Debt ceiling dynamics
Posted by WARREN MOSLER on July 14th, 2011
Here’s my take:
A. They get a few trillion in long term cuts and maybe a few that kick in reasonably soon and extend the debt ceiling
This would help ensure aggregate demand stays low for long, which is bond friendly, and stocks muddle through in a range with slowing earnings growth but just enough top line growth to stay positive.
B. They don’t extend the debt ceiling
This would immediately and directly reduce aggregate demand, which is very bond friendly and very bad for stocks, as many top lines go negative until federal spending is restored.
And either way the economy remains vulnerable to looming external shocks, including a China slowdown, euro zone default and/or slowdown, UK slowdown, and a strong dollar.
July 14th, 2011 at 1:11 am
Words of wisdom from the Washington Post:
http://www.washingtonpost.com/business/economy/with-no-debt-deal-obama-would-face-tough-choices-aug-3-about-what-bills-to-pay/2011/07/13/gIQAvHECDI_story.html?hpid=z1
“Some skeptics in Congress and conservative economists say that Obama has overstated the risk of not raising the debt ceiling and that tax revenue could pay for up to 60 percent of government operations.
“You do not have to default and you don’t have to shut down the government if you choose not to,” said Peter Morici, an economist at the University of Maryland. If Congress raises the debt ceiling without a long-term plan for reducing the federal deficit, he added, “they’ll never solve the problem, and we’ll end up like Greece.”
Are any of the MMT guys being interviewed on this issue? There’s as lot of Morici’s type of info flooding the airwaves.
Ron Paul is all over the place, but the MMT may as well be on another planet as far as the mainstream media is concerned.
Reply
MamMoTh Reply:
July 14th, 2011 at 10:54 pm
@James Hogan,
More of Ron Paul all over the place:
http://www.youtube.com/watch?v=UUNIeOB0whI
Reply
roger erickson Reply:
July 15th, 2011 at 9:14 am
@James Hogan,
Morici is just an awful person. Being next door, I tried to talk to him several years ago, before I’d even heard of Warren. Even then, Morici was outrageously rude, & basically said it wasn’t worth his time to talk to anyone except prime time TV audiences.
He has a bow tie gifted from Pete Peterson himself. That absolves him from any responsibility to interact with the serfs.
Reply
James Hogan Reply:
July 15th, 2011 at 12:21 pm
@roger erickson,
Morici seems to be a favorite at CNN, which says a lot about CNN. The remark about the US ending up “like Greece” is what caught my eye. Whenever I hear people try to tie the US problems to those of some of the countries in the Eurozone, I have to wonder what else they don’t know. It is a sure sign of ignorance.
Peterson has been described by the Washington Post as a “centrist.” (And the “words of wisdom” the in above post is total sarcasm, if it isn’t obvious) Peterson is in the “center” of what? He wants to destroy Social Security and Medicare. That has been his long-term goal. He even funded the “traveling economists” road show earlier this year.
It is frustrating that none of the MMT advocates can get airtime to offer an alternative to the destructive policies that are being proposed.
It is even more frustrating that the public seems to be so gullible when it comes to macroeconomics. Now nobody ever claimed that macro was easy, but the media could do a much better job of trying to explain how the monetary system really works. That might enlighten some folks and brunt some of the obvious attempts at fraudulent explanations and fear mongering.
After all, the reason we have a “freedom of the press” clause in the First Amendment is the idea that an informed electorate is foundation for self-governance.
Reply
James Hogan Reply:
July 15th, 2011 at 10:31 pm
@James Hogan,
Just to state the obvious: The advocates of Modern Money Theory (MMT) have the best available explanation of the economic circumstances we find ourselves in the middle of, and deserve much more recognition.
MMT is to economics as Copernicus was to astronomy.
WARREN MOSLER Reply:
July 16th, 2011 at 12:08 pm
:)
Dollar Monopoly Reply:
July 16th, 2011 at 1:19 pm
@James Hogan,
Dollar Monopoly completely agrees
July 14th, 2011 at 1:11 am
What would a strong dollar do to things? How does that negatively affect the economy now?
