Ryan’s Risky Debt Default Dare

May 19th, 2011 at 8:07 am | 20 Comments |

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The more I look at Paul Ryan’s recent comments on CNBC, downplaying the odds of a debt deal while claiming bondholders would accept missed payments, the more I am troubled. Not only is his cavalier attitude to a default scary in and of itself, but his justification for it just doesn’t make any sense.

In the interview, Ryan said: “I talk to lots of bond traders. I talk to lots of people like Gross and Druckenmiller and economists. They all say, whatever you do, make sure you get real spending cuts, because you want to make sure that the bondholder has confidence that the government’s gonna be able to pay them.”

Ryan also added: “That’s what I’m hearing from most people, which is, if a bondholder misses a payment for a day or two or three or four, what’s more important, that you’re putting the government in a materially better position to be able to pay their bonds later on.” (Ryan also seemed to be echoed by Sen. Toomey on this point).

But is there really any crisis of confidence among the bondholders? The current yields on 5 and 10 year notes and 30 year bonds are, respectively, 1.84%, 3.17% and 4.29%. For comparison, in late 1999 and 2000 all these yields were above 6% (never mind notes and bonds – on some days in 2000 even the yields on T-bills were more than double the yield on a 10-year note now!).

Back then the budget was balanced, inflation and unemployment were low, and there was an expectation that the country would just continue to party like it’s 1999. Much lower current yields certainly do not suggest any loss of confidence since those good old days.

And why would bondholders be so worried about long term deficit projections anyway? The average maturity of U.S. debt is 5 years, and over 90% of publicly held debt matures within 10 years. Does Ryan really think that “all” or “most” bondholders are seriously concerned that the government may not be able to pay them within the next several years?

And if that’s really so, why does he callously disregard those concerns? His plan does not even begin to reform Medicare for 10 years and does not balance the budget for about 20 years. Furthermore, in the next few years it actually adds more to the national debt than the president’s budget plan and thus puts the government in a materially worse position to be able to pay the bonds that are currently in circulation.

Why would bondholders be reassured by such a plan, let alone welcome a default if it helps to pass that plan?!  A bonus question for CNBC: why wasn’t Paul Ryan asked follow-up questions about these glaring contradictions?


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20 Comments so far ↓

  • chicago_guy

    Because people who work at CNBC aren’t journalists, they’re shills who used to work in the financial services industry.

    As such, they’re not into asking probing questions about much of anything – note how all of them missed the obvious clues that the country was headed into a tree all during the 2000s.

  • balconesfault

    This is what conservatism has come to … those who would torch the government in order to save it from the people.

    • armstp

      balcon,

      These “conservatives” do not want to save government. They want to get rid of it. I really have no idea what these people actually believe in other than to get rid of government. What are they going to replace it with?

      Strong government and not weak government is the reason the U.S. has succeed since its creation. Destroying the government is just bringing this country down.

      You have to wonder what these “conservatives” are actually thinking?

      I suspect that they are going too far and they will feel it at the ballot box in 2012.

  • ottovbvs

    A bonus question for CNBC: why wasn’t Paul Ryan asked follow-up questions about these glaring contradictions?

    Because they are superficial lightweights hired for their attractiveness and not analytical skills. Some of the performances of Bartiromo and her ilk have been excruciatingly embarrassing over the last few years. And Ryan is obviously lying when he says most people (ie. bond traders) would not be fazed by an indefinite default on interest payments (who can say it’s going to be three days for godsake). Even assuming the govt chose to maintain payments while effectively shutting down most of the US govt, the suggestion this would have no impact on bond and equity markets is ludicrous. The nihilism of people like Ryan which is basically a product of limited knowledge is scary.

    • armstp

      CNBC is a joke. First of all they are not journalists. They missed every single important economic and business story. In fact, CNBC can be directly blamed for promoting many of the things that caused many of the bubbles. They are a hype factory.

      They do not ask the questions or really any questions. They are mostly there to help their guests and sponsors promote IPOs, financial services and investment managment services.

      More than half the hosts are far-right wing economic ideologues and all of them only have a very cursory knowledge of what they talk about.

      And this from a channel that is suppose to be a specialized serious business news channel. In business people want to hear the objective truth and not something spun through an ideological lens. Nobody takes CNBC serious, although given the high volume platform they can have an influence.

  • Elvis Elvisberg

    Republicans don’t care about policy; CNBC is not journalism, it is a PR wing of company management.

    This ain’t new.

  • TerryF98

    I guess it takes a lot to love your country so much, in order to save it you are willing to destroy it’s economy! (snark)

  • Watusie

    Andrew, have you read the Ryan “Plan”? If so, then I think I can explain things to you – Ryan isn’t all that bright, and he lives in a fantasy world.

  • rbottoms

    God you idiots really are in a pickle.

    You’ve lied to the teabilly crowd for thirty years and now your back is against the wall, allow a nuclear device to go off in credit markets or get torched by the screaming racists.

    Decisions, decisions.

    This is really enjoyable to me as a Democrat, except for that whole plunge the world into a depression and destroy 400 years of building the most powerful nation on earth just so you can eject that black guy from the White House.

    Come on David, time to pull out all the stops before these assholes allow the Krell machine to destroy the planet.

