SCENARIOS-Options for raising the U.S. debt limit

And this and $20 will get you a cup of coffee.
I still see no sign of agreement.

Nor have I read anyone discussing the downward acceleration in GDP triggered when the spending limits are reached.
As previously discussed, GDP will accelerate as it falls, as the automatic stabilizers will be disabled.

So spending is further cut, sales go down more, more jobs are lost, and tax revenues fall more,
When the $150 billion/moth in govt spending stops in 2 weeks, sales fall, jobs are lost, and tax revenues fall, so spending is further cut, sales go down more, more jobs are lost, and tax revenues fall more, etc. etc. etc. until no one is left working.

(And it’s really bad for stocks, by the way, when no one buys anything.)

So seems they are underestimating the odds of no bill reaching the President’s desk.

And they are radically underestimating the speed and extent of the subsequent damage.

The problem is that most, probably including the President, believe the US takes dollars out of the economy when it borrows.
And therefore when it stops borrowing to spend the economy will have those dollars to replace the lost federal spending.
And so after the initial fall, it all come back that much stronger.

Except they are dead wrong.
And therefore we are all dead ducks.

Ever hear anyone ever say ‘I wish they’d pay off those Tsy bonds so I could get my money back and go buy something.’?
Of course not.
Tsy borrowing gives dollars people have already decided to save a place to go.
Dollars that came from deficit spending- dollars spent but not taxed.
If they were spent and taxed, they’d be gone, not saved.

Tsy bonds provide a resting place for voluntary savings.
They are bought voluntarily.
They don’t ‘take’ anything away from anyone.

For example, imaging two people, each with $1 million.

One pays a $1 million tax

The other doesn’t get taxed and decides to buy $1 million in tsy bonds.

Pretty obvious who’s better off, and who’s still solvent and consuming.

Someone tell the Democrats and the Republicans, thanks.

They are about to cut $150 billion/month in spending because they think it crowds out the private sector.
They really think the dollars the govt. pays out cause business to lay people off.
They don’t know that it’s that deficit spending that we get first as income that adds to our savings of govt. bonds.

And, of course, they also think they have no choice, as they all believe the US could become the next Greece, and face a similar financial crisis.

It’s completely inapplicable- Greece is like a US state, not the federal government- but they don’t know that.
No mainstream economist has pointed this out.
No one in the media has pointed this out.
So who can blame them?

I’ve never seen this kind of systemic risk looming in my 40 years in the financial markets.

So hope for the best,
and prepare for the very worst.

SCENARIOS-Options for raising the U.S. debt limit
(Reuters) – Democrats and Republicans in Congress, unable to compromise on how to cut budget deficits and raise U.S. borrowing authority, are now working on their own, competing bills.

With nine days’ left until the United States runs out of money to pay all its bills after Aug. 2, the two parties were rushing to get their respective bills moving through Congress this week. [ID:nN1E76M0B0]

Here are some scenarios for raising the debt limit by the early August deadline to avoid a potentially crippling government default:

This is the path being pursued by Senate Majority Leader Harry Reid, a Democrat.

Since tax increases that Democrats had been seeking were the major sticking point in negotiations with Republicans, Reid is simply removing the problem from the formula altogether.

Instead, he’s writing a bill that would achieve about $2.7 trillion in spending cuts over a decade while raising the $14.3 trillion U.S. debt limit by an identical amount.

If this streamlined plan were to pass Congress, there would be no need to revisit the divisive debt limit fight until 2013, after the presidential and congressional elections. Democrats would be glad to see no benefit cuts to popular Medicare, Medicaid and Social Security programs.

Financial markets would be happy that government borrowing authority is ensured through 2012.

Some of the savings could be squishy, such as counting money not spent in the future on wars as the United States withdraws from Iraq andAfghanistan.

Also, overall deficit reduction is short of the $3 trillion to $4 trillion many had hoped for, including financial markets.

And there likely would not be anything in the plan to force future reforms of the cumbersome U.S. tax code and major benefit programs for the poor and elderly that will increasingly weigh on the federal budget.

The result could be that conservatives won’t go along.

And it’s unclear how U.S. credit ratings agencies would view the legislation.

House of Representatives Speaker John Boehner, the top U.S. Republican, is going ahead with a two-stage program to achieve some spending cuts and a stopgap debt limit increase with plans to do another installment of both next year. He’d start with about a $1 trillion debt limit hike by Aug. 2, with a similar or greater amount of spending cuts.

Then, over the next six or seven months, Congress and Obama would fight over large additional savings — maybe from expensive benefit programs and by reforming the tax code — in order to get a second installment of the debt limit increase.

Boehner also might attached language requiring passage in Congress of a balanced budget amendment to the U.S. Constitution.

Tea Party conservatives who are important to Boehner’s political future have been pushing for such an ambitious plan and especially like the fact that it includes no tax hikes.

It is complicated, and sets up another difficult fight over the debt limit next year that could rattle financial markets. It could cause credit ratings agencies to downgrade the U.S. prized Triple-A rating.

If the Senate were to pass the Reid plan and the House were to pass the Boehner plan, could the two be married?

Possibly. There could be a debt limit increase that carries through 2012 with no tax hikes, coupled with mechanisms to try to achieve more savings than Reid’s $2.7 trillion.

But leaders would have to work hard to find a “sweet spot” with just enough adjustments to get the necessary majorities for passage in Congress. And they’d be under an almost impossibly tight deadline.

A backup “fail-safe” plan first proposed by Mitch McConnell, the top Senate Republican, could be dusted off if it appeared the two sides could not reach a compromise on their competing bills.

Through a complex back-and-forth between the White House and Congress, it would allow Obama to raise the debt limit by $2.4 trillion in three installments through November 2012, when Obama and most lawmakers are up for re-election.

Under the McConnell plan, Republicans would not have to vote to raise the debt limit.

Obama has said that “at a minimum” the debt limit has to be raised and that he will take responsibility for that if the McConnell plan passes Congress.

House Republicans hate the plan, saying it would be a missed opportunity to get the big spending cuts they demand.

It’s getting late to launch yet another round of negotiations, but at some point, leaders from both parties are going to have to work out either a brand new deal or one that accepts elements of their respective bills.

This seems to be the most unlikely scenario.

Some have argued that Obama could ignore Congress if it fails to raise the debt limit and order continued borrowing by relying on the 14th Amendment of the U.S. Constitution.

The fourth section of the 14th Amendment states that the United States’ public debt “shall not be questioned.”

Obama has said White House lawyers had explored the option and they are “not persuaded” that it is a winning argument. But he did not rule it out.