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Danger in Debt Ceiling Deal?

Leo Kolivakis's picture




 

Via Pension Pulse.

Before I delve into the debt ceiling deal, I want to apologize to those who misread my last comment on 400 years of tyranny
as "anti-American." When you write your thoughts in a blog, it's easy
to get carried away and even though I have problems with the wars in
Iraq and Afghanistan and the pathological greed on Wall Street, it's not
the fault of regular, hard working Americans, most of whom loathe Wall
Street and corporate greed.

My comment was more to say that the world expects better
from the US. When my grandfather left Greece at the age of 20, moved to Cedar Rapids, Iowa and volunteered to fight alongside American soldiers in
the first World War, he didn't flinch. He was proud of being part of the
US army, fighting for something he believed in. When he died, the US
government kept sending a pension to my grandmother in Crete and she was
extremely grateful. When my uncle left Crete and settled in New Jersey
to become one of the first surgeons to perform laparoscopic surgery at
John F. Kennedy Hospital, he was proud to be American and extremely
loyal to his country. He died last year after battling colon cancer but
in his later years, he was disenchanted and disgusted with US policy and
the lack of leadership which he saw across the political spectrum.

That's my preamble to
the ongoing and raging debate on the US debt ceiling. I consider this
to be a purely political issue, but others will construe it as a make or
break economic issue (it isn't, only serves their political agenda to
paint it that way). Bill Schneider, a professor of public policy at
George Mason University,  wrote an excellent opinion piece for Politico
which reflects my thinking, The danger in the debt ceiling deal:

The danger in the debt limit negotiations is not that the two sides
will not make a deal. It’s that they will. Specifically, that they will
reach the kind of agreement Republicans are demanding — which would cut
more than $1 trillion in government borrowing over the next 10 years.

 

Any
deal of that magnitude would have a devastating effect on the nation’s
economic recovery. And make the deficit situation worse. Economic
activity would slow and government revenues fall even further.

 

Democrats and Republicans are arguing over the correct
balance between spending cuts and tax increases. Republicans insist that
all the savings come from spending cuts. Democrats are willing to
accept some cuts but insist that the deal be “balanced” with new tax
revenues.

 

What they are both missing is that the exact mix doesn’t matter. What
matters is how much money is taken out of the economy at a time when
economic growth is desperately needed. Economic growth is necessary for
any deficit-reduction plan to succeed.

 

Ronald Reagan knew that. Reagan said in his 1985 State of the Union
speech, “The best way to reduce deficits is through economic growth.”
That is because big spending cuts and tax increases are politically
impossible.

 

On the other hand, growth will not be sufficient. The debt problem
has become so large that we can’t grow our way out of it without further
sacrifice. Some spending cuts and tax increases will be necessary. But
growth will have to be a major part of the solution, just as it was in
the late 1990s.

 

Right now, big spending cuts will damage the recovery. So will tax
increases. Bill Clinton understands that point. “I hope they make a
mini-deal,” the former president said in a recent interview at the Aspen
Ideas Festival. “I don’t think you can agree to some mega-deal on their
[Republican] terms.”

 

What makes the most sense, and what Clinton recommended, is a delayed
deal. “What I’d like to see them do is agree on the outlines of a
10-year plan and agree not to start either the revenue hikes or the
spending cuts until we’ve got this recovery underway,” Clinton said in
an interview with ABC News last month.

 

The problem is political. All we need to do right away is get through
the Aug. 2 deadline for raising the debt ceiling. The United States is
the only country in the world where a political decision must be made to
do that.

 

It’s never easy because it’s never a popular thing to do. To the
American people, raising the debt limit defies common sense. If the
government has maxed out on its credit card, it seems foolish to raise
the credit limit.

 

President Barack Obama tried to get around that argument at his news
conference, when he argued that raising the debt limit applies to money
that the government has already spent. “These are bills that Congress
ran up,” Obama said. “The money has been spent. The obligations have
been made… . This is not a situation where Congress is going to say, OK,
we won’t buy this car or we won’t take this vacation. They took the
vacation. They bought the car.”

 

Raising the debt limit is a problem but not exactly a crisis. Jobs are a
crisis. “If we defaulted on the debt once for a few days,” said
Clinton, speaking at a fiscal summit in Washington in May, “it might not
be calamitous.” Later, his spokesman said that Clinton had
“inadvertently misspoken.” But had he?

 

Early this year, Treasury Secretary Timothy Geithner warned that failing
to raise the debt ceiling would have “catastrophic economic
consequences that would last for decades.” That may have been an
exaggeration. No one really knows.

 

But one consequence does seem likely. Obama called attention to it at
his news conference. “If capital markets suddenly decide,” Obama said,
“you know what, the U.S. government doesn’t pay its bills so we’re going
to start pulling our money out, and the U.S. Treasury has to start
raising interest rates in order to attract more money to pay off our
bills, that means higher interest rates for businesses. That means
higher interest rates for consumers.”

