Posted by WARREN MOSLER on 28th July 2011
The headlines are all about the risks of default or a too small deficit reduction package causing a downgrade of US debt.
And while markets react to those issues, they all miss the point.
The consequences of a downgrade to US govt debt are minor at best.
Note that when Japan was downgraded below Botswana,
with a debt/GDP ratio nearly triple that of the US,
interest rates remained the lowest in the world
The real risk comes from the spending cuts.
No debt ceiling extension is the worst case-
Government spending falls by some $150 billion/month as expenses can’t exceed revenues
Fed Chairman Bernanke mentioned that might reduce GDP by a full 6%
And that’s just the first order effect, as a falling economy means falling tax revenues,
Which means further reductions in Treasury spending in a pro cyclical nightmare.
And if they do extend the debt ceiling it will be with prescribed spending cuts.
This too adds drag to the economy.
The more the cuts are meaningful and immediate, the more the drag on the economy increases.
Because the markets don’t yet understand this,
the feedback they are giving is misleading policy makers,
and encouraging them to make deeper, more meaningful cuts.
Posted in Deficit, GDP, Government Spending | 72 Comments »
Posted by WARREN MOSLER on 28th July 2011
Maddening! The Clinton surpluses were driven by the dot.com bubble and unsustainable private sector deficits. When the bubble burts, stocks crashed, the economy went into recession, and the surplus quickly reversed itself. It was only AFTER the government’s budget moved sharply into deficit that the private sector was able to get out of the red. All of this would happened even without 9/11, the wars in Iraq and Afghanistan, the subprime crisis, etc. We cannot keep relying on asset bubbles (stocks, housing, whatever) to drive economic growth.
The simple fact is this: A GOVERNMENT SURPLUS IMPLIES A DEFICIT IN THE PRIVATE SECTOR. And the private sector, unlike the public sector, cannot survive when it’s running a deficit. Anyone who does not recognize this simple fact (intuitively or empirically) should not offer commentary on matters of such significance.
Government Deficits allow the private sector to net save financial assets. Balance the budget, and the private sector loses financial assets. Run a government surplus, and you drive the private sector into deficit.
Someone in Washington better figure this out pretty damn quick, or our children and grandchildren are going to be burdened like never before.
The Ph.D. Economists who blog here understand:
By Rep. Keith Ellison
July 28 — America has an historic opportunity. We have the chance to address our budget deficit in a manner not seen since President Bill Clinton created a budget surplus in 1999. And if we do it right, we could pave the way for a vibrant American economy based not on gimmicks like giveaways for special interests, but on job creation for working Americans. As co-chair of the Congressional Progressive Caucus, I urge us to avoid a default on the faith and credit of the United States while protecting Medicare, Medicaid and Social Security.
At every step of the way, Republicans in Washington have blocked a fair plan. The American people are demanding that our government resolves deficits while maintaining our promises to the middle class. Yet, an uncompromising political faction is stonewalling and ignoring the clarion call of this historic moment.
The Congressional Progressive Caucus stands with the American people. Long before Republicans took our economy hostage, we introduced the People’s Budget, the most fiscally responsible deficit plan introduced this year. The People’s Budget would eliminate the deficit in 10 years. Economists across the political spectrum have called it courageous and responsible. Introducing this budget was one of my proudest moments as a Member of Congress, because it shows the power of Progressive policies and values. Creating an economy that reduces deficits and creates jobs is a progressive value, not just a slogan as it is for the Tea Party.
As the People’s Budget has proposed, and the president has affirmed, our solution must reflect the same values that have motivated us historically. We believe in a fiscally healthy America because it leads to an economically healthy America. A balanced budget is critical precisely because it allows us to maintain the services that the middle class depends on. Any deficit deal that takes money away from seniors and American workers who rely on Social Security, Medicare, or Medicaid undermines the original goal of deficit reduction. Any deficit deal that cuts food stamps but pampers the wealthy is not only bad for the most vulnerable Americans, but damages our fiscal health.
