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Danger in Debt Ceiling Deal?
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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The QE went down the shadow banking shithole, never to be recovered. They gave it a shot, against the spoken will of the people (see statistics on citizen input to their representatives in both Houses). If the funds had gone to public works or some other project to benefit those without jobs we would be following the path of Japan. Side note: We do have some nice stuff remaining from the WPA, so all was not lost in a similar circumstance. But this time it is different in the sense that the problem is not a typical business downturn.
Due to the depth and breadth of the banking insolvency there was/is no way to prevent collapse of the systems, both in the U. S. and in Europe, et al.
Game over. Only the fires and death to come are on the table, but all will be rebuilt. In the long run there will be no lessons learned nor substantive changes made unless things regress to an agrarian age.
Not to worry, Rocky --- as long as pension fund managers can get together over lunch and mentally masturbate each other with all the new wealth and power that governments can usurp from the markets and from individuals in order to continue propping up a failing Ponzi pyramid consisting of a house of cards of unpayable governmental entitlement promises built atop the quicksand of a dying fiat currency system, being shaken by the death throes of an unsustainable worldwide military empire, while also being buffeted by winds filled with the stench of corruption and sociopathy blowing from the direction of Wall Street and the world's central banking cartel, all will be well in the world (of Leo).
Debt Ceiling deal; agreed to as soon as the market needs another pump job.
The focus should have been on jobs from day 1. If congress feels it needs to make spending
cuts now, they should cut wasteful spending and use money to create good jobs, not McJobs
that they are creating now.
I love the idea of more and better jobs...but, doing what, exactly? What can we produce that can be competitive in the US market, let alone the global market? Sure, we could emphasize quality, but who's gonna shell out the extra geetus for "Made in USA"? How does one level the playing field? Would OSHA, EPA and the rest of the bowl of alphabet soup even let you attempt to compete?
Not pickin' at you, zorba, just wishin' I had workable answers...the way things are now, I don't believe that anything short of a collapse and rebuild can help.
www.southernnationalcongress.org
The government cannot create jobs. The government can only take away private jobs and replace them with government jobs, just like how taxing works.
If the current government went Keynesian-mad (not Klepto-Keynesian as we have seen these last few years), they could put millions to work building bridges and it would certainly help with infrastructure.
But the problem with the economy is not the infrastructure, nor is it unemployment, in my humble opinion. The problem is systemic. We are a nation of children who want it all now, for us, and fuck everyone else. The banksters suck, but in reality, they are us and we are them. It doesn't help that the TV teaches us to worship the rich, and the politicians teach us that being crooked and dualistic is the best way to acheive power. They too, are us and we are them. I won't even get into our other great duality: our various other escapism addictions (prozac, alcoholism, partisan politics, cultism, or our various dogmas).
In short, the whole thing is broken, and we neither have the tools nor the desire to fix it. Instead we seem intent on destroying it and ourselves in the process. Hopefully the strongman who gets to pick up the pieces will have it in his heart to right the ship.
Otherwise, welcome to the new dark ages.
It doesn't matter at this point, and it wouldn't have mattered 3 years ago. We're witnessing the death throes of a system that has been broken for decades. There isn't a thing Congress can do about it.
+1
A flat tax with absolutely no loopholes on all sources of income would solve a lot of the revenue problem. It is hard for anyone to justify or rationalize why multinationals pay no tax or get "credits" like GE. For individuals, it is also hard to rationalize any "shelters" for multi-million dollar earners.
On spending, entitlements are the key and should be means tested and age eligibility raised. Then there's defense which could be cut by 1/3, but hardly likely since the US military is the enforcement arm of the banking cartel.
In the end, any Keynesian pumping will only decimate the middle class even further through debasement of the dollar, and the inflation that will ensue.
The only solution for America is the big reset button, but it will take the 2nd American Revolution against the new tyranny to accomplish it.
The ony deals the Democrats and Republicans make is to screw the middle class and let the rich engorge themselves.
Stuck in Zero, you're absolutely right, both parties pander to the bankers on Wall Street and Corporate America, effectively betraying the people that vote them into office. Partisan politics is the cancer that has destroyed the American Dream and will destroy every country in the so-called "civilized" world.
Hey, you almost got it for once!
Remove the word partisan (that's just the divide and conquer phrase), and your post is absolutely right.
Politics is evil. Partisan politics is just it's natural form.
so you agree that the appearance of partisan politics is the problem, but that the solution is to continue to postpone some kind of reckoning by kicking the can again?
that kind of self contradiction brings to mind:
Upton Sinclair-
“It is difficult to get a man to understand something when his job depends on not understanding it.”
reset and let the corrupt take the hit, or continue and let all of us rot slowly.
