Inflation is just one of the risks when you buy fixed rate bonds of any sort. If you don't like that risk there are other investments, be they stocks, commodities, or inflation indexed treasuries. Asking why inflation doesn't amount to a default is like asking why people would play a game of baseball when one side always loses. It's just part of the ordinary upfront risk everyone knows about and if you don't like it there are other things you can do. Losing is not the same as tearing up the bases and going home to sulk in the middle of the fifth inning.
Just let Ron Paul write the whole goddamned thing and have it mailed out to the states and the President. Of course Congress working together would fuck it up. They can't do anything together without fucking us over anymore.
And therein lies the problem. No one on the Hill is accountable for anything, but they want to spend your money.
We are not going to default on our debt payments. The US pulls in enough money per month to more then meet our monthly debt payment obligations. We also pull in enough money to pay Social Security, Medicare/cade, and the Federal payroll (civilian and military). Our problem is all the other shit Congress and the President wants to spend money on. Like the Cowboy Poetry Festival in Harry Reid's state. The only way we would default would be the Obama administration purposely not making debt payments. Which I wouldn't pout past the bastard if he thought he could get away with it. The rating agencies are screaming at us about downgrading our status from Aaa to something lesser not because of the debt ceiling. They are screaming about our out of control spending and debt obligations current and future. If we raised the ceiling but actually cut spending they would be happy. If we cut the ceiling and cut spending they would be happy. If we left the ceiling where it is and cut spending they would be happy. Does anyone not notice what it would take to keep the rating agencies happy and not downgrading the United States to junk?
THIS! A million, zillion times this. Every single fucking thing like this needs to go. The endowment of the arts needs to go. Buying art for federal buildings needs to go. Any and every bit of spending that is unnecessary needs to go. Foreign Aid needs to be less until we can afford it. THey need to stop crying and fucking DO IT.
Can you spot the debt downgrade? Japan's debt was downgraded within the past 15 years in economic circumstances very similar to those prevailing in the U.S. right now. Keep in mind that Japan has a debt/GDP ratio more than twice that of the U.S. When you give up, follow the link to find out when Japan's debt was downgraded. This is by far and away the most relevant empirical example of what's likely to happen if U.S. debt is downgraded. The theory is pretty clear cut as well; ratings agency ratings are relevant to the extent that investors have limited information about the creditworthiness of the entity issuing the debt. Every major investor in the world, however, has the exact same information about the U.S. and Japan's creditworthiness that the ratings agencies have, and the major investment banks are better suited to make use of that information than the credit ratings agencies are. You can bet that Goldman Sachs has better projections on when the Fed will start raising short term interest rates than S&P or Moody's does, and the ten year treasury rate mostly reflects ten years of projections on short term rates, compounded, with a minor risk adjustment. Even a short term political crisis about the debt ceiling can't change that. No one is even close yet to thinking that the U.S. won't pay back its debt in the long term. With respect to G8 level government bonds, ratings agency ratings add no information for the typical smart investor and to the extent that they cause panic in dumb investors they merely present profitable arbitrage opportunities to smart investors. Someone cynical enough might even say that that's the whole point of a threatened downgrade: panic the dummies and clean up when their short contracts on treasuries go belly up. Where a downgrade might actually matter is with respect to bond issues other than federal treasury issues that are tied to the government's credit rating. State and municipal credit ratings are often tied to federal credit ratings. Even though those state and local level ratings aren't particularly reliable investors are much more likely to pay attention to those ratings than to federal credit ratings because they have much less information of their own about state and local finances. The mistaken belief that bad information is better than no information--held mostly because relying on bad information from a third party provides you a scapegoat when things go wrong--is likely to drive state and municipal rates higher, at least in the short term.
You're missing a lot of important stuff there, but whatever, I'll be eager to see the fuel efficiency of libertarian ideals in Abrams tanks.