Progressive economic policies lead to a sustainable economy. Americans understand this and history confirms it. Progressive policies implemented since the early 1900s launched America into the modern age and created a vibrant, middle class. Yet, for 10 years, Republicans have given more money to special interests, while the middle class has footed the bill. They passed the biggest tax cut ever for millionaires and billionaires, without paying for a dime of it. They passed a giveaway to the pharmaceutical lobbyists that will cost $1 trillion over 10 years. And it was George W. Bush, not President Obama, who ran roughshod into two unfunded wars, which alone are estimated to have cost us $4 trillion, more than 20% of the deficit.
The stakes are too high now. Republicans have taken us to the brink of default, and it is already hurting our economy. If we do default, the pain our middle class feels would be even worse. Retirement investments would be threatened by plummeting stock prices; higher interest rates would make it more expensive for Americans to pay off credit bills; and the unemployment rate would skyrocket in the face of decreased consumer spending. House Speaker John Boehner’s proposal is less a good-faith effort to avoid a default than an appeal to a narrow sliver of his political base. As Robert Greenstein, president of the Center on Budget and Policy Priorities wrote yesterday, “[Boehner's plan] could well produce the greatest increase in poverty and hardship produced by any law in modern US history.” Most worrisome of all, it wastes our opportunity for a long-term solution and stalls progress for another six months. Credit agencies have already hinted Boehner’s plan would not convince them that America is able to pay its bills.
Progressives know this is America’s moment to lead. The deadline is upon us – but so is the opportunity.
Posted in Congress, Deficit, Government Spending | 15 Comments »
Posted by WARREN MOSLER on 28th July 2011
From Goldman, this talk is making the rounds:
More on Jobless Claims
Some commentators are attributing the improvement in weekly claims to the fact that this year, the retooling of Auto plants have occurred over one week as opposed as the usual two weeks. This will imply a number in the region of 430,000 for next week.
Posted in Employment | 5 Comments »
Posted by WARREN MOSLER on 28th July 2011
Says it all:
By Sen. Jim DeMint
July 26 — I have troubling news. I’m very careful about criticizing my party’s leaders, but what is happening in Washington right now cannot be ignored.
House Speaker John Boehner (R-OH) has abandoned the Cut-Cap-Balance Act and is now pushing a new plan that is nearly identical to the one proposed by Senate Majority Leader Harry Reid (D-NV).
The Boehner-Reid plan gives the President an immediate increase in the debt limit and only promises to cut spending in the future. It violates all three principles of the Cut-Cap-Balance Pledge because it does not substantially cut current spending, it does not truly cap future spending, and it does not require the passage of a strong Balanced Budget Amendment before raising the debt limit.
In short, I oppose the Boehner-Reid plan because it won’t balance the budget and stop the debt that is destroying our country.
The Boehner-Reid Plan
You will hear many claims about this plan over the next few days as it is pushed through the House and Senate. Some of these claims will be true, but many will be false. Here are the facts. The Boehner-Reid plan:
Provides two increases in the debt limit — $900 billion and $1.6 trillion — totaling $2.5 trillion. It gives the President an immediate $900 billion increase given that Congress does not vote to disapprove it. It gives the President another $1.6 trillion increase next year if a bill written by a new Super Committee passes both houses and becomes law.
Reduces spending by only $1.2 trillion over the next ten years. This amount won’t even come close to balancing the budget, as the debt is expected to grow by as much as $10 trillion over the next decade. The plan also reduces spending by only $6 billion in 2012. Considering that our government currently spends $10 billion a day, $6 billion is far too little to cut over the first year of the plan.
Calls for a vote on the Balanced Budget Amendment but does not require its passage. Without passage of a strong Balanced Budget Amendment, Congress will never break its addiction to spending.
Makes it virtually impossible to stop the debt limit from going up. The debt ceiling increases can only be stopped if Congress passes a resolution of disapproval and then votes to override the President’s veto with two-thirds support in the House and Senate.
Creates a new, 12-member Super Committee to write another “grand bargain” to reduce the deficit by at least $1.6 trillion. It does not, however, prohibit the Super Committee from writing a bill to raise taxes and destroy jobs. The bill can then be fast-tracked through the House and Senate with no amendments.
Why It Should Be Rejected
After reviewing the details of Boehner-Reid plan, I cannot support it.
It won’t balance the budget and stop the debt. Even if the cuts called for in the plan were real, the debt will still increase by $7 trillion over the next ten years.
It won’t protect our AAA bond rating. According to financial reports, this plan will not reduce long-term spending by enough to prevent a downgrade. If we lose our AAA rating, it will create higher interest rates and cause our debt to grow even faster.
