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IMF ponders the improbable: Will U.S. default?

By Howard Schneider

Will the U.S. government ever default?

It's not a pleasant thought for anyone holding some of the roughly $9 trillion in U.S. government bonds and notes currently in public hands - or for anyone hoping the global economy can stay on an even keel.

But the economists at the International Monetary Fund are paid to ponder the improbable, and in papers published on Wednesday fund staff examined where the U.S. and other developed countries fit on a continuum between easy living and disaster.

We're farther along than you might think.

Using a concept known as "fiscal space" - basically how much latitude a country has to borrow before markets will shut off the spigot by demanding unsustainable interest rates - the IMF staff drew a bright red line through five nations it considers to be running out of room: Greece, Iceland, Italy, Japan and Portugal. Of the 23 developed nations it analyzed, four others, including the U.S., received a yellow caution flag.

Does it mean default is imminent or inevitable? Hardly - and in companion articles the fund discussed the steps being taken to control public debt, and broadly discounted the chance of an outright sovereign default among any of the advanced countries.

But consider the U.S. The IMF estimated a series of probabilities regarding the amount of increased debt a country might be able to sustain without hitting its projected point of no return.

In the case of the U.S., the fund said the odds were roughly three out of four that the country could increase its total debt to some degree without being penalized by investors -- logical considering that the debt is steadily increasing and interest rates remain low and steady.

However that probability falls to an even 50-50 if the amount of new borrowing were to exceed fifty percent of GDP - or about $7 trillion given the current, $14 trillion size of the U.S. economy.

That might seem like plenty, except for the fact that under current Office of Management and Budget projections the "fiscal space" may fast disappear. The OMB projects total U.S. debt to jump by about $4.7 trillion in the next five years, leaving little room after that.

Better than expected growth, of course, could add fiscal "space," but another recession could shrink it. As IMF researcher and report author Jonathan D. Ostry said, it is best to be cautious.

"Markets may give little or no warning," Ostry said, pointing to the recent troubles in Greece. "The debt limit is the point at which you bounce off to infinity. It is a point that you want to strenuously avoid."

By Howard Schneider  |  September 1, 2010; 1:33 PM ET
Categories:  International Economics , International Monetary Fund  
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Next: Five reasons to be optimistic about the economy


of course the U.S. will default. it's in the cards, it's the end game. the country has been looted ! the banks have been involved in "gross folly" as HUGH HENDRY says. Let them fail! That's what happens when Wall St. greed, banking greed, central banking criminals take control of a government. In a few more years the FEDERAL RESERVE will be gone & the citizens will live a stable life once again with "sound money, money based upon hard assets". We will have to go into revolution to get these people out of the government. Thanks to WOODROW WILSON & bankers from Europe in 1913 for this holy mess.

Posted by: lyndscott | September 2, 2010 10:52 PM | Report abuse

I would like to remind readers of a different concept: it is ancient history of course. Ever heard of the "Year of Jubilee?" In ancient Israel, on the 50th year, debts were to be wiped clean and forgiven. Imagine if we voluntarily forgave all debts???? Instead, we will INVOLUNTARILY dismiss debt when it becomes uncollectible. This is very painful for all.

Interesting, that no matter who we blame for the current situation, the situation is that the financial system is likely to collapse or come close. Some of us will prosper but most are badly hurt in this environment and can we ignore our neighbor's pain?

As to the President's select committee on the debt and deficit, it reminds me of the terms of surrender Sir William Wallace offered the English.

One might suggest that these "gifted experts" get on their knees and seek the Most High for His Answer. An old Jewish proverb says, 'man plans, God laughs.' I suspect that the plans of man will ALL fail. The only best solution is the one that God gives. I like the reference in

"How much longer will you waver, hobbling between two opinions? If the LORD is God, follow him! But if Baal is God, then follow him!" But the people were completely silent.

Posted by: Anonymous | September 3, 2010 11:07 PM | Report abuse

Funny how reality keeps intruding on all the happy talk about the impending "recovery" of the US economy. No one can ever quite explain how this recovery is supposed to take place but the empty headed US infotainment industry just accept it on faith and blurt it out to a desperate and vulnerable American people.

Nothing is made in the United States anymore! Nothing that is except weapons of war. War making is the only "healthy" sector of the US economy left, which is why were staying in Iraq, escalating in Afghanistan, and expanding the fight to Pakistan, Yemen and Somalia. But a healthy capacity to drop bombs on people around the world will not rescue this broken economy.

Why? Because the capitalist economic system is exhausted and will soon collapse. From the time of the collapse of feudalism and its birth in the Industrial Revolution, capitalism was always destined to become the dominant global economic force. Globalization will be a historic marker as the zenith of its existence. But globalization robbed the system of the only thing that kept its fatal internal contradictions at bay—-growth. Capitalism has conquered the planet, it has nowhere else to feed. The time of its death is now at hand.

Skirmishes and crisis around the world, are signs the two most powerful groups that capitalism creates are beginning to engage in a final battle for power. Marx called them the bourgeoisie, the ruling class, and the proletariat, the working class. It can be most simply described as the clash between the wealthy and the working people.

The fight is inevitable and it will destroy one class or the other. Then on the ruins of the old system, the class that prevails will reorganize society along the lines of their dictates. If the bourgeoisie remains on top it will not mean the restoration of capitalism to health and stability. It will mean the depopulation of the planet and the enslavement of man in a world described in the dystopian literature of Orwell, Huxley, and Atwood.

Posted by: malcolmxmlk | September 3, 2010 11:41 PM | Report abuse

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