Debt Ceiling dynamics- no chance of US default

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.

Latest Comments

Leave a Reply

Your email address will not be published. Required fields are marked *