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WSJ: U.S. Companies Are Bracing for Default

By JLP | July 27, 2011

Yesterday, I mentioned a WSJ article on how a default would affect us personally. Today, the WSJ talks about how companies are bracing for default:

In a recent survey by the Association of Financial Professionals, which represents treasury and finance executives, half of the 305 respondents said failure to reach an agreement by the Aug. 2 deadline would have a detrimental impact on their access to capital and short-term investment strategies.

Half of the respondents planned to take defensive actions, such as a freeze on hiring, reducing capital spending and drawing on credit lines to build cash, the AFP said.

Buckle your seatbelts…

Topics: Economics | 17 Comments »


17 Responses to “WSJ: U.S. Companies Are Bracing for Default”

  1. BG Says:
    July 27th, 2011 at 3:10 pm

    You can bet that whatever happens come 8/2/2011, it will be great for businesses (banks really), and bad for taxpayers.

  2. Dan Says:
    July 27th, 2011 at 6:34 pm

    Somehow our political system has gotten us to a choice between sovereign default and a severely contractionary austerity policy during a weak economic recovery from a massive recession.

    An old Woody Allen quote comes to mind: “More than at any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly.”

  3. JLP Says:
    July 28th, 2011 at 10:17 am

    Love the quote, Dan…lol.

  4. Jack Says:
    July 28th, 2011 at 4:26 pm

    I don’t think taking on more debt has EVER prevented a default. Nor do I think that refusing to take on more debt has ever CAUSED a default.

  5. kitty Says:
    July 29th, 2011 at 11:37 am

    “I don’t think taking on more debt has EVER prevented a default. Nor do I think that refusing to take on more debt has ever CAUSED a default.”

    This doesn’t make any sense. If you have to pay rent tomorrow or you’ll be evicted, and your only option TODAY is to borrow, you have no choice but to borrow and pay rent. Otherwise, you are going to be evicted. Yes, taking more debt may be bad for you longer term, but you have to pay your rent first, then reduce your debt. Ditto with your electric bills. Your creditors don’t care about your personal problems or how much debt you have, they just want bills paid. Refusing to pay your bills is not the way to control your spending spending habits.

    Ditto about the US creditors. If the US has no money to pay unless it borrows more, it has to borrow and pay and then work on its budget. But it has to pay its bills.

    Yes, taking on more debt prevents or at least postpones the default. Sure a long term strategy for reducing the debt is needed, but the US has to pay its bills first.

  6. Stacey Says:
    July 29th, 2011 at 1:16 pm

    So good to see your words, Kitty. You’ve been missed.

  7. Jack Says:
    July 29th, 2011 at 6:37 pm

    Kitty, our debt service is about 5% of spending — about 8.5% of revenue. We are not in danger of defaulting on our debts.

    In fact, we can pay Social Security out of the Trust Fund w/o increasing our total debt — just sell general-issue bonds, use the proceeds to redeem the special-issue bonds in the Trust Fund, and the SSA will have the cash to pay benefits as long as the Trust Fund has bonds to sell back. Unemployment Insurance also has such a Trust Fund.

    As for the rest, we can pay all employees, including the military, and pay all vendors that have contracts with the government. In other words, those who have earned it. Medicare? No. You’re just taking from your children and grandchildren anyway, so just get it from them directly and cut out the wasteful government bureaucracy.

    Medicaid? No. Sorry, you have a right to healthcare, but you do not have the right to take someone else’s money to get it. (You may ask — that’s why I contribute to free clinics.)

  8. kitty Says:
    July 31st, 2011 at 9:06 am

    Jack – what planet are you on? What you are talking about longer term cash flow, not the bills vs cash now. The time of arguing which policies are good or bad (or which of the expenses you HAVE ALREADY INCURRED are good or bad) isn’t whent he bills are coming due, it’s when you spend your money. There are X billion in bills that are coming due next week for services already rendered, and there is not enough money to pay for it. Bond holders – certainly, but not social security and the rest. Personally I’d start with members’ of congress salaries.

    But even if you talk medicare, these are medicare bills for SERVICES ALREADY RENDERED and if you stop paying for anything you promised to pay you are a deadbeat. You cannot say – this is a bad program to begin with, so I am not going to pay for it at all and screw the doctors and hospitals who have already rendered their services, forget what I promised. You want to reform medicare/medicaid – fine, do it through the democratic process (and what about the money the elderly who are on Medicare now have paid over the years in medicare taxes?), but you don’t do it at the time you have to pay your bills.