 

Not to mention higher interest rates for the government to pay off the national debt.

 

It is important to raise the debt limit to avoid that consequence. But
not by caving in to Republican demands for a mega-deal — which would
have far worse consequences. That’s why Clinton urged Obama not to blink
under Republican pressure. “The White House could blink,” Clinton said
at Aspen. “I hope that won’t happen. I don’t think they should blink.”

 

Clinton revealed his own priority when he told ABC News, “All that
matters is putting the country back to work. We put the country back to
work and prepare for the new century, the rest of this will take care of
itself.”

 

A recovery-choking deficit deal would be the worst possible thing for
the country right now. How can we keep that from happening? The answer
is gridlock. If it prevents bad things from happening, gridlock can be
good.

I agree, gridlock can be good, and President Clinton is right to warn
President Obama not to cave in under Republican pressure. Moreover, I
let a senior pension fund manager know that the "debt ceiling crisis" is
exactly what the big global macro hedge funds and prop desks want
because it creates more uncertainty and volatility. He responded:

What I am really worried about is the likelihood of very pro-cyclical fiscal tightening (i.e. tightening when the economy is weak). The US economy is currently EXTREMELY vulnerable and I can’t imagine a worst possible time to cut spending and try to make a big dent in the deficit. Greece and some other European countries are doing just that, but it is basically a matter of life and death and if they want to stay in the Union, they have no choice. They are, in effect, facing a lenders’ strike. The US, on the other hand, is able to borrow and there are plenty of willing lenders. It is, to boot, extremely solvent.

Sharp fiscal tightening now would constitute a grave self-inflicted wound. It makes no sense, but I understand it is a touchstone issue from a political point of view. Most senior members of Congress and the Administration know this, Republicans and Democrats, but the rank-and-file don’t, and they appear to be in control of the national discourse, amplified through the megaphone of indentured media: whether it’s the Tea Party blogs and Fox on the one hand, or the rabid left-leaning counter-Republican outlets, the whole debate is extremely polarized and demagogical. I don’t see a lot of responsible behavior in Washington, but even less so on the internet and the media.

The debt ceiling and default are probably not key issues for hedge funds either. My strategy as a hedge fund would revolve more around knowing which way the economy is headed, and how hard the Federal government is going to push it up or down. At the end of the day, the big issues will not be addressed until AFTER November 2012. There are plenty of lenders of last resort with deep pockets and the US is not Greece, Ireland, Portugal or, for that matter, the UK or Japan. The play is a lot more on credit spreads and equities, in my opinion. And maybe, to a lesser extent, on the dollar…

I understand that many will dismiss these views as pure "Keynesian dogma,"
but that's only because they follow another religion from the Chicago
School of "Free Market" Economics. I think these people are genuinely
concerned about debt, but their myopic obsession based on a now debunked economic theory is clouding their judgment. The real crisis now isn't the debt ceiling, it's about jobs and lack of leadership on that front. The sooner we get people back to work at good jobs with a good pension, the better off the US and the developed world will be.

 

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Tue, 07/05/2011 - 17:58 | 1427880 Leo Kolivakis
Leo Kolivakis's picture

"Try running your own persoanl finances the way you suggest we run the national finances...you wouldnt last long would you?"

See comment above on this. We do not run gvt finances like personal finances...that's what you all don't get.

Tue, 07/05/2011 - 18:05 | 1427894 akak
akak's picture

Yes, those magic money-trees that grow only on the Potomac and Hull Rivers, within the cloistered confines of our central-banking elite, really make the difference.

Quick, leo!  The unicorn ran THAT way!

Tue, 07/05/2011 - 15:28 | 1427445 Obaminator
Obaminator's picture

Nice Try Leo! But its Unsustainable...its called math! Are you really this naive? really?

For being 'intelligent' you sure seem to not see the long-term damage that running debt does. Its called SYSTEMIC Risk, and when that risk is predicated upon exponential growth (no matter how small), at some point you run into a big brick wall and everything comes to a screeching halt. Your entire premis is IMPOSSIBLE to sustain. Raise the friggin debt ceiling sure...and exactly when, Leo, does the debt become so large that its not possible to pay back at all? At what point does the creation of new money have no impact? Were virtually there right now...we get $0.10 in actual economic growth from each $1 the government borrows.

How about just giving the fucking money to people, rather than banks? Might as well with brilliant ideas and viewpoints such as yours.

Try running your own persoanl finances the way you suggest we run the national finances...you wouldnt last long would you?

Tue, 07/05/2011 - 15:27 | 1427442 Obaminator
Obaminator's picture

Nice Try Leo! But its Unsustainable...its called math! Are you really this naive? really?

