Monday, October 07, 2013

One wonders is this Congressman is this stupid, or just funnin' us

I have read the full article and quote, and either Rep. Ted Yoho is an idiot, or he plays one on TV.
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He doesn't come across as stupid at all, but as hard headed and unwilling to understand an argument.  Not that he can't understand, but he won't understand.
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He seems to get that a default would raise the cost of interest on our national debt and our individuals cost of borrowing.  But he doesn't seem to get that this borrowing was signed off by Congress.  The debt limit is to pay for what Congress has already spent.

Like a father teaching a wayward child a lesson, he thinks defaulting will force us to learn our lesson and save money.  He doesn't seem to care what the byproducts are.  The cost of that lesson would range from very high to astronomical.




On the very high side, a default would raise interest rates for the government, which raise the cost of loans for everyone that has any type of variable loan or any new loan,  The government, which borrows money cheaply, would pay more interest.  That slice of the pie that says "Interest on Debt" that is 6%, it is held at 6% because the US Dollar is considered the safest investment internationally.
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In the best case scenario, it would still be the safest investment, but not as safe as before, so it would be more expensive to pay for the things we have already spent money on.
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The worst case is that we would have to borrow money in Euros or Renminbi (Chinese money) because people don't trust us to manage our accounts.  That is the problem with a country like Iceland in the 2008 crash.  Iceland borrow Euros when their currency bought a lot per Euro.  But when their currency crash, the cost of each Euro they had to pay back went through the roof!  When their currency fell, then each Euro costs more in the local money.
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Right now, the US dollar $1 = Chinese 6.12 R.
- Now let's say we have to borrow a million dollars worth of Reminbi.  At current rates we would owe them 6,120,000 Reminbi.
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And over time, they let their currency rise (which makes our exports a better deal overseas, but our imports of foreign goods very expensive).  The United States has advocated this for a long time (let the Chinese currency float).  And say it rises by 25% (we have drifted that much between currencies a lot).
- Now each Rimenibi costs us 20 cents instead of 16 cents like it does now.  So that million dollars of loan now costs Chinese Remnibi 7,650,000 - before interest.  Each Reminbi we buy to pay back our loan will costs us more.  Worse, we can't control how much more.  So your loan is unknown.
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The Untied States has the luxury of borrowing and paying back in our own currency, so we never really see this.  We are probably the ONLY country that do this with a loan of any size.  Congressmen Yoho, it is a huge cost we will have to risk, if our currency loses its appeal.  That that isn't teaching a child a lesson, it is being purposefully ignorant.

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