded. Do you think the American people will believe that we are going to cut in the future? The only budget that counts is this year. 10-year programs are pie-in-the-sky talking. This year our obligations are 5 trillion dollars.

Al Hunt: The idea of a spending cap that takes place in 10 years does not appeal to you?

Ron Paul: A 10-year spending cap is too little, too late. No one is going to believe it. All governments when they get this far into debt, default. They don't default by not paying the bills. We will always pay the bills. The default comes from the devaluation of the currency.

Al Hunt: On Libya, Afghanistan, it looks like most are taking the John McCain line.

Ron Paul: Politically they are making a big mistake. I have been arguing to bring the troops home. I did not want them to go in the first place. The people now know we cannot pay for this. A lot of conservatives are coming to that direction. I've said over the years that I will win this argument because we will run out of money. That is how all great nations and empires end. They cannot afford it any longer, and that is what is happening right now. I have proposals that are different. As much as I am opposed to all spending, if you want to cut purposely in deliberate fashion, then have priorities. My priorities is cut all all foreign welfare and foreign militarism, and corporate welfare before you go after child healthcare. That sells. You don't have to just address health-care for poor people, rather than looking at atrocious spending overseas.

Al Hunt: You would bring home troops from Afghanistan, Libya, Pakistan?

Ron Paul: Res, I believe in strong national defense and that hurts our defense. I would bring them all home. We have no reason to be there. The soldiers we have in Korea went there when I was in high school. How long are we going to stay there?

Al Hunt: Do you see any other candidate [for president] who is talking about a full audit of the Federal reserve?

Ron Paul: No way. But they won't laugh as much as they did last time. They won't laugh any longer. Just think of the difference no on the attitudes of the people on the Federal reserve.

Al Hunt: Is the Federal Reserve in retreat?

Ron Paul: (laughing) Have you ever anticipated over the years, Bernanke would be holding press conferences defending his position? He can't defend it because it is a failed policy. You can't print money to get yourself out of trouble. Grade school kids know this. We will win when the system comes unglued.

In regards to spending in general and military spending in particular, Ron Paul is correct. This is "how all great nations and empires end".

A similar sounding statement attributed to Margaret Thatcher goes like this: "The problem with socialism is that eventually you run out of other people's money to spend." The statement is true whether or not Thatcher ever said so explicitly.

Republicans need to stop US militarism and focus on the US economy.

In regards to the debt ceiling, unfortunately I too think Boehner will cave. Please see my video discussion on Yahoo Finance regarding the debt ceiling and the bond market: Debt Ceiling Discussion on Daily Ticker with Mish, Aaron Task, Henry Blodget: Will the Bond Market Eventually Force Congressional Hands?

Mike "Mish" Shedlock

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Mike Shedlock

Mike Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management.

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