For being 'intelligent' you sure seem to not see the long-term damage that running debt does. Its called SYSTEMIC Risk, and when that risk is predicated upon exponential growth (no matter how small), at some point you run into a big brick wall and everything comes to a screeching halt. Your entire premis is IMPOSSIBLE to sustain. Raise the friggin debt ceiling sure...and exactly when, Leo, does the debt become so large that its not possible to pay back at all? At what point does the creation of new money have no impact? Were virtually there right now...we get $0.10 in actual economic growth from each $1 the government borrows.

How about just giving the fucking money to people, rather than banks? Might as well with brilliant ideas and viewpoints such as yours.

Try running your own persoanl finances the way you suggest we run the national finances...you wouldnt last long would you?

Tue, 07/05/2011 - 15:03 | 1427377 Dr. Engali
Dr. Engali's picture

The debunked economic theory is Keynesian. We have not nor have we ever had an economy that worked off of free market principles. If we had we would have let a lot of institutionsdie off so that new ones can take over the mantel. We chose instead to bail out dying institutions and throw new capital at dead ideas. In free markets when recessions hit the incompetent are punished via the death of their poorly run operation. The competent are rewarded by getting their assets on the cheap. Instead we are rewarding the incompetent by bailing out their companies.

 

By they way Keynes also said that durng times of plenty government should pull back spending and bank reserves so that capital is there during the tough times. You keynsians seem to miss that part.

Tue, 07/05/2011 - 13:46 | 1427083 williambanzai7
williambanzai7's picture

I have a confession to make.

I enjoy reading the death matches between Leo, Akak and others. I think it is the same part of my brain that still enjoys old style pro wrestling. In fact I would pay top dollar to attend a match between Akak and Leo.

I want ring side seats with some folding tables and chairs nearby. Careful what you say Leo.

I would like Geithner and Bernanke to be ring announcers as well.

What an event it would be. Where's my chair...

Tue, 07/05/2011 - 14:04 | 1427111 akak
akak's picture

LOL WB!

It would, however, be an unfair match, Leo being a cripple and all.

Oh, and then there are his physical infirmities as well ....

 

PS: I eagerly await your graphical representation of the match.

Tue, 07/05/2011 - 14:06 | 1427154 williambanzai7
williambanzai7's picture

Careful now, there are "disabled" martial artists who are very capable. Their disabilies become weapons of distraction. Check out the Thai movie Chocolate.

Tue, 07/05/2011 - 14:11 | 1427185 akak
akak's picture

If disabilities --- not just physical, but intellectual and spiritual as well --- can be weapons, then Leo is possibly the most dangerous man in this forum.

Tue, 07/05/2011 - 14:31 | 1427268 williambanzai7
williambanzai7's picture

Saturday Nights main event ;-)

Tue, 07/05/2011 - 15:17 | 1427411 Leo Kolivakis
Leo Kolivakis's picture

Tue, 07/05/2011 - 16:27 | 1427618 akak
akak's picture

More like the following --- and I'll let you guess who is the stand-in for the Black Knight here:

http://www.youtube.com/watch?v=gXY9TuuwyL8&feature=related

Tue, 07/05/2011 - 13:15 | 1426943 ljag
ljag's picture

Keating;

I find it hard to believe that we have 'a half trillion in gold' lying around that we can sell if push comes to shove. Ur kidding, right? We see on a daily basis the effort that goes into manipulating our laws to appease TPTB yet we are supposed to believe that all that gold just lying there is going to be 'off limits'? Surely, you jest!

Tue, 07/05/2011 - 13:14 | 1426920 cranky-old-geezer
cranky-old-geezer's picture

Remember what Leo's motivations are.  He's a public pension whore, saying whatever he has to say to look good to that industry.

He sees Geithner raiding federal pensions for govt operating funds while the debt ceiling debate goes on.  He knows what it means for public pensions in general.  They're all vulnerable.  If Geithner can do it, so can eveyone else.  It sets a precedent that drives Leo crazy.  

And yes, they'll all be raided as govts sink deeper in financial trouble.

Tue, 07/05/2011 - 14:00 | 1427132 ZackAttack
ZackAttack's picture

And you know perfectly well TPTB have to be salivating over those 401K dollars, some of the last real wealth in the system.

Like the pensioners, we'll all find that our concept of 'retirement fund wealth' is nothing but an accounting entry error.

Tue, 07/05/2011 - 14:37 | 1427285 cranky-old-geezer
cranky-old-geezer's picture

And you know perfectly well TPTB have to be salivating over those 401K dollars, some of the last real wealth in the system.

It's why 401Ks were created. So they could be raided.

Tue, 07/05/2011 - 13:17 | 1426947 Leo Kolivakis
Leo Kolivakis's picture

"He's a public pension whore"

LOL! Is that why they all blacklisted me??? You're completely clueless!! A more fitting description is that I'm a pension prick that calls it like he sees it.