    If you are in insurance business and you sell insurance, you can’t say to the holder – oops, it was a bad insurance policy I shouldn’t have sold it, so I am not going to pay for your claims now never mind that you’ve been paying your premiums for most of your life. If an insurance company does it, it’s bankrupt. Medicare is essentially an insurance – people pay Medicare tax (premiums) over the years, then they submit claims. Is it an insurance that is losing money – sure, so think how you can reform it without behaving like a deadbeat.

    In life if you refuse to pay for any obligation that you incurred you are a deadbeat. Sure, some obligations are higher priority than others, but the moment you renegged on even one, you can’t be trusted. The time to figure out whether you can afford a tv set or not is when you buy it not when your credit card bill is due.

  9. kitty Says:
    July 31st, 2011 at 9:16 am

    Stacey — thanks. I’ve got involved in other stuff – opera, ballet, cats…. – just kidding, although yes, I’ve spent more time commenting on this type of discussions (plus some theater trips) than on financial blogs.

    But when something like this comes up, a subject that I feel strongly about and which affects me, I comment.

  10. Jack Says:
    July 31st, 2011 at 11:09 pm

    There is more than enough money in the Social Security Trust Fund, and in the Unemployment Insurance Trust Fund. We do not OWE people future Medicaid and Medicare, nor do we owe anyone a Social Security check or a welfare check.

  11. Jack Says:
    August 1st, 2011 at 5:39 am

    If I may ask, how does this issue affect you?

  12. kitty Says:
    August 1st, 2011 at 4:17 pm

    “If I may ask, how does this issue affect you?”

    Jack this issue affects all of us, our economy, our country and for many years to come. For the record – I am still employed, I have no debt, and my net worth is in low seven digits. I also – unlike some of the tea party republicans – have never had credit card debt. But this issues affects all of us, it has affected all of us already. Stock market all over the world has been going down, the credibility of the US is down. A lot of today’s economic numbers had to do with uncertainty over the contracts and who gets paid. Because of the uncertainty created by this crisis, the interest rates the US has to pay on bonds are already up:
    http://money.cnn.com/2011/08/01/markets/debt_ceiling_treasury_bills/

    This is more money out of the US budget ALREADY, right here. In case of a default, the interest rates on the debt would go up even more resulting in a lot more money lost. You may think that not sending social security checks isn’t really a default, but the creditors who watch you see it like the US is bad risk and they want higher interest.

    Think “universal default” policy of the credit cards. If you don’t pay for ANYTHING on time your interest rates go up regardless of if you think a particular bill is important or not. You don’t like a particular expense – deal with it at the time when it’s appropriate, not at the time when the bill is due.

    I used to be a landlord and now my father is one (but I manage it given as he is 80 and barely speaks English…). I would most definitely consider someone who didn’t pay for a bill as a bad risk. I don’t care how important the bill was – if someone promised to pay and then refused, this person is bad risk.

    “We do not OWE people future Medicaid and Medicare, nor do we owe anyone a Social Security check or a welfare check.”
    HELLO??????? People who are getting social security payments are people who’ve been paying INTO social security all their lives. People have been paying medicare tax for quite a long time too. But this isn’t really about specific programs.

    There is a process on how and when the changes of these programs are to be discussed. This doesn’t include just stopping checks. The hospitals and the doctors who are currently taking Medicare have been promised checks for services. The government promised them to pay when they agreed to accept Medicare and Medicaid. The decision time is not now.

    There is a time to discuss budget and to approve expense or disapprove expenses and it’s when you make a purchase and not when you get the bill. The debt ceiling discussion was about paying for the expenses ALREADY APPROVED by the congress. You don’t agree with these past decision – deal with them on similar discussions in future. The debt ceiling is normally a routine – Bush raised it several times without any issues. This time a group of people used it for their purposes. They essentially blackmailed everyone into going along with their plan instead of doing it through normal process.

  13. kitty Says:
    August 1st, 2011 at 4:18 pm

    JLP – my comment is “awaiting moderation” because I included a link. Just letting you know so that it doesn’t get stuck in this state.

  14. Jack Says:
    August 2nd, 2011 at 6:23 am

    EXCELLENT!! At long last, we arrive at the heart of your misunderstanding: “People who are getting social security payments are people who’ve been paying INTO social security all their lives. People have been paying medicare tax for quite a long time too.”

