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Debt Ceiling dynamics- no chance of US default

Posted by WARREN MOSLER on May 19th, 2011

Republican Senator Pat Toomey is now making the point that with debt payment an executive priority,
and with tax receipts more than sufficient for interest payments,
not raising the debt ceiling will not mean default,
instead it will mean other federal spending will get cut,
which he pronounced analogous to a partial government shut down.

While this has always been factually correct, it is only very recently that this has become the lead response from the Republicans, in direct response to warnings by the Democrats of a US default.

With the Democrats being exposed as factually wrong and guilty of at least innocent fear mongering, their entire negotiating position is weakened by both the facts and their reduced credibility in general.

So I have to conclude the end result will be dramatic spending cuts,
no tax increases, a large reduction in long term aggregate demand,
and most likely reductions in short term aggregate demand as well.

The Democrats are now left with fighting for alternative spending cuts, with the military a prime target.

In fact, they may already be cutting military spending, as the executive branch is not necessarily compelled to spend the funds authorized by Congress, but can selective not fund or delay funding in the normal course of business. So, for example, they may be able to cut $150 billion a year from actual military spending and score it as something over $2 trillion in savings over 10 years, which would reduce the need for other cuts currently under consideration. And this might be the motivation for brining as many troops back home as possible, from all over the globe.

These kinds of cuts would remove maybe 1-2% of nominal gdp from 2012, support unemployment and the dollar, help keep the Fed on hold, as, in general, fear of becoming the next Greece continues to cause us to work to turn ourselves into the next Japan.

24 Responses to “Debt Ceiling dynamics- no chance of US default”

  1. Crake Says:

    Have you seen any legal arguments about other contracts being protected by the 14th amendment as far as the US having to pay them and what constitutes a contract? For example, is spending legislation already passed and signed the forming of a contract and therefore unless amended by subsequent law, an obligation that must be honored per the 14th Amendment section 4?

    Reply

    Calgacus Reply:

    @Crake, Yes, there is a good amount of case law that holds that government contracts can be binding obligations, just like bonds. Recent cases are the 1998 Winstar case and the 2004 Cherokee Nation case, and an Obama administration legal opinion determined there was an obligation to pay ACORN for some contracts even though Congress had just passed legislation that could naturally be interpreted to stiff ACORN. In Winstar the court notes that although the dividing line can be unclear whether a particular law and obligation is binding, there is no doubt that some, like bonds, are, and create binding obligations which future Congresses have no power to repudiate.

    Reply

    WARREN MOSLER Reply:

    those are ‘political’ decisions- self imposed conditions and constraints

    we can even amend the constitution

    Reply

    Calgacus Reply:

    @WARREN MOSLER, ? Don’t understand this point at all. The only constraint these decisions make is that the US government must honor its promises, its debts. That it should follow its own laws, which as so interpreted by the courts are uniquely MMT-friendly and constrain the government against retroactively imposing conditions and constraints on itself to break its promises.

  2. Gary Says:

    Interesting development. That again shows who rules the U.S. As long as Republicans can avoid the pressure from the financial interests – they can terrorize the rest of U.S. at will. Especially that even the left does not really understand that the fear of “national debt” is baseless.

    Reply

  3. Dan F Says:

    So let me understand;

    They will continue to honor the contracts and make interest payments on the debt. The majority holds of the debt are; China, Japan, UK, and wall street.

    While they refuse to honor contracts and not not make payments US citizens?

    I have that right don’t I?

    And no one is upset about that?

    Reply

    beowulf Reply:

    @Dan F,
    But guess what doesn’t have an accrued interest? Benefits arising from the Social Security Act (more than just SS checks– also Medicare, Medicaid, unemployment benefits and TANF welfare benefits).
    2. A person covered by the Social Security Act has not such a right in old-age benefit payments as would make every defeasance of “accrued” interests violative of the Due Process Clause of the Fifth Amendment… (a) The noncontractual interest of an employee covered by the Act cannot be soundly analogized to that of the holder of an annuity, whose right to benefits are based on his contractual premium payments…
    http://caselaw.lp.findlaw.com/scripts/getcase.pl?navby=CASE&court=US&vol=363&page=603

    On the hand, government contractors probably have a constitutional right to demand payment.
    The Government in effect concedes yet more. It does not deny that, were these contracts ordinary procurement contracts, its promises to pay would be legally binding… A statute that retroactively repudiates the Government’s contractual obligation may violate the Constitution.
    http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=us&vol=000&invol=02-1472

    If Wall Street and the defense contractors are going to be squared away, that might explain why the GOP doesn’t seem to be sweating the debt ceiling.

    Reply

    beowulf Reply:

    @beowulf,
    Sorry, ‘On the [other] hand, government contractors probably have a constitutional right to demand payment’ was my comment. The following two lines are from a Supreme Court ruling.

    Reply

    Tom Hickey Reply:

    As austerity bites the US, there will be rising social unrest. The country is already coming apart at the seams politically, and things aren’t that bad yet. Reduce demand and they will be. This has the potential to get ugly.