Tue, 07/05/2011 - 13:31 | 1427005 cranky-old-geezer
cranky-old-geezer's picture

That was a bit garbled Leo, didn't quite understand it.  Try easing that pension fund manager's dick out before speaking.

Tue, 07/05/2011 - 13:34 | 1427024 akak
akak's picture

It would help if he took Bernanke's and Krugman's cocks out of his ass as well --- all his moans of pleasure tend to garble his already garbled message that much further.

Tue, 07/05/2011 - 14:07 | 1427157 Leo Kolivakis
Leo Kolivakis's picture

Why don't you and the cranky old geezer get a room and fondle each other.

Tue, 07/05/2011 - 14:13 | 1427192 akak
akak's picture

Puerile --- but I have come to expect nothing less from you, little leo.

Tue, 07/05/2011 - 12:49 | 1426803 jmc8888
jmc8888's picture

Glass-Steagall

The real issue is the following.

If the executive branch takes the powers of the purse AND the war powers into the fold, are we then in a dictatorship?

I'd say yes. Well we have Libya for the 2nd part.

From what I keep hearing...Obama will use the 14th ammendment to keep paying off our fraudulent debt to the banksters if congress doesn't pass the debt limit.

(of course if you Glass-Steagall you don't need to cut anything needed, because you wouldn't be anywhere close to the debt limit, and thus.....there would be no debate on 'entitlements'....except the dogma the idiots feel that it 'needs to be cut'...because they are fascist dumbfucks)

Tue, 07/05/2011 - 12:50 | 1426802 Madcow
Madcow's picture

fiat money REQUIRES constant and never-ending INCREASES is the debt. All this talk of "austerity" and "balance" is nothing but deceitful rhetoric. 

Debt is was Money. 

Tue, 07/05/2011 - 12:49 | 1426789 williambanzai7
williambanzai7's picture

Whatever merits there could conceivably be with respect to the growth argument, they are totally eviscerated by the complete vacuum of responsible and visionary leadership. All we hear is bull shit sound bites about American resilience in adversity, by the grace of God. I hear nothing intelligent about America's revised "business plan."

Just because there are suckers willing to lend on this basis does not mean we should borrow.

Are we to be a national subbprime borrower?

Our leaders have answered this question and for this reason need to be shoveled into a political honey bucket ASAP.

And big tits won't change anything (try as they may).

Tue, 07/05/2011 - 12:37 | 1426759 NotApplicable
NotApplicable's picture

"I understand that many will dismiss these views as pure "Keynesian dogma," but that's only because they follow another religion from the Chicago School of "Free Market" Economics."

Nice of you to polarize all of your detractors into a false dichotomy. Which is funny, given that the Chicago school is just another flavor of Keynesian stimulus with a targeted growth rate. How come you can't address your real critics, who hold coherent ideas about business cycle theory?

I used to think you were just another conventional wisdom clown. Now I see that you're really just here to stir up trouble (as evidenced in your comments above). Otherwise, I have no idea why you still post here, as your "counterbalancing the BS" argument is pure BS itself.

Personally, I think you're just an attention whore who couldn't attract any attention at all without having someone else's blog to promote you. I quit reading you months ago, and I only check-in to see how few people even bother to reply to your idiocy anymore (always good for a laugh). Looks like you've had to step up your game of pushing buttons, as replies to your posts have been lacking lately.

Tue, 07/05/2011 - 14:45 | 1427317 SystemsGuy
SystemsGuy's picture

Chicago school is Keynesian? Milton Friedman established the Chicago School, and he was very much a student of Mises economically (as well as firmly in the orbit of Ayn Rand, philosophically). Chicago School is largely built upon Monetarist economics, not Keynesian. For that matter - most of what's called Keynesian economics today by the Libertarian school of thought were views that he himself didn't espouse: He believed that government spending policy should be loosened during times of financial crisis, but he also believed that it should be tightened during times of financial stability in order to build up surpluses - a very sensible view in my opinion; he also believed that during times of crisis the reason for that loosened policy was to stimulate spending to increase the aggregate velocity of money.

Keynesian policies are hated by the wealthy because of the obverse of that - taxes should be raised during times of prosperity, primarily upon those benefiting most from that prosperity, because these people generally were most able to survive recessions with minimal disruption - they had a much larger cushion, even when taxed, than most people do. Not surprisingly, Keynes became a pariah because of that to anyone whose primary income was derivatives based. 

Tue, 07/05/2011 - 13:00 | 1426841 akak
akak's picture

I used to think you were just another conventional wisdom clown. Now I see that you're really just here to stir up trouble (as evidenced in your comments above). Otherwise, I have no idea why you still post here, as your "counterbalancing the BS" argument is pure BS itself.

