TwoTongues wrote:For the speculation on sovereign debt part, don't large volume sell-offs have the potential to cause default i.e. inability to pay out? What I mean is, preventing large volume, short-turn around moves (speculation) in the sovereign debt market would help prevent economic catastrophe in a similar way to the "circuit breaker" on the US stock market - can't drop too far too fast to destroy anything big.
The way I understand it, large volume sell-offs don't affect the payout but affect the ability of the country to refinance the debt. Very simply put, the payout is for the value of the bond and is between whoever issued the debt and whoever holds the debt. A large volume sell-off would be good for the debt issuer (so long as they have the cash) because they could purchase back their outstanding debt for less than face value of the bond based on the market's belief that the paper isn't worth the face value amount.
Most countries don't have the cash reserves to pay the outstanding debt, or don't want to, so they pay off the old debt holders by the funds they get from selling new bonds. Where they get hit is on A) the interest rate they pay on the new bonds and B) if anyone will actually buy the bonds. If the market thinks Greek bonds are at a high likelihood of default based on their debt load and spending patterns, no one will buy Greek bonds unless the interest rate compensates them for the risk. That makes it more expensive to borrow because instead of paying 5% interest you now have to pay 10%. If the risk level is too high then no matter how high an interest rate you give, no one will purchase the debt. That's what would cause the catastrophe that you alluded to.
Also, what are the odds of the government of a Western nation defaulting on its bonds? (that's a serious question, I don't know) I would assume very very very low, even when it's a serious economic downturn. If that's true, then it's really just a money game, as no one expects a Western government to default for real.
BTW, the ignorance of Fred Thompson's statement in your signature is mindboggling.
I don't think anyone knows. Pre-Euro it wouldn't matter much if Greece/Italy/Portugal defaulted on their bonds because it would be contained. The shared currency spreads the damage much wider if someone defaults. Greece knows that they will get bailed out because they have an ability to cause serious damage to the Euro by defaulting. They are also much less likely to institute the necessary spending cuts because they know they'll get bailed out by Euro holding countries. Those countries have debt of their own and if the Euro gets beaten down, it will be harder to pay it off.
Fred Thompson's quote is humorous in that he's both right and wrong. Payroll tax cuts benefit small businesses the most, but its big business that drives the economy. A cut in the payroll tax won't lead to any new hiring because demand isn't there. Even if demand is there, businesses aren't going to hire because they can see the higher tax rates that are coming down the pipeline. Small government, and lower tax rates, would benefit everyone but it's unlikely to happen. At least he isn't feeding people to pigs though