Reply
Mario Reply:
July 14th, 2011 at 1:29 am
@Tom,
don’t know for sure and would like to hear as well what Warren will say, but I’d imagine that a stronger dollar means more deflation, drops in prices just to grab SOME revenue, which means drop in profit margins, which means drops in employment and hiring, and also an increased UE rate, and all of that on top of the debt ceiling issue is like gasoline to an already big enough fire as it is. :(
Reply
WARREN MOSLER Reply:
July 14th, 2011 at 9:27 pm
hurt stocks, mainly. earnings translations, etc.
Reply
July 14th, 2011 at 4:40 am
From what Bernanke said yesterday, I understand that now he is more concerned about deflation than inflation. I may have misinterpreted what he said, but it isn’t ofter I hear a FED chairman mention deflation.
Reply
July 14th, 2011 at 4:50 am
Now the Republicans are proposing a new idea that Obama can raise the debt ceiling all by himself a bit at a time, and in that way put off any deal until after the next election. With this plan they can blame Obama up the wazoo next year for being responsible for the “enormous Uncle Sam debt” that our children’s children have to pay back. Bullshit.
This really makes me mad. Obama needs to push his ten-year plan because, as he says, this makes common sense. Alternatively, if the votes in Congress really cannot be gained, then Obama should lay this on Ben and the Fed. If the republicans are happy with Obama raising the ceiling, then he should tell Ben to just recalculate it. Since the Fed and Uncle Sam have a sort of husband and wife relationship, then all the QE funds spent on the US bonds are actually just the same as a company buying it’s own shares or buying back it’s own debt. American’s will understand this even though they don’t know MMT.
Anyone who knows where our money comes from (MMTers) understands that the debt ceiling was something the Banker’s cronies in Congress made up to torture the American people into paying taxes that go to Banks and other financial institutions for loans that Uncle Sam never needed to take out in the first place.
Reply
Crake Reply:
July 14th, 2011 at 10:46 am
@Dennis Kleid,
Actually the debt ceiling was instituted because Congress, after passing responsibility to the Treasury for authorizing the bonds issues (before Congress did it for each bond issue), was not comfortable in giving the Treasury unlimited ability to do that, so the debt ceiling is like an accounting “control” on that administrative authority.
Reply
WARREN MOSLER Reply:
July 14th, 2011 at 9:30 pm
you’ve got some work to do, thanks! start with the 7 deadly innocent frauds and then the mandatory readings, as well as the proposals?
Reply
July 14th, 2011 at 5:40 am
Krugmans’ Rule by Rentiers and Who Are The Rentiers? hypothesis attributes TPTB to bond market. Austerity forever…
… is not necessary going to hapen, if dog is wagged not by bondholders, but by (imaginable) concentrated speculative derivative market interests. Base money expansion should enable some position accumulation in one or another market/instrument by one or another basic player, isn’t it?
Maybe Bill Gross, after all, is not so stupid, just better informed?
Reply
anarchistas Reply:
July 18th, 2011 at 8:50 am
Is the debt ceiling drama really all about the GSEs?
Reply
WARREN MOSLER Reply:
July 18th, 2011 at 9:42 am
don’t want to risk a housing recovery…
Reply
July 14th, 2011 at 9:54 am
Wouldn’t the Fed’s commitment to a target rate keep yields on treasuries from getting too high? The Fed will keep making a market in this stuff so it continues to have value regardless of whether it’s a performing financial asset. The yield on treasuries can’t go too high without making most financial institutions insolvent and driving up the price of overnight lending. So the Fed, in trying to hit the target, will basically just buy a ton of Treasury debt at the yield that will keep the payment system happy.
Is this wrong?
And if it’s right, it makes me think it’s outrageous that Treasury says it will make payments on bonds before everything else. Bonds are the one thing they don’t have to make payments on in order to prevent a crisis. The government contractor with a huge account receivable because of uncle sam can’t be helped by the Fed (by the way, that AR is debt just like Treasury bonds, but it doesn’t get counted towards the debt ceiling. The whole thing is so silly). The Fed can keep bondholders from feeling any pain.