Personally, I think you're just an attention whore who couldn't attract any attention at all without having someone else's blog to promote you. I quit reading you months ago, and I only check-in to see how few people even bother to reply to your idiocy anymore (always good for a laugh). Looks like you've had to step up your game of pushing buttons, as replies to your posts have been lacking lately.

All excellent observations, NA.

I am still trying to figure out why Leo's bullshit and whoremongering for the financial and political power elite is even allowed onto this site in the first place ---- has he somehow blackmailed Tyler into allowing his narcissistic and rabidly statist, Keynesian rants to be published here?  Or is he merely the token pro-Establishment shill, given a podium here to act as a lightning rod for our collective (and justified) outrage and anger?

In either case, I find Leo one of the most contemptible, vile, unprincipled, amoral, repulsively duplicitous slimeballs I have ever encountered.  His abject cowardice and complicity with the parasites and sociopaths who continue to grind our wealth, our living standards, and our freedoms into the dust is enough for me to unabashedly wish for his speedy death.  I only hope it is an agonizing and horribly painful one --- he and his ilk deserve no less.

Tue, 07/05/2011 - 13:14 | 1426936 Leo Kolivakis
Leo Kolivakis's picture

akak,

Tell your shrink to increase the dosage. Mental illness is a serious disease and should not be taken lightly. Find the right dosage and get back onto those Yahoo boards where you belong.

Tue, 07/05/2011 - 13:23 | 1426971 akak
akak's picture

Keynesianism: the greatest mental disease of them all

Schizophrenics can't hold a candle to you Keynesians' wholesale denial of reality.

Tue, 07/05/2011 - 13:14 | 1426931 Leo Kolivakis
Leo Kolivakis's picture

akak,

Tell your shrink to increase the dosage. Mental illness is a serious disease and should not be taken lightly. Find the right dosage and get back onto those Yahoo boards where you belong.

Tue, 07/05/2011 - 13:21 | 1426962 akak
akak's picture

It is illuminating, dear Leo, that you have NEVER tried to counter any of my well-justified accusations against you --- because you know that you cannot.

And once again, because you REFUSE to ever acknowledge it, the fact that so many of your vile, craven, corrupt authority-worshipping comments on ZeroHedge have been junked into oblivion by literally dozens of other outraged ZH members condemns you, and speaks for itself.

Tue, 07/05/2011 - 14:03 | 1427144 Leo Kolivakis
Leo Kolivakis's picture

"ZeroHedge have been junked into oblivion by literally dozens of other outraged ZH members condemns you, and speaks for itself."

Boohoo! Do you really think I care? akak, you will never break me..EVER!! I eat turds like you for breakfast.

Tue, 07/05/2011 - 16:22 | 1427570 akak
akak's picture

Of course you don't care, little leo --- because you are a ragingly amoral narcissist and a shameless and soulless sociopath.

Tue, 07/05/2011 - 12:52 | 1426794 Leo Kolivakis
Leo Kolivakis's picture

You're so full of it and the reality is that I couldn't care less who reads me or what you and other morons here think of me. My blog is followed by the top institutions in the world. Unlike ZH, my stats are public and you can see who is following me. Nothing to hide and you'll keep reading me, I guarantee it! I threaten you, which is why you took the time to try to discredit me. Better luck next time...and have the guts to reveal your real name...not here but at least to me via email...but you're a coward so I'm not expecting you to fess up.

Tue, 07/05/2011 - 13:14 | 1426937 NotApplicable
NotApplicable's picture

No, I'm just mad because everything is broken, and it's people like you that insist we break it better.

I have no doubt that top institutions follow you, as someone has to lead those lemmings off the cliff.

And no, I won't keep reading you. I didn't even read this article (just skimmed it, because, like all of them, they are moot), and wouldn't have responded except that I saw your smear attack on Austrian Economics without mentioning it by name, instead herding everyone into Freidman's village.

As for the attack about my "real name," well shit, I don't even have a fake name. This isn't due to my hiding, but rather I don't know of a single name that fits what I am, because all I know of myself, is that I'm an awareness. If I attempt to label this at all, it ends up being a misnomer, as my awareness changes over time. If I label a physical attribute, well that is incomplete, and hardly worth the effort, as all it can do is to to distract and mislead.

But hey, you've already called me a coward, so what's it matter what I do now? Like, not send you an email with my "real name" for instance (sorry, my server's been down a couple of months). Which I consider to be a threat. Why? Other than to attempt to silence me, my "real name" serves absolutely no purpose. What you can know for sure is that I post under this label, and this one only. So what I'm saying is that I'm a unique awareness. I am not anonymous, as you can see me right here, right now.

Speaking of here and now, care to retract your insult against Austrian Economics and its supporters? Or will you continue to falsely associate it with Friedman?