    The people who have been paying into Social Security and Medicare have been ROBBED. It was the early recipients who made out like bandits. They paid very little into the system, but took a lot out. Social Security is a classic Ponzi scheme. If one person robs you, it is not the responsibility of another to make you whole.

    In this case, it is our parents and grandparents that have robbed us. It is not up to our children and grandchildren to make us whole.

    Social Security and Medicare do nothing but take money from the children and grandchildren to give it to the parents and grandchildren. Why not just take the money directly and cut out the wasteful bureaucracy of the feral government?

  15. Jack Says:
    August 2nd, 2011 at 7:25 am

    “The debt ceiling is normally a routine – Bush raised it several times without any issues.”

    Uh, no. The last time Bush raised the debt ceiling, EVERY democrat voted against it. BTW, our deficit then was about 1.4% of GDP. Now it’s close to 10%. That is NOT “routine.”

  16. kitty Says:
    August 3rd, 2011 at 9:32 am

    Jack – I don’t suppport either democrats or republicans. I actually voted republican in the last election, but next time – I am not so sure. I voted for McCain in the last election and until this crisis I was all set to vote against Obama. But if it’s between Obama and some of those tea party nuts, you can be sure I am not going to vote for the tea party. And if you look at the polls, you’ll see that the majority of the people in the US feels the same way. So here for you is another side effect of this crisis – the republicans will lose votes as a result. BTW — the only reasonable talk I saw on tv was from Giuliani…

    But yes, the democrats voted against raising the debt ceiling before and yes it makes them hypocrites. Politicians in general are hypocrites. Not news. The difference though is people who voted against raising the debt ceiling before knew it would pass and their vote was largely symbolic. They knew it would pass anyway. This time was different in that people brought the country to the brink of default which would have been catastrophic for economy.

    I may be convinced by some of your arguments about social security or medicare. But again, these programs should be dealt with through the democratic process, and not by simply refusing to pay the bills. And by the way – if these are Ponzi schemes, that so is any insurance. These programs were meant as insurance: people pay premiums so that they get the money when they need it. It wasn’t a well-managed insurance, and yes it needs changes. BTW — don’t forget you’ll be old one day too. But you don’t deal with it by simply refusing to pay the bills. If you refuse to pay any bill that you promised to pay you are a deadbeat and your credibility is shattered.

    The world and buyers of the US bonds don’t care about the details of the US programs. What they know is that if the US is having issues with paying any bills, it’s not such a good risk.

    Also, when you do your math you conveniently forget all the other bills such as contractors who do work for the government, etc. Your math was just counting bond interest vs cash flow not the concrete amount of bills that would come due on a specific day – bond interest, bonds that mature and need to be repaid, salaries to military, teachers, other government employees, contractors.

    The time to cut expenses is when you think if you should buy a tv not when the bill comes.

  17. Jack Says:
    August 4th, 2011 at 1:47 pm

    “This time was different in that people brought the country to the brink of default which would have been catastrophic for economy.”

    I think I have already debunked the “default” scare. Could you please tell me why you still think that, were the debt limit not raised, the US could not service debt interest that only amounts to 8% of revenues?

    “And by the way – if [Social Security and Medicare] are Ponzi schemes, that so is any insurance.”

    Uh, no. Insurance does not guarantee a payout at all. If the event for which one is buying insurance does not occur — you do not suffer a catastrophic injury or expensive illness, your house does not burn down, etc. — then you do not collect. Hence, the DISABILITY INSURANCE portion of Social Security is NOT a Ponzi scheme. Also, unemployment insurance is not a Ponzi Scheme.

    Insurance is a pooling of risks, not a Ponzi scheme.

    “Your math was just counting bond interest vs cash flow not the concrete amount of bills that would come due on a specific day – bond interest, bonds that mature and need to be repaid, salaries to military, teachers, other government employees, contractors.”

    Actually, I was counting those things — except teachers. The feral government does not employ teachers. And bond that mature I did not count, because bonds that mature could be replaced by new bonds without increasing the total debt.

    But, we should have simply told Medicare recipients that the party was over. Same with TANF, Food Stamps, etc.

    We did not promise these people anything. Congress promised to steal from the working people to give to those who do not. Ending that is not being a deadbeat.

    Sure, we should pay all expenses already incurred. AND we should stop incurring expenses we cannot afford.

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