So it seems to me we are doing exactly the wrong thing on every front and at every level.
Reply
WARREN MOSLER Reply:
July 14th, 2011 at 9:33 pm
the fed probably will buy if yields go up to not hurt the housing market. but it’s doubtful yields will go up
note that tsy auctions seem to be just as strong without the fed buying
Reply
beowulf Reply:
July 14th, 2011 at 10:12 pm
@Arthur,
The contractors would go to court immediately to seek payment and they’d get it. An unpaid invoice is a debt.
Reply
Tom Hickey Reply:
July 14th, 2011 at 10:30 pm
@beowulf,
Beowulf, maybe you can parse Perry for us. I read as saying essentially that US debt is a binding contract and legislature does not have the authority to renege on contracts entered into and one which counter-parties rely.
Reply
July 14th, 2011 at 11:04 am
I suspect the mechanics have already been addressed and the Fed and Treasury operations will not have any viewed hiccups. Right now a political game of poker is happening. The Republican hand and bet was that modest cuts would get done, enough to keep the economy hum-hum which put odds of them winning the White House high while not harming the economy enough to get any blame. The Obama Administration then called that bluff and upped the anti for “real” cuts and “no more kicking the can down the road” therefore turning the Republicans own words against them. The Republicans realize there bluff was called (McConnell said on radio just yesterday that he does not want co-ownership of a bad economy, highlighting how tax increases will hurt the economy – these people are not stupid, he knows spending cuts will harm it too and does not really want large spending cuts either – I suspect President Obama could quit demanding tax increases and Republican would still not want material cuts for the same reason – they do not want co-ownership of a bad economy.) Now Republicans are trying to walk away from this poker game they invited everyone to play because it is not turning out like they thought.
So now I think the ball is in the White House court. The White House can go along with a modest increase to the ceiling and get blamed for “kicking the can down the road” and fully own flat-lining economy. Or he can press that the hand be finished and played, forcing the Republicans to do something so they get to share blame whiling knowing the mechanics are in place to keep the system from even hiccupping.
Reply
roger erickson Reply:
July 15th, 2011 at 9:27 am
@Crake,
At what point was it not more productive to simply tell the truth to the electorate? ~1933?
The once noble art of politics involves eliciting existing fervor and redirecting it, to accelerate group decision dynamics. It’s risky, but has been an acceptable playing field for bright people.
Problem is that the utility of the politics hack, as played, doesn’t scale with the size populations we’ve achieved.
On monetary issues, political rhetoric is 88 years behind the times. We simply need more operations & less politics. There are many obvious steps to take, as Warren keeps listing. Long term, how about also guaranteeing universal political campaign funding as just another Automatic Stabilizer?
Reply
July 14th, 2011 at 11:24 am
what I don’t understand is how not extending debt limit would be “bond friendly”? Wouldn’t it make government bonds appear unreliable? Or would markets look it interest is actually paid, instead of risks that it would not be?
Reply
Chaos Reply:
July 14th, 2011 at 1:01 pm
@Gary,
It does not matter if debt limit is raised or not. Bonds will be paid anyway, indeed, as they’ve said: that will be the priority.
So while rating agencies can play their stupid games with ratings, bonds still will be risk-free assets earning free income (interests). They will be specially attractive in a deflationary environment of economics slowdown and aggregate demand destruction.
So… yep, very bond friendly.
Reply
WARREN MOSLER Reply:
July 14th, 2011 at 9:41 pm
the economy caves and it’s clear the fed will be on hold for that much longer.
term rates anticipate future fed rate moves
Reply
July 14th, 2011 at 4:52 pm
How do you see the probability that the debt ceiling will not be raised, that the FED will continue to clear checks from the tsy for spending that already was approved by Congress anyway, that not a lot is going to happen like in 1971 and that eyes finally will be opened for the fact that the US does not need to issue bonds and the no-overdraft rule will be gone forever?
Reply
WARREN MOSLER Reply:
July 14th, 2011 at 9:45 pm
low
Reply