    Reply

    Yuu Kim Reply:

    @Tom Hickey,

    social unrest in america? i doubt it, seriously.

    americans are pretty tame, despite the tough image.

    besides, only the most clueless amongst them know that if they do get out-of-line that there is a goon squad out there that’s armed to the teeth and is ready, willing, and waiting come after them.

    Reply

    Tom Hickey Reply:

    @Yuu Kim,

    Can’t happen here? In the Sixties and Seventies I participated in large demonstrations in DC that turned into riots, completely with gas. Hundreds of thousands of people in the street in DC and probably well over a million around the nation. And don’t forget that people died, too. All this was pretty much ignored or marginalized in the media at the time, but it was very real and brought the message to government that there would be consequences.

    In 1968, I also watched Washington burn after Dr. King’s assassination from across the Potomac in Virginia. That was very eerie. It was a predominantly , so I was not on the scene.

    When people are hard-pressed and don’t think that have any viable political outlet, then there is unrest. I realize it is difficult to imagine in the US, but I have seen it. It also happened during the Great Depression when troops were called out. See The ‘Bonus Army’ War in Washington

    selise Reply:

    @Yuu Kim,

    seconding tom’s comment.. this is from 2003 and much smaller scale than what tom describes, but i think it can be described as unrest:

    http://www.archive.org/details/miamimodel
    http://en.wikipedia.org/wiki/Miami_model

    may not be the best example, but i saw it for myself.

    Yuu Kim Reply:

    @Yuu Kim,

    40-50 yrs. ago? yes.

    now, in 2011 or in the coming years? no.

    most americans are clueless and will “personalize” their suffering rather than see it as systemic and, for those who don’t, well, to put it mildly, the US government will deal with them.

    so, i just don’t see it happening here. it could happen in the 3rd world, or the 2nd world, or in France, but nowhere else and definitely not here.

    Tom Hickey Reply:

    @Yuu Kim,
    The student-led revolt, sparked by the Free Speech Movement when Mario Savio was handed a bullhorn on the steps of Berkeley, woke America up out of the Fifties. The present day is nothing like the Fifties. I grew up in the Forties and Fifties. Looked at what was happening around me that thought I might die of boredom. Then all hell broke loose.

    I think that this generation is a whole lot more savvy than mine and they don’t need a bullhorn. They now have the Internet. And they have no future.

    beowulf Reply:

    @Tom Hickey,

    The problem is that people don’t believe George Carlin.
    “It’s a big club, and you aint in it. You, and I are not in The Big Club.”
    http://tomhuff.wordpress.com/2011/01/19/george-carlin-its-a-big-club-and-you-aint-in-it/

    I mean they REALLY don’t believe him.
    An October 2000 Time-CNN news poll showed that 19 percent of Americans thought that they were in the high income group that would benefit from proposed tax cuts – defined as roughly the top 1 percent of the distribution.
    http://www.brookings.edu/opinions/2003/0623useconomics_graham.aspx

    If you could harness that cognitive dissonance, we could power cities.

    Reply

    Tom Hickey Reply:

    Former Governor Jesse Ventura sounds the call.

    http://weaintgottimetobleed.com/

    Reply

    beowulf Reply:

    @Tom Hickey,

    You’re a Navy man Tom, you should throw him a lifeline before Ron Paul drowns him. :o)

    Reply

    Matt Franko Reply:

    @Tom Hickey,
    Tom, Wow he gets it…. Resp,

    Reply

  4. Crake Says:

    Dan F,

    That is short, direct and easy to delivery – i.e. perfect short message to use. But the question is will the President use it.

    Reply

  5. Crake Says:

    A question about who profits:

    If the US federal government reduces its deficits, the likely outcome is a decline in public savings / more public debt.

    Does the financial sector make more money from the increase in treasuries from larger deficits or does it make more money from the public taking on more debt? I assume the latter but on a risk adjusted basis, and with back office expenses being higher on consuemr debt, maybe the treasury route is more profitable.

    Which?

    Reply

    WARREN MOSLER Reply:

    the financial sector does far better in a good economy

    Reply

    Dan F Reply:

    Heard a piece by Robert Reich today about how the rich are heavily invested in the debt. At least that was what he implied but never really produced real stats.

    http://www.csmonitor.com/Business/Robert-Reich-s-Blog/2011/0518/The-great-switch-by-the-super-rich

    Reply

  6. Marcello Says:

    Warren,

    I have been monitoring the deficit numbers for some time here. (http://www.fms.treas.gov/mts/index.html).

    The US has been racking up some big deficits for several years now and as I understand the system, these dollars don’t go into nothing but either get saved or used to stimulate the economy.

    I haven’t been doing comparative cash flows but it seems like we should continue to see growth. (that is until the deficits are killed by deficit hawks). Even the extra money we pay for foreign oil does not do much to dent these defect numbers.

    All that being said….Why would the recovery stall out now?

    Reply

    WARREN MOSLER Reply:

    It should muddle through at modestly positive numbers barely above productivity growth with continued high unemployment unless/until Congress gets serious about deficit reduction and/or foreign markets contract.

    Reply

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