The Luxury of Choosing to Default - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 19 October 2013
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- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
Earlier this week, the US government averted a catastrophic default. The US Congress passed a last minute extension of the debt ceiling, and postponed the problem for a few months. We can certainly expect that this issue will come again when the debt ceiling expires in February 2014.

The most striking part of this US debt crisis is that it has been manufactured by politicians and has nothing to do with the economics of default. The US has the money to pay its obligations. The debt ceiling crisis was a question of whether they should choose to default, i.e. whether they should honor their obligations, despite having the ability to do so

No other country in the world has the luxury of choosing to default. In fact, most countries go to great lengths to avoid default. For example, throughout the Eurozone crisis, the entire focus was on how to prevent a default from taking place. In India's case, since our balance of payments crisis in 1991, we always ensure that we have adequate FX reserves so that we can pay our import bill.

The US has this choice to default because it is an economic power and its currency is the world reserve currency. This comes with many privileges including lower interest rates and not needing to worry about FX reserves. But with privilege also comes responsibility.

The US has a responsibility to ensure that they do not cause unnecessary instability to the global financial system, and this means not choosing to default. Just because they have the ability to cause a financial crisis is no reason to actually cause one. Just because you can jump of a bridge does not mean you should jump.

It also does not mean you should come close to jumping off, but this is exactly what the US government has done. They have miserably failed in living up to their responsibility that comes with the privilege of being an economic power.

Though the rest of the world is heavily impacted by US actions, there is little anyone can do to prevent this type of crisis from take place again. We can only hope that US politicians come to their senses and ensure that this does not occur again. But I would not count on that.

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is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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5 Responses to "The Luxury of Choosing to Default"

ramana reddy

Oct 22, 2013

Your articles I mean all economists always beats round the bush. You all have been saying what if $ vanishes? that means is it that if the $ becomes 0 will Re -100?

Like 

Nabarun Halder

Oct 21, 2013

Its now painfully obvious that US can pay its debt by borrowing more money, in other words by increasing its debt limit. The mute question is how much debt a country can take before it can be said to have gone broke?

The slide of the dollar against all major currencies points to the fact that the status of dollar as reserve currency is gradually weakening.

If the US economic data starts showing better result, the Fed may start tapering early to protect the dollar from sliding further. That will probably result in the equity markets reversing its trajectory to the moon.

Its all really hypothesis based on what Fed might do in the foreeable future. Based on what they have done so far, and the choice of next Fed Head indicates they may remain dovish for quite some time more.

Where is the Black Swan lurking these days, or is it just a myth?

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Prof Keshava Nireshwalia

Oct 20, 2013

It is indeed unfair for a country with such huge international debts not only to get away but cause upheavals in the economies of other nations by their willful defaults. It is high time to halt all economic equations on a few chosen currencies. There needs to be an independent money which truly equates across all economies. Private currency printing should be halted inthe interest of the USA as well as all nations.

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V V S Prasad

Oct 20, 2013

One can threaten only once on one issue. The repetition makes the person more weaker. the Republicans should know this

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C K Vaidya

Oct 20, 2013

I don't know what you mean by 'The US has the money to meet its obligations...'. If that was so, why raise debt ceiling and allow it borrow even more? What the US did by raising debt ceiling was to allow the Govt to pay Paul by borrowing even more from Peter. If they were not allowed to borrow even more from Peter, the Govt won't have been able to pay Paul.

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