Wavepacket Blog

Wavepacket Blog
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Thu Jul 28 23:52:07 2011
The Big Default
Can we please not do this again?

Our turn to fall?
Image courtesy of Paul Kennedy

I enjoyed speculating over the financial problems of Portugal ( Bankrupt Portugal), Greece ( Greece's Surrender), and others ( Sovereign Bankruptcies), probably out of a spate of schadenfreude.

However, now it's our turn. Barring a miracle, on August 2nd the United States will default on its debts for the first time in history. Most of the rest of the world thinks we are complete morons (see stories from London, China and Singapore).

Reading the international news is pretty sobering: many countries are quite worried, because a default will have a dramatic impact on them, due to exchanges rates and the (lack of) credit a default would cause.

Will we default? I didn't think so a week ago, but now I'm not so sure. The Democrats and Republicans were unable to even talk, and now even the Republicans can't agree among themselves.

What should you do?

The US default will likely cause markets to take a big hit, and your retirement fund (if invested in stocks or bonds) will likewise drop. How can you avoid that?

Actually, I have no idea. I think Gold is overpriced, so I wouldn't go near that. The imminent US default means that normally safe US Treasuries are likely to plummet, so I wouldn't buy them. Cash may be a reasonable option, but exchange rates will go against the dollar, and the government will almost certainly have to use inflation as a way to fight federal debt, which erodes the value of cash over time.

I did move a bunch of my savings out of markets and into cash positions, but I don't know if that will help.

There are a bunch of kinds of defaults: orderly, strategic, and even strategic sovereign defaults. Those are defaults made by rational people or countries after having evaluated several possible options and picked what they believe to be the best course of action.

The US Default will be particularly notorious because it will not be strategic or deliberate, but rather due to the inability of Congress to compromise.

How can we stop this from happening again?

Ideally, the next time the country faces a crisis, our elected representatives will work together instead of retreating to their respective corners. Really, their current behavior is embarrassing and it's shaming to know that we elected them.

The 4th Congressional District of Illinois
Image courtesy of Scott Ritchie

One of the big problems is gerrymandering. (Actually, this isn't my idea--I read it recently but now I don't remember the source).

Don't get me wrong: we're in this mess because we as a country we have been unable to control spending for the past 30 years. Check out the Wikipedia page on the US Debt to see graphically how every administration since and including Reagan has screwed things up (one exception: Clinton).

However we got here, I'd expect Congress to realize the magnitude and seriousness of the problem, and act in the common good of the entire country.

Instead, the opposite has happened. The Congress we elected appears to be unable to do anything. And I think gerrymandering is a large reason why.

The idea is that because of gerrymandering, we are electing people that aren't actually representative of any real city or area. Instead, our representatives are elected from artificially-constructed regions that encourage extremists of either side, rather than force candidates to try to accommodate the broad views of real communities.

How can we stop gerrymandering?

I don't recommend changing the voting system, or any of the other more radical solutions. Instead, just require that districts not look weird, like the one above.

Interestingly, a bunch of people have looked at how to stop gerrymandering, mostly by looking at more neutral ways to define congressional districts. See examples like this, this, and this. It's clear that a lot of people have gotten annoyed with the effects of gerrymandering and have good ideas to fix them.

Check out those sites--it is amazing how bad today's Congressional districts are, and how many better solutions are out there!

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