Tue, 07/05/2011 - 12:30 | 1426742 Ace Ventura
Ace Ventura's picture

It's been said many times within this comment trail, but it merits repetition:

GOVERNMENT HAS NO MONEY OF ITS OWN.

Please, for the sake of sanity, let that sink in as long as needed until you see the light. I don't care if its GS-scale jobs, or gubment-contractor jobs (referred to at times as 'civilian' jobs). If the paycheck comes from government, then by default the money comes from somewhere/someone else.

One more time, for extra credit:

GOVERNMENT HAS NO MONEY OF ITS OWN.

Aaaaallllllllrrriiiightyyy  theennnnn !!!

 

Tue, 07/05/2011 - 13:31 | 1427011 SystemsGuy
SystemsGuy's picture

Um ... nope.

The government creates money (or at least did until it outsourced that job to the Federal Reserve). When you get a paycheck from your employer, that paycheck is denominated in US reserve notes. At one time, the money creation needed to be tied into some form of physical assets - typically gold, but to a certain extent government policies could determine the price of gold as denominated in FRNs. When the US went off the gold standard internally in the 1910s, it was because the country was growing faster than the supply of gold, and the decision to do so may have ultimately led to the 1930s depression.

The decision to go with the Federal Reserve, the policies of the Bretton Woods at the end of WWII, and Nixon going off the gold standard internationally in 1971 (in part because of the French demand for payment exclusively in gold) all meant that more and more of the money that was created was done so in an interest bearing regime, and for the most part, American taxes are in fact not only not paying down the debt, they are not even paying down the interest on that debt (we did do that for about three years in 1996-1999, then Bush came into power and the US went on a spending orgy).

Wages contribute a portion to government revenues, but realistically speaking, most wages earners are not creating money (and indeed would be imprisoned for doing so). Some create value by creating goods, though I'd argue that this is actually a vanishingly small percentage of the population. Far more provide services, all of which facilitate spending. The taxes on that spending also provide revenues, but each of these are essentially transaction taxes; a percentage of value removed from the transaction in order to provide funds for those things that individually (or even at the corporate level) people are not equally capable of providing - education, development of infrastructure, defense, research & development, and so forth.

Government policy dictates which particular transactions are taxed, largely to encourage or discourage certain behaviors. It's interest is in seeing people spending, because the velocity of money determines to a great extent how much money gets returned to its coffers upon creation. However, it also taxes by allowing a certain bleed in the system, inflation, to accommodate additional growth. Inflate too little, and you reduce the velocity of money as it pools and accumulates (savings), in effect going out of circulation. Inflate too much and you create imbalances where wage growth is either forced to go up accordingly or standards of living decline, again, decelerating the velocity of money. Deflation both reduces the velocity of money, which both reduces the money available in the system and increases the relative value of debts.

Sorry for the screed, but in point of fact, at this stage money is created by the central bankers, usually by selling off promissory notes paid with interest to large investors or sovereign funds, is borrowed (with interest) by the US Government, and then distributed by the US to other banks, which in turn lend it out in order to finance businesses. When you get paid, you are in effect borrowing that money for a while, but it's not really "yours" - it will get paid back into the system at some point when you purchase some good or service. Where things get twitchy is when other investors no longer wish to purchase your bonds. Right now there's a holding pattern - velocity is being created artificially (and probably somewhat illegally) by FR banks and the US government selling to one another repeatedly in very short windows, but it's not sustainable for more than a few more months.

However, to reiterate the point - the taxpayers are at best paying on the interest to the debt, but there's a very real upper limit beyond which the government cannot tax without actually reducing revenue. When it comes down to it, most of the actually "wealth" generators for governments are resources - oil, coal, water, grain, metals, etc. The taxpayers make up only a small piece of a much larger, more complex puzzle.

Tue, 07/05/2011 - 12:28 | 1426735 Neutron_Boy
Neutron_Boy's picture

Basically, the situation is like "Bad Lieutenant."  Uncle Sam is played by Harvey Keitel.  If you have seen the movie, you know how it ends.  If you haven't seen the movie, watch it  with this analogy in mind.  Perhaps, Keitel represents an amalgamation of Uncle Sam, the Bernank, and the Squid all rolled into one.  Now that is funny, or not.

Tue, 07/05/2011 - 12:28 | 1426731 goldnguns
goldnguns's picture

So Leo, if I get this right, we should be spending MORE in stimulus in order to create a $40,000 a year job which actually cost $280,000 to "produce"?  How is that good for the economy.  Lessee, even if the guy doesn't cheat on his taxes he will pay  umm mebbe $5-6000 per year so in 47 years we will be cash flow positive!!!!

Tue, 07/05/2011 - 12:21 | 1426708 miker
miker's picture

Clinton has a lot to loose if the economy worsens.  His legacy.  Basically, he's the primary one responsible for listening to the banksters and helping create the financial/debt crisis we face.  More and more people are waking up to this fact. 

