Friday, October 10, 2008

Reduced circumstances

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"After Year of Declines, Investors Lose $8.4 Trillion of Wealth"

Wall Street Journal, this morning

Wow, I didn't know I was down that much.

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2 comments:

yih said...

The evaporation of $8.4 trillion in paper wealth is indeed mind-boggling.
Wall St. has essentially laughed in the face of the pink fluffy bunnies plan.
And now everyone and their brother seems to have a hand out for some of that pink fluffy bunnies plan money.
But as someone who has had to deal with the harsh reality of credit firsthand I know there is a breaking point to where no one will lend you a penny more without some form of collateral.
I'm starting to wonder if 'Uncle Sam' is closing in on the max of his 'Visa card' i.e. total Fed debt reaches the point where continued borrowing will in effect be impossible.
That would be the point where any further Fed debt becomes in essence 'junk bonds' (high return/high risk of default).
Basically the rest of the world cuts up 'Uncle Sam's Visa card' and essentially implements what amounts to a Ch. 10 (municipal bankruptcy) on the entire USA.
When a municipality files Ch. 10 all existing debt (municipal bonds) are expected to be honored for full principal and interest but the municipality is forbidden to borrow further in any way, shape, or form.
It also forces immediate across-the-board spending cuts that can't be overridden.
If that means say 1/4 of the city police force are suddenly out of a job all the police union can do is whine about it.
On the federal level the US budget would be forced into balance. No more continuation of borrow and spend.
Default won't be possible but increasing the so-called 'federal debt ceiling' won't be possible either.
That's where America hits the wall. Federal taxes go up or Federal spending goes down (or some combination of both).
The GOP and it's media will whine if taxes go up and the Dems and their media will whine about any cut in spending. But income will be forced to meet outgo literally day-to-day.
For both sides it will no longer be about ''how to grow the pie'' it will be competing factions arguing over the size of the slice they get. With interest payments on existing debt getting the first ration and everyone else squabbling over the size of their ration.
Picture Sen. McCain (child #1) being forced to choose between supporting the troops in Iraq (child #2) or supporting the Social Security checks of all those retirees in Arizona (child #3).
The music has stopped and there are only two chairs.

Rick Darby said...

YIH,

When a municipality files Ch. 10 all existing debt (municipal bonds) are expected to be honored for full principal and interest but the municipality is forbidden to borrow further in any way, shape, or form.
It also forces immediate across-the-board spending cuts that can't be overridden.


That sort of Judgment Day sounds like exactly what we need. But is there any precedent for a country being declared bankrupt? And who would so declare it? Our Treasury bills are held by dozens of countries.