Consequences of debt ceiling extension outcomes

If Congress does get a bill to extend the debt ceiling to the President, he will sign it.
The US economy will continue to muddle through, with an extended soft spot and modest growth.

If Congress doesn’t get a bill to the President,
And if the US Treasury goes cold turkey to a balanced budget,
spending only as revenues accrue,
I forecast the following consequences:

Interest rates on US Treasury securities will fall, and not rise.

The US unemployment rate will move geometrically towards 100% until US Treasury deficit spending resumes.

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31 Responses to Consequences of debt ceiling extension outcomes

  1. Mario says:

    sad but it does appear to be quite true.

    The US unemployment rate will move geometrically towards 100% until US Treasury deficit spending resumes.

    surely 100% UE is not exactly possible even with a balanced budget, so wouldn’t say this is somewhat exaggerated? I could easily see 20% UE but what does will move geometrically towards 100% really mean exactly?

    Reply

    Calgacus Reply:

    @Mario, Think Warren means, to use “geometrically” more standardly, that the employment rate will move geometrically to 0% – e.g. 90% –>81%–>72.9%–>65.61% etc

    Reply

    WARREN MOSLER Reply:

    exactly that.
    Ok, maybe 90%, if Mrs. Bachman changes here vote by then…

    Reply

  2. GLH says:

    What is going on in DC is just a game O and the Republicans are playing. This is Naomi Keiln’s shock doctrine. The idea is that they create a crisis and then force a bad agreement onto the American people. Both parties are involved in a game of good cop, bad cop. I wondered why Guitner said they were making no provisions to do anything if the debt ceiling wasn’t reached.
    I fully expect an agreement to be announced later today that relieves everyone. But, it will be a sorry agreemnent for us and a great one for Wall Street.
    Someone else posted it earlier, but check out Democracy Now and Amy’s interview with Michael Hudson called ‘pushing crisis’. It reminds me of Prof. Mitchell’s blog a few weeks ago about this being a needless delimma. Now I understand why.

    Reply

    Tom Hickey Reply:

    @GLH,

    http://finance.groups.yahoo.com/group/gang8/message/16102

    Reply

  3. Robert Cogan says:

    Warren, Why would interest rates on Treasuries fall?

    Reply

  4. Jason says:

    Read this on Reformed Broker: “As of yesterday, 22% of US high-grade issuers (from the J.P. Morgan JULI index of 250 issuers) have a CDS spread inside that of the US government. This is up from zero a year ago.” Meaning, institutions buying and selling insurance against potential default believe that Coca-Cola and its ilk have bonds that are a less risky credit than the stuff coming from the US Treasury.”

    How can the individual investor bet on the number going from 22% back down to zero? From an MMT perspective this is not a financial risk but a political one and I’ll take that bet but I can’t sell a CDS on Treasuries.

    Reply

  5. Paul Mineiro says:

    Here are 4000 towards the geometric progression to 100%.

    http://www.faa.gov/news/updates/?newsId=64216

    Here is Dan Quayle’s son (R-Ariz) using the credit card analogy.

    http://articles.latimes.com/2011/jul/21/opinion/la-oe-mcmanus-debt-ceiling-republican20110721

    Reply

  6. jown says:

    One hit wonder goes multi-platinum! The Geithner “Put”

    (The last thing Timmy does before he quits, coin seigniorage)

    Dumb, just trying to amuse.

    Are you going to amend Deadly Innocent Fraud No. 1?

    1. The government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow.

    (e.g. government spending is limited by bonehead, fake-crisis, political charades designed to gut and offer to Wall Street presently funded and critical social programs)

    Please keep heart and keep up the great work. Really appreciate all you do here. Thank you.

    Reply

    Robert kelly Reply:

    @jown,
    Maybe Warren could add parenthetic footnotes to the next edition. This one was very well put!

    Reply

    WARREN MOSLER Reply:

    thanks!

    Reply

  7. bram says:

    Let me try that with the right tags…
    Interest rates on US Treasury securities will fall, and not rise.
    So if I get your drift, you expect rates to fall because the GDP will drop (down 6% presumably by year end) and there will be a flight to safety.

    Reply

    WARREN MOSLER Reply:

    and a perception the fed won’t be hiking any time soon

    Reply

    Tom Hickey Reply:

    @bram,

    Interest rates (yields) fall in a depression and unemployment skyrockets.

