Tags: federal | bond | default

Economist Warns: Coming U.S. Bond Default

By Gene J. Koprowski   |   Friday, 06 Nov 2009 08:59 AM

The U.S. may have to default on its debt payments after 2019, writes economist Robert Samuelson.

If the deficit spending continues on the current path it will consume 82 percent of gross domestic product within a decade. There will be no wiggle room for tax cuts, and spending cuts may be politically unpalatable, he surmises.

“The Congressional Budget Office reckons the Obama administration's planned budgets would increase the debt-to-GDP ratio from 41 percent in 2008 to 82 percent in 2019. Higher interest rates would aggravate the debt burden,” writes Samuelson in The Washington Post.

Anticipating higher interest rates, the CBO estimates annual interest payments on the federal debt at $799 billion in 2019, up from $170 billion today.

“Even the size of exposed debt is unclear; adding Fannie Mae's and Freddie Mac's debts — effectively guaranteed by the government — to Treasury debt would raise the total sharply,” writes Samuelson.

However, constraining future debt by spending cuts or tax increases will involve “wrenching and unpopular measures” and may backfire.

“Some advanced country might decide that a partial or complete default, though dire, would be less damaging economically and politically than the alternatives,” writes Samuelson.

“Deprived of international or domestic credit, defaulting countries in the past have suffered deep economic downturns, hyperinflation, or both.”

The odds may be against the U.S trying that, but even the “remote possibility” of that demonstrates the difficulty of the economic situation.

“The arguments over whether we need more stimulus — and debt — obscure the larger reality that past debt increasingly constricts governments' economic maneuvering room,” writes Samuelson.

Debt default is a reality for many in the corporate bond market now.

The Wall Street Journal is reporting that 11 issuers defaulted on bonds last month, and the default rate is now at 11.33 percent.

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The U.S. may have to default on its debt payments after 2019, writes economist Robert Samuelson. If the deficit spending continues on the current path it will consume 82 percent of gross domestic product within a decade. There will be no wiggle room for tax cuts, and...
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