Of course what so many people fail to realize is that seldom do we see an outright single event where a company, state or sovereign government decides to stop paying all its debt all at once. Instead these things happen very slowly.
My claim is the United States has already started to "default" on its "debt" in various ways. Let me just mention a couple of them, and see if you agree.
- The bond-holders of GM and Chrysler. They should have been first in line. But instead the US courts violated all kinds of contract law when they decided to put the unions and pensions ahead of the bond-holders. Its a default, pure and simple. Why didn't anyone make a fuss?
- Freddie Mac and Fannie Mae. Two government "sponsored" enterprises who for years operated with lower interest rates on their paper and benefited from higher bond ratings because of an implicit government guarantee. FRE (now FMCC) stock used to trade at $60. Today it closed at $0.25. FNM (now FNMA) stock traded for years at a price of more than $80/share. Today it trades on the pink sheets for $0.30. How low do these government institutions have to go before someone considers it a "default"?
- For 2010, the US Social Security Administration announced there would be no increase in the Monthly Social Security and Supplemental Security Income (SSI) benefits payments due to "no increase in the Consumer Price Index (CPI-W) from the third quarter of 2008 to the third quarter of 2009." Then why did SSA increase the Minimum Quarterly Earnings needed to earn one Social Security credit from $1,090 (2009) to $1,120 (2010)? That seems like a 3% increase to me. Who really believes the CPI-W anyway?
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