It's not really partisan politics if they both reach the same conclusion. The devolution of partisan politics into a singular, amorphous mist of rhetorical ether is what destroyed our country, including the introduction and propagation of the "American Dream", which managed to successfully morph our populace from being focused on "freedom" to being focused on "getting stuff".
Another bleeding heart argument for kicking the can down the road by not cutting the budget now when it's too damn high to begin with..
Why do leftists think the gov't can spend tax dollars better than a taxpayer?
More importantly, why do leftists keep thinking they can spend their way into economic prosperity in the long term? Sooner or later the bill is going to come due, and no empire has ever been able to avoid the boom and bust of an economic cycle.. and never will.
Bottom line: take the major pain now.. or your left arm and leg later..
The major pain is taking the arm or (possibly and) leg now...later the decision will be the head or the heart.
So the debt ceiling needs to be raised so that the government can suck more resources out of the private sector and distribute it to the "entitled"? Give me a break. I'm sick and tired of hearing that bigger government is the answer to all questions. Big government is the problem, not the cure.
Keeping interest rates low, inflating the currency and increasing the debt load creates a cunundrum for savers: How can they possibly keep ahead of inflation and not join the asset inflation chasers? The current financial situation requires a reset not a reprieve.
Well said!
You're missing the point. Who cares about the debt ceiling when the Fed is getting ready for QE3?!? The debt ceiling is a distraction. Pure and simple. Dummies who treat gvt expenditures like an individual who has maxed out his credit card. You simply can't run a gvt the same way you run your family budget. Flame away but that's the brutal truth and any "economist" who disagrees with this is a fool.
Sorry, Leo: As long as the money that the government spends is coming directly from those family budgets, the government MUST be run EXACTLY the same way as those family budgets are run.
Unfortunately, given how many families are drowning in debt, that does seem to be the case. :(
Leo, you're the one missing the point. The real point: The US government shouldn't be borrowing money, period. Think that through for a good bit of time, including reasons why we actually should default on our debt. Think through who benefits and who doesn't. General idea: try to think outside of the box here.
"The US government shouldn't be borrowing money, period."
OMG! This doesn't even merit a response! Get it through your thick skulls, the US isn't Greece, it will NEVER default on its debt and even if it does base don some technicality like a debt ceiling, SO WHAT???
Inflating debt away (which also won't work) is defacto default.
You need to correct yourself. The USA defaulted on it's debt in 1971. Pre1971 the us dollar was convertible into gold (for foreigners anyway). Thanks to Nixon that redeemability was reneged on. It wasn't only new dollars that were no longer backed, but ALL dollars. The is textbook default. Debasement of a currency is default
+1
Funny thing is, Nixon said "We are all keynesians now" at the moment he was defaulting on the US debt. Could not be more clever, even though perhaps not intended.
"The Dollar is our Currency, but Your Problem".
John Connolly, Sec UST, 1971
More particularly, in a balance sheet recession, how do you get out of it, given that more stimulus provably doesn't work?
I'm glad you responded in spite of your view that it doesn't merit a response. It doesn't matter whether we default or not, the point is that it shouldn't even "be".
Given that you are not at this stage yet though, let me address your more specific point, which is that we need either further QE from the Fed, greater government spending, or both. Tell me how this will actually work (in practice, not where you hope the money will go, but where it will actually go), look at Japan (which is exactly the path we're headed on, as has been so expertly pointed out by Richard Koo), and then tell me why this is a good idea.
Completely clueless.
"You simply can't run a gvt the same way you run your family budget."
That is the usual garbage believed by statists. It implies that the government is a separate entity, independent from and above the people. And that is exactly what drove us into the mess in the 20th century. We forgot that the gvt should be a creature of the people to accomplish specific tasks, not the other way around where the people obey the gvt's command to do this and that.
From the moment you understand that gvt should only be a tool of the people to do specific things with money that people willingly provides it, it becomes uber non-sense to pretend that running the state's budget is different from running a family budget.
The gvt has no money of its own, all it has is the people's money. To pretend that it can do whatever it pleases with it is what feeds statism.
All status quo preserving solutions could fail. More taxes, less taxes, spending cuts, stimulus; none of these can preserve a growth-dependent economic model if we've reached the limits to growth. We'll all see who's missing the point and who's the fool before too long.
'could' should be 'will'.
You simply can't run a gvt the same way you run your family budget.