    Adams: You still refuse to face the truth.
    Morbius: What truth?
    Adams: Morbius, that thing out there. It’s you.

    ~ Forbidden Planet

  • bdtex

    Why didn’t they asked Ryan if he had talked to anyone at Moody’s or S&P?

  • dante

    Can we officially get a 3rd party made up of the remnants of the GOP that have been deemed “not pure enough” and those of us who have switched to the Democrats because of the batshit crazy ideas/people/politicians coming out of the GOP these days? I nominate Frum as our Chairman, and all others can be judged on a case-by-case basis. We need REAL reform in this country. We need higher taxes, cuts to defense, and yes, long-term reform of entitlement programs. We need a sensible energy policy that’s not just about gasoline prices at the pump today, but one that anticipates ALL energy pricing over the next 5, 10, 20+ years. We need to accept that abortion should be safe, legal and rare. We need to ensure that our business climate is welcoming to all businesses, large ones AND SMALL ONES!! We need to foster an entrepreneurial spirit by making pass-through taxes (LLC, S-Corp) as low as corporate (C-Corp) taxes. We need universal health care for all because it will make our manufacturing and manufactured goods cheaper. If GM is paying $12,000/year for health care for it’s workers here in the US, and Honda is paying $0/year for health care for it’s workers in Japan, that means that companies making products in Japan have a competitive advantage over companies making products here.

    I read FF because it’s a satisfying critique of today’s GOP, but it has come to the point that I’m surprised that DF still actually calls himself a Republican. This isn’t the party of Ronald Reagan, it’s the party of batshit crazy people like Rush Limbaugh, Sarah Palin and Michelle Bachmann. It’s the party of Paul Ryan instead of the party of Newt Gingrich. Your party has left you, and me, and just about every other sane rational person that tilts slightly to the right in this country. If they want to swirl around the toilet bowl on their way into the sewer, let them.

    I used to think that I was a pretty good barometer for the middle of this country, since I agreed with the Republicans *maybe* 50% of the time, and with the Democrats *maybe* 50% of the time. Now I agree with the Democrats less than 50% of the time, and with the Republicans ZERO percent of the time.

    So how about it, DF? Are you up for being the standard-bearer for a new political party, one that actually has the best interest of the country at heart instead of the corporations? If so, I’ll be your first supporter.

    • indy

      It isn’t even the party of Newt any more. DF, who is sane and reasonable on domestic issues, is too much of an unrepentant neocon on foreign affairs.

      • LFC

        Can we officially get a 3rd party made up of the remnants of the GOP that have been deemed “not pure enough” and those of us who have switched to the Democrats because of the batshit crazy ideas/people/politicians coming out of the GOP these days?

        Oh, wouldn’t it be great. Imagine if a center/right party could slice a half dozen votes off of each side of the aisle. We could end up with a sanity bloc that could prevent the insane use of the filibuster by the Republicans and keep left-wing excesses in check. We could have a Congress that could get things done for the good of the nation, and not function like the completely broken system they have in California.

    • joanna

      it’s not that easy:) the system is set up to keep status quo, and make it uphill for the newcomers, that’s why we are stuck with this dysfunctional system. There is interesting book on the subject by James Bennett: “Not invited to the party – how the Demopublicans have rigged the system and left independents out in the cold”. You just have to remember that the author is a libertarian, and make a correction for that, but in general he sticks to the facts.

    • think4yourself

      +1
      That’s why I started reading FF. The party’s conspire to keep themselves in power. In 2000 CA electorate voted an open primary (I voted for McCain back when he was a maverick), but the GOP and Dems banded together and spent money to defeat the bill on appeal because it weakened the party system.

      I’d be happy to vote GOP if they hadn’t decided to quit being the party of fiscal discipline and became the party of no taxes, if they weren’t the party of intrude in your personal business and if they didn’t support CEO’s of huge company’s over the interest of small business owners and working Americans. Lastly, more than the Dems, the GOP has shown it is more interested in having power than exercising good governance. It would rather be obstructionist to make their point than statesmanlike. I don’t particularly want to vote Democratic, but the GOP is insistent on pushing me that way.

  • sbh

    So, let me get this straight: Ryan is suggesting strategic default for the government as a tactic? Tactical strategic default? I wonder what his stance would be with respect to that kind of behavior in individual mortgage holders?

  • Saladdin

    You can’t scare folks into believing government is completely bad for 2 years, get into power and then expect folks to trust them…

    Reading over Ryan’s comments and seeing the video, the question that comes to mind is, “this is the best and brightest the current GOP has to offer?” Conservatism used to mean something, now, I’m not sure.

    Can’t imagine seniors being happy, especially when ss checks are delayed. Same for unemployment checks, something pretty important to people in this economy.

  • Churl

    Default, devalue, or some combination of both: we will do one or another other of these eventually. One way or another, our creditors won’t be happy, but what will they do, foreclose? Think of how easy it was to stiff GM’s bondholders.

  • ottovbvs

    Default, devalue, or some combination of both: we will do one or another other of these eventually. One way or another, our creditors won’t be happy,

    Apparently Churl doesn’t understand that a) the US currency floats and b) the ten year bond yield is close to historic lows. After demonstrating his ignorance of the English language he now demostrates his ignorance of currency markets. What are you an expert on Churl? Dog walking?