Wednesday, June 29, 2011

Does the people in Congress know the trouble they are in?

Seriously, when I see people make comments like this, it makes me wonder if they understood the gravity of the situation facing the US now. I quote from Bachmann:
It isn't true that the government would default on its debt. The treasury secretary can pay the interest on the debt first and from there we just need to prioritize our spending

This is seriously a very simplistic way of looking at the problem. For anyone who has did contract management of a certain amount, you will know that payment is usually based on certain milestones, and it may cross one or more years. The figures may change depending on the type of milestone payment and your cash flow will differ from year to year. For example, a $2 million contract may result in someone paying $0.5 million for the first year, and $1.5million the next. A typical contract usually only pays upon completion of service.

Using the above example, if the US government paid $0.5 million last year for this contract, they are obligated to pay $1.5 million this year. Using Bachmann's example, that would mean the US government could only afford to pay $0.5 million this year, which means that the US government would have defaulted on its obligations. Default on its obligations may involve damages depending on how the contract is worded.

The ratings agency should downgrade the US government's credit ratings right now to force them to act.

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