Why a U.S. Default Will be a Good Thing (or Why Default Terrifies Socialists)

Money Morning ^ | 8/11/11 | By Martin Hutchinson

[St_Thomas_Aquinas]

....Future Credit Downgrades and a U.S. Default

The idea of a decline in the safety of U.S. Treasuries causing a flight to safety in which investors buy still more U.S. bonds is a sign that markets are truly irrational.

But if nothing effective is done, this game eventually will come to an end. As the U.S. credit rating is downgraded again and again, somewhere this side of BBB-minus (the lowest "investment grade" rating) the markets will finally panic and decide that U.S. deficits can no longer be supported. That will make it impossible to sell enough Treasuries to finance America's debt burden.

As in the case of Greece last year, this is likely to happen quite suddenly. And when it happens, the market's negative verdict will be irreversible.

Furthermore, since there is no kind Sugar Daddy such as the European Central Bank (ECB) standing by with its force of German taxpayers ready to bail out the U.S. Treasury, the U.S. will be forced to default.

That will be very painful in the short run, but in the long run will be a good thing.

After all, there is no reason why governments should be considered better credit risks than top- quality companies.

The Proctor & Gamble Co. (NYSE: PG) and The Coca-Cola Co. (NYSE: KO) make tangible products that people want to buy - and they do so at tightly controlled costs. So it's clear that companies like these can repay modest levels of debt under almost any circumstances.

The same is not true for a government - especially one that makes no money itself, produces few goods and services of value, and obtains money only by squeezing its unfortunate taxpayers.

Just imagine a world in which investors won't lend to governments: That's a world in which governments cannot overspend - they won't have the money.

That's a world in which resources cannot be diverted from the productive to the unproductive. That's also a world in which economic power is determined by success - and one in which the chairman of Coca-Cola has more credibility than the U.S. Treasury s ecretary.

Our leaders down in Washington may think that such a world is pure hell - a civil servant's version of Dante's Inferno.

But for investors like you and me, a world like that - where everything makes sense - is a financial Nirvana

[SunkenCiv]

Thanks St_Thomas_Aquinas.

As the U.S. credit rating is downgraded again and again, somewhere this side of BBB-minus (the lowest "investment grade" rating) the markets will finally panic and decide that U.S. deficits can no longer be supported. That will make it impossible to sell enough Treasuries to finance America's debt burden.

The sole reason that the Obama deficits might prove unsustainable is the Obama recession. Wealth isn't a fixed-size pie, although the left and their kissing cousins on the so-called extreme right believe that it is. Wealth comes from the transformation of materials (raw, or having gone through some steps or stages) into something useful and/or desired through the use of labor, technology, and energy.