I disagree, but won't flame you. Can you explain what it is that is so different between running a family budget and a government budget? Best would be in the context of money as resource allocation. The problem here is that anyone who is fiscally conservative sees things like crony/pork/war spending as terribly inefficient, and there are very close parallels to a family budget.
With a family budget, once you run out of cash and credit you go to the homeless shelter.
With the government, when you run out of money you coerce other people to give you more, or you just steal it straight from their savings. Just like that other organization...what was it called? Oh yes...the mob
That is the difference.
Family budgets used to place an emphasis on saving, building that nest egg, while at the same time building equity, but not relying on it.
Government is like the new family, up to their eyeballs in debt on hopes of higher earnings in the future, totally insolvent, living from paycheck to paycheck (debt ceiling increases,) having to decide which bills are most important and which bills they can put off paying until the next paycheck.
Family budgets used to place an emphasis on saving, building that nest egg, while at the same time building equity, but not relying on it.
My problem is that governments sometimes do that as well. And when they do, they seem to grow much more prosperous as a result. This is what kills me in this respect.Governments need debt to counteract the vagaries of market cycles. Deep cuts in gvt expenses now that the economy is weak is simply shooting yourself in the foot all because some choose to take an ideological stance instead of doing the right thing for the country. It's so stupid and yet people BELIEVE it just like an extremist Islamic terrorist believes he will die a martyr and go to Heaven with 72 virgins! It's all nonsense!!
Leo, what a load of crap. There is a QUALITY DIFFERENCE in GDP that is never discussed by people trained in keynesian economics. In other words if the GDP generated by goverment spending is pissed away on worthless crap like bombs or handouts to drug users who shoot it up their arms it's of little or no long term value. Especially compared to money invested in the private sector that generates a new invention that can be sold in larger quantities for decades to come. (producing jobs and income)That's why Keysian economists could never see that WW2 didn't produce a good economy, just a neccesary one. Most people could find little of what they wanted during the war because resources went to the military.
Government management of the economy is a fallacy. Keynesianism can help at first, but the problem is that you can't get a little bit pregnant. In capitalism, once the government tries to manage the economy, it opens itself up to moral hazard. Everybody will try to take advantage of that. These days, some are extremely successful, while many others pay the price.
If the government did not manage the economy, it would revert to a state of economic Darwinism, which is exactly what free market capitalism is. You cannot have it both ways. You are either free, or you are managed. If you are free, you sink or you swim. It is up to you. If you are managed, you better be high up in the food chain, or life sucks.
This is not an ideological matter. It is a practical matter. All we have to do is think "like a criminal" to see the logical result of the moral hazards. These days, we don't even need to think like a criminal. We can simply observe the world around us to see sufficient evidence.
The vagaries of market cycles are caused by debt.
The debt and monetary policy is what causes the business cycles. You'd know that if you'd read real economists (Austrian School).
Leo, Krugman and Reich: the last unrepentant Keynesians
Wipe, flush and be merry ---- the reign of these statist economic charlatans is coming to its sorry and rightful end.
Thaks for providing some laughs in the meantime, Leo.
PS: I couldn't give a shit about your supposed anti-American feelings --- I find your statist anti-humanity beliefs of much more concern, and contempt.
They really are insane akak. I didn't want to believe it...but they are.
"Governments need debt to counteract the vagaries of market cycles. Deep cuts in gvt expenses now that the economy is weak is simply shooting yourself in the foot all because some choose to take an ideological stance instead of doing the right thing for the country."
Lets see.
Lets let government and financial markets collude together on social engineering projects, then leverage the debt and call it an "asset" or insurance and when it eventually implodes in on itself we'll call it a "vagary of market cycles" and scream for higher taxation.
Its like fucking Dr.Strangelove around here.
Insane ---- or evil. Probably both (particularly in leo's case --- he has all the psychological hallmarks of the classic narcissistic sociopath.)
QE3? Free money for the "entitled"? Budget balancing is for losers? Big government is the answer? Bloat away. I don't give a shit.
Many kudos. Rationality is not the currency of the day. Taking a drink of water from a glass does not increase the amount of water. In the tank or in the glass.
The HFT world is a few degrees past pissing down their own leg.
Many kudos. Rationality is not the currency of the day. Taking a drink of water from a glass does not increase the amount of water. In the tank or in the glass.
The HFT world is a few degrees past pissing down their own leg.
Why make extortion seem so complicated?
The crux of the matter is that creating jobs is not simply a wave of a wand. All the dollars created vanishes abroad to maintain the USD hegemony. So, it permits us to consume beyond our means but cannot ensure dignity of jobs for the American public.