As far as creating jobs......well the jobs that we had were all a mirage.......created by an economy gorging on debt.  They ain't coming back in the private sector.  The public is finally starting to get that which accounts for why a majority are now in favor of cutting back on debt seriously...NOW. 

Generally the public is pretty stupid on issues that are new/early, but given enough time, the mainstream usually get's it right.  And thanks to blogs like this, people are actually getting a well rounded picture of what has happened.  Otherwise, more would be in the dark.

Cut the spending, reform the tax code for fairness and equity.  Starting NOW.

Tue, 07/05/2011 - 12:21 | 1426704 cheapy
cheapy's picture

The PROBLEMs are the TRADE DEFICIT and in addition, the BUDGET DEFICIT.

 

We wouldn't HAVE the budget deficit if we had balanced trade.  Americans would be WORKING (paying taxes and producing) to produce goods and services to match consumption and export demand instead of sitting at home wishing and waiting for chump change to be printed by the Fed and doled out by Uncle Sam.

 

The trade deficit is about $45 or $50 billion a month.  Divide that by the number of unemployed and you get about $2200 to $2500 per month EACH.   Fix the trade balance and you fix the unemployment problem as well as a good chunk of the revenue problem Uncle sam has.  See Warren Buffet's 2002 "import certificate" article for a way to do it.  And no, you can't exempt oil, LOL, but you need to exempt money, ie gold and silver from it, and phase it in over a 24 month timeframe in order for it to be both WTO legal and work, IMO.

 

My major point is all these decades, and we STILL are doing NOTHING to solve the actual problem.

Tue, 07/05/2011 - 12:12 | 1426687 keating
keating's picture

Leo, I believe you are wrong. First, the govenment has assets to sell such as nearly a half trillion dollars of gold. Second, many countries have brought their budget into control by making small and reasonable reductions in their budgets.  I am sure a sensible budget reduction would bring GOP agreement. Third, the problem at the end of the day is political. If a message sent last November could be any clearer, it is the will of the people to limit govt spending. Obama and the top dems refuse to budge, ever, because of the extreme ideological nature of their beliefs. Fourth, in 1946 federal spending was cut in half. The economy responded by booming. If unemployment benefits and federal employee rolls are reduced, the same will happen, enormous job growth.

Tue, 07/05/2011 - 12:33 | 1426741 SystemsGuy
SystemsGuy's picture

Keating,

First, the gold in question is most likely collateralized and hence encumbered. A similar case can be made for most other natural assets that the US has - the cost involved in selling them likely exceeds any benefit in doing so.

Second, the current GOP response, if the news from the Beltway is any indication, is that the budget should be slashed by $1 trillion dollars and most social programs should be eliminated while the Defense budget should be increased and existing taxes on the top 1% of Corporate America should be decreased rather than increased, while no new taxes are put on the table. This is not in fact a small and reasonable reduction in the budget.

Third, 2010 also marked the first year in which we had effectively "corporate" free speech at the polls, where, surprise surprise, groups of banks, energy companies, pharmaceuticals and the like were able to outspend teachers and unions by a factor of 10 to 1. That the same groups have also been active "boosters" of the Tea Party and its related ilk makes me really question the true strength of that "mandate".

Fourth, in 1946, the US was no longer fighting a world war for the first time in five years, millions of servicemen returned to the US with cash in hand (paid for by the US government), the opportunity to get college degrees, and four years of OTJ training. The US was the "last man" standing, which meant that much of the resulting work was actually helping Europe and Japan to rebuild their economies. As such, it was an anomalous outlier that's not indicative of the overall trends. If you take a broader look at history, cutting government has usually resulted in reduced growth or recessions most of the time.

Tue, 07/05/2011 - 12:46 | 1426787 forexskin
forexskin's picture

If you take a broader look at history, cutting government has usually resulted in reduced growth or recessions most of the time.

citations?

Tue, 07/05/2011 - 12:11 | 1426680 FlyPaper
FlyPaper's picture

Sigh.  

The US economy has been propped up by debt spending (excess) for probably 15 years.  So the the author's point is that the US economy will implode if the guberment slows down spending.  

But on the other hand, if we don't slow spending, we simply allow this government and the Fed to monetize the debt and steal the wealth via inflation.   And further, how will the US economy fare when oil is $5-7 per gallon due to this inflation?

The risk further increases the longer the US continues to borrow and run a government where 44 cents of every dollar spent is borrowed.  This will collapse the system at some point, will it not?

Pretend and extend doesn't fix anything.

Tue, 07/05/2011 - 13:34 | 1427021 pupton
pupton's picture

Not that I disagree, but isn't oil's price measured in barrels?  You probably meant gasoline prices. 