    Reply

  8. studentee says:

    yikes. helluva scenario

    Reply

  9. Walter says:

    As I understand you expect US tsy secs to remain the safe haven. Let’s hope so. I also assume that foreign holders of large usd reserves will not start dumping. After all they all complained that US is living beyond its means, deficits and debts are too high, the US need to bring their house in order etc etc. Well now they go to see what it means what they asked for. I expect they very soon will realize that their USD surpluses existed thanks to the US running deficits.
    I believe last time (during Clinton) the Asian and Russia crisis, after oil went to usd 10, were some direct consequences.

    Although nations that run a trade surplus with the US could change their perception towards USD, probably none of these exporting nations wants to lose mkt share in the US. And which other mkt is as developed, large and liquid, as the US, where to turn?

    In the meantime we see usd/chf to record lows. From around 1.80 in 2001, to around 0.81 last week. That’s 55% down.
    It looks to me that recent gains in chf are kind of panic flight.

    If the tsy secs remain the safe haven now, do you also expect that usd/chf will have seen its lowest point?

    Reply

    WARREN MOSLER Reply:

    sorry, don’t follow the dynamics of that particular cross closely

    Reply

    Tom Hickey Reply:

    @Walter,

    Walter, it means that things are getting pretty expensive relatively in Switzerland and not many US tourist will be going there.

    All the international “gyrations” are about capital positioning itself. There are limits to every position as the place gets more and more crowded and prices run up. Then people look elsewhere for better values. Sure, gold and the Swiss franc the ultimate safe havens, but the supply of both physical gold and CHF is limited. We’ve already seen that a bubble can develop in gold. Just look at a historical chart if you weren’t around in 1980. (link) Gold hasn’t yet hit its previous high when adjusted for inflation.

    The advantage of the USD is that it is a both a a safe haven, abundant, and highly liquid. Don’t look for the dollar to collapse as long as the US the world’s only superpower and the country with the largest GDP.

    International finance is really quite complex and even very smart players take a hit as well as making a killing. Anyone who thinks that investing in these vehicles is a sure thing is whistling in the wind. Even safe havens get overpriced with the market gets crowded, and some people loose money when the tide turns and they haven’t already cashed out, typically those who got in toward the top.

    Reply

    Walter Reply:

    @Tom Hickey
    Thanks Tom, CH indeed very expensive for US and almost any other tourists. Swiss exporters are on the edge. Looks all pretty deflationary there to me.
    Totally agree with you about gold and chf as so-called safe havens. Those ‘havens’ are far too small. A lot of people are going to get hurt there.
    Of course usd/chf can get down some more and some longer time, but for those with patience and some risk tolerance it begins to look to me very attractive, both fundamentally as well as technically.

    Reply

    beowulf Reply:

    @Walter,
    Dumping T-bonds just means they their dollars from Fed “savings” account to their Fed “checking” account. The Fed can scoop up T-bonds as fast any bondholder can sell them. Which raises another issue that’s been bugging me the last few weeks.

    Its a basic principle of Anglo-American trust law that when a party holding legal title to an asset forwards its income to another party (just as your broker will forward you dividends on shares held in street name), the second party holds equitable title to the asset as the beneficial owner of an implied trust. Even if the Fed truly were “independent”, because its income from Fed-held debt is rebated to Tsy, clearly Tsy hold equitable title to Fed-held Treasuries.

    So panic dumping T-bonds due to fears the govt is “out of money” (as our philosopher-king President believes) simply allows Tsy, as beneficial owner, to buy back its own debt on the cheap via the Fed as its trustee. All this would be true even if the Fed really was independent of the govt, but Tsy’s ownership interest is even stronger than a trust beneficiary.

    Not even the Fed itself actually thinks its independent of the US govt, rather it describes itself as “an independent government agency… ultimately accountable to the public and the Congress”. The Fed is part of the US government, even though the fourth branch of govt it thinks its in doesn’t actually square with Constitution’s three and only three branches. But even if central bankers sometimes get confused, internet domain suffixes do not (.gov).
    http://www.federalreserve.gov/faqs/about_12799.htm

    Its simply bizarre that the US govt as a whole is constrained by a debt ceiling, while an agency that’s a part of the same govt is unconstrained by a debt ceiling. An anomaly so illogical can only exist unquestioned for decades because someone is making a tremendous amount of money from it. Maybe the way to out-crazy the Tea Party is to demand the Fed be subject to the debt ceiling too.

    Reply

    Calgacus Reply:

    @beowulf, Hmm, so you believe 3 does not equal 4 and infinity is greater than 16 trillion? Be interesting to formalize the arithmetic and logic implicit in these laws and institutions – if you wanted to see a mad robot with smoke coming out of its bolts, waving its arms and saying “it does not compute”!