Anyway, you're right on.  Leo is advocating continued feeding of the debt ponzi.  Others are not.  Pick a side and bet accordingly.  Personally I beleive all ponzi's destroy themselves, as this one will.  My bet is on silver, not paper, to preserve my wealth. 

I wonder if Mr. Leo is going to be buying some of that wonderful new debt himself?

Tue, 07/05/2011 - 12:10 | 1426676 Slap That Taco
Slap That Taco's picture

Leo:

  As far as I'm concerned, you beat the pants off Graham Summers (sp?)

  At least you don't require our emails to offer your 100% absolutely free advice!

  I also don't believe you are a polar opposite to much of what is posted here.

  Unless you are Mr. Altucher, the message is clear:

  WE ARE SCREWED.

Tue, 07/05/2011 - 12:08 | 1426673 SystemsGuy
SystemsGuy's picture

Jobs are jobs, regardless of whether they are private or public sector. What does a job do - it provides income that will get translated into spending, which will stimulate demand for products produced by the private sector. It provides at least a modicum of stability at a time when stability in the job market is rare, meaning that people become more willing to invest in higher end goods and services. Moreover, most of those "public" wages are not in fact paid to GS employees, but are rather paid to contractors working for companies that are themselves private - perhaps one job in five that might be considered "civil service" is actually being performed by someone in the GS pay system at the Federal level, and most states are now in a position where they've trimmed their state civil service forces to an absolute minimum, because they don't have the money to pay them.

My objection to current policies is not that they are either socialist or Keynesian (an objective history of either would prove that they are far from either), it's that too much of the "stimulus" has gone to the very financial agencies that wrecked the system in the first place, in essence removing the "moral hazard" from what should be a hazardous field - investing. Investment is a form of gambling - you are gambling that by allocating money to a particular company producing service x, property y or widget z that there will be a sufficient demand in the future for x, y or z to not only recoup your investment but also make a profit. Some gambles will succeed wildly, some will fail spectacularly, most will probably do okay if you do your homework. But there are no guarantees, nor should there be - if you invest in swampland in Florida, don't be surprised when you don't make a profit.

This is why I get so pissed at Libertarians bemoaning all the moral hazard of the government "taking over the market" - when functioning properly (as a regulator of market activity) the government's primary purpose is to keep the level of moral hazard in the investment community sufficiently level so that should an investor make a poorly considered risky decision and it fails to pay off, then the investor assumes the loss. It's only when the government becomes so riddled with corruption due to large businesses controlling the regulatory and policy processes that this changes, and if anything, it only moves the US towards a hypercapitalistic society.

One final note - the stimulus projects, when they could get past partisan bickering, pork larding and states reappropriating funds for their own ends - for the most part worked ... they put people to work, they improved infrastructure, and they made it possible for people who hadn't been able to find work to get by until they could in the private sector. The cost was about $250 billion dollars, and by all analyses I've seen, that $250 billion did in fact make its way back into the economy. The $1.3 trillion spent outside of this has been going largely to the recapitalization of the banks. Of that, perhaps $50 billion has made its way back into the economy. This is where the system is broken. Recapitalizing the banks didn't work in 1931, it delayed the fallout of the the 1997 LTCM scandal until 2000, and it's likely that the mortgage loosening that Bush engaged in around 2003-2004 was almost certainly a "second round" injection into the banking system of funding through a back channel because the first round of capitalization didn't work. Bank capitalization is not Keynesian - he actually argued vociferously against it in the 1930s as a drain on the state's ability to react to financial crises, but like so much of the drivel that passes for knowledge among the "Tea Party" sect this point is never in fact brought up.

Tue, 07/05/2011 - 12:43 | 1426774 forexskin
forexskin's picture

jobs are jobs, regardless of whether they are private or public sector.

utter statist bullshit - control the pursestrings, own the power

One final note - the stimulus projects, when they could get past partisan bickering, pork larding and states reappropriating funds for their own ends - for the most part worked ... they put people to work, they improved infrastructure, and they made it possible for people who hadn't been able to find work to get by until they could in the private sector

selective reading of history. since debt depressions have been dealt with this way, they have tended to last much longer, with centrally planned assertion of authority consequently becoming entrenched and inevitable.

back to school, troll

Tue, 07/05/2011 - 11:57 | 1426642 MrBoompi
MrBoompi's picture

About "being unAmerican"....

Many of us are accused of being unamerican because we are constantly criticizing our government's lack of responsibility in dealing with the banking sector, the effects of lobbying on democracy, and putting the interests of the wealthy over jobs and benefits for the rest of us. We are told "If you don't like it here move", and other similar epithets.

Sorry, but Americans might be a lot of things but we aren't quitters. We still believe in the ideals and values that our founding fathers envisioned for us. We aren't against the government as much as we are against the way it has been usurped by the financial elite.

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