    If we had real AI, the Treasury and Fed computers would die of laughter at the jokes we are telling them.

    Reply

    anon Reply:

    @beowulf,

    “Even if the Fed truly were “independent”, because its income from Fed-held debt is rebated to Tsy, clearly Tsy hold equitable title to Fed-held Treasuries.”

    Boy, that’s stretching stuff to the limit. The Fed is not forwarding interest on the debt to the Treasury any more than a commercial bank is forwarding interest on its loans to its shareholders. Profits are forwarded. Treasury has no specific claim on interest on the debt held by the Fed.

    Nobody has ever said the Fed is independent from Congress. It’s operationally independent from Treasury. It doesn’t take, can’t take, and won’t take running orders from Treasury, unless Congress changes the game. That’s all that matters.

    What do you mean the Fed isn’t constrained by a debt ceiling? The Fed doesn’t issue debt. Are you talking about a QE ceiling or something?

    Reply

    ESM Reply:

    @anon,

    Good points. Not that any of this really matters.

    “What do you mean the Fed isn’t constrained by a debt ceiling? The Fed doesn’t issue debt. Are you talking about a QE ceiling or something?”

    He probably means that all reserves and Federal Reserve notes are liabilities of the Fed, and hence debt. Of course, most of that is offset by assets of the Fed, but the debt limit doesn’t look to the net debt position of the Treasury either.

    WARREN MOSLER Reply:

    it also means the fed can spend all it wants

    Tom Hickey Reply:

    @anon,

    “The Fed doesn’t issue debt.”

    Do you disagree that all money is debt? If you don’t, are reserves not money? All money is some’s liability and reserves are liabilities of the Fed.

    WARREN MOSLER Reply:

    any reason/further purpose for trying to define ‘money’ here?

    anon Reply:

    “Do you disagree that all money is debt? If you don’t, are reserves not money?”

    Whether or not I agree with the first, the second doesn’t follow. The idea that money is not debt doesn’t imply that reserves are not money.

    Anchoring back to reality here, the debt in question is Treasury debt, which is held by but not issued by the Fed. And the debt ceiling in question pertains to the issuer of debt, not the holder of debt. So I assume the question may pertain to the Fed as the issuer of reserves and currency, which is formally and institutionally separate from Treasury as the issuer of Treasury debt.

    Tom Hickey Reply:

    @anon,

    Warren: “any reason/further purpose for trying to define ‘money’ here?”

    I’m trying to understand what Anon means.

    WARREN MOSLER Reply:

    maybe best to ask him how he defines ‘money’ there to give you some guidance.

    Tom Hickey Reply:

    @anon,

    Why are tsys “debt” and not reserves, especially when the Fid is paying interest on them. As far as I can see tsys are a liability of the Tsy and reserves of the Fed. If, as Randy Wray argues, for example, following Innes in “Wat is money?”, all money is debt, they it seems to me that both tsys and reserves are debt.

    beowulf Reply:

    @anon,
    @anon,
    1. US Govt has a debt ceiling
    2. The Fed is a part of the US Govt but does not have a debt ceiling.
    3. Fed passes capital income to Tsy and capital losses to same.
    The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability…
    http://www.economicpolicyjournal.com/2011/01/hot-fed-hides-major-accounting-change.html

    “It doesn’t take, can’t take, and won’t take running orders from Treasury”
    The paradox is that Fed independence depends largely on not disagreeing with the Secretary (and putting new presidents in fear of bond vigilantes). The 1951 Tsy-Fed Accord was sui generis since up on the Hill, the Joint Economic Committee was actually chaired, perhaps by some terrible misunderstanding, by a world-class economist Sen. Paul Douglas, who was preparing legislation to uncap interest rates when Tsy walked before Congress made it run.

    Colonel Douglas is long gone so if Tsy and the Fed did come into conflict, then you’d look to a clause in the FRA that’d be stricken as unconscionable if were part of a prenuptial agreement “(“shoulda read the contract, honey”). :o)
    wherever any power vested by this chapter in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.
    http://www.law.cornell.edu/uscode/12/usc_sec_12_00000246—-000-.html
    Or DOJ could go to Court to have the Fed declared unconstitutional since it exercises federal executive power yet doesn’t answer to the President.
    “The Federal Reserve Board and the Unitary Executive”
    http://volokh.com/posts/1207512634.shtml

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