It will likely result in higher taxes that will destroy even more jobs. The unemployment rate is over 9 percent. We cannot afford to lose more jobs when so many Americans are struggling to find work.
There are some in my party who think I should ignore the flaws of the Boehner-Reid plan, bite my tongue, and support my party’s leaders. If I thought this were a political game, that might make sense. But the future of our country is at stake, I don’t believe this plan will save it, and I have a moral obligation to say so.
The Way Forward
Fortunately, there is a much better solution.
The Cut-Cap-Balance Act would balance the budget, stop the debt, and protect our AAA bond rating. This legislation passed the House with bipartisan support but was blocked by Democrats in the Senate.
The votes in the Senate for Cut-Cap-Balance are there if Republicans stand firm. 23 Democrats in the Senate have expressed support for the Balanced Budget Amendment at some point in their careers. They’re blocking it now because they believe Republicans will blink and agree to something much less.
And that’s exactly what will happen if the Boehner-Reid plan is passed. It gives the big spenders in Washington everything they wanted — an increase in the debt limit, phony spending cuts, and a mechanism to pass tax increases.
Please call your senators today and urge them to oppose the Boehner-Reid plan and to demand passage of the Cut, Cap, Balance Act.
United States Senator
Chairman, Senate Conservatives Fund
By Erick Erickson
July 26 — I’m getting beat to hell and back by conservatives for insisting the GOP hold the line on Cut, Cap, and Balance. Even here at RedState, I’m getting accused of “ideological intransigence.” Yeah, here at RedState. There’s a first time for everything.
People want a deal. People want John Boehner’s deal. People are upset with me for not liking John Boehner’s deal. People are telling me, “They only have one house, Erick. You can’t expect them to not compromise. They control nothing.”
I’ve said all along I expect a deal and a compromise. Here’s the problem and I need you to understand this from perspective, whether you agree with me or not.
See, I worked to send people to Washington, DC to solve problems, to make things right, to fix the things that were broken, and to send power back to the states. They are not doing that.
We all saw Democrats go to Washington in 2008 and take the whole thing. They controlled everything and they made everything worse. They passed a stimulus bill that killed or ruined hundreds of thousands of jobs in the private sector while growing the government. They increased dependency on the federal government. And then they passed Obamacare and socialized American healthcare. But it doesn’t fully take effect until 2014. We saw Democrats willing to lose their positions to lurch the nation left.
So we sent to Washington an army of conservatives to Washington to defund Obamacare and stop the White House. And now they’ve gotten there and have refused to fight. They promised and put in writing that they’d cut $100 billion from the federal government budget in 2011 and they ultimately cut only $38 billion. The Congressional Budget Office, when it was done scoring it, said they really were only cutting about $500 million and it would cost more money that it was worth it to actually cut those dollars.
So they said, “But we”ll stand firm on the debt ceiling. We’ll hold the line.” Everybody gave them a pass and said, “Okay, hold the line on the debt ceiling.”
Now here we are the week before the deadline. John Boehner laments they should have done it sooner, but he refused to do it sooner. The Speaker has prevented the Republicans from submitting legislation to ensure we would not default so that he would have leverage over his own members to force them to take a deal. And now they are dealing.
What is their deal?
Their deal creates another committee to look at spending — the 18th in the past 30 years. These 18 committees have never done anything except raise taxes. Their spending cuts are put off a decade and future congresses ignore them.
Boehner’s spending caps are easily waived as they’ll be rules, not laws. And they punt.
A lot of you are emailing and getting on twitter saying to take the deal. Take the compromise. Why should we compromise? That’s what we always do. Even when in the majority we compromise. The Democrats didn’t compromise on healthcare. But you people want to compromise. Republicans, whether in the majority or minority, are always compromising in favor of bigger government and imaginary spending cuts.
To make matters worse, why the hell are the Republicans the ones coming up with the plans if they only control one house of one branch of the federal government? Why are they doing it? We’re on the third damn plan. They aren’t even compromising with the Democrats. They are compromising with themselves.
The Democrats are holding their line. The GOP is splitting conservatives. The Democrats are saying “Raise the debt ceiling. Don’t cut anything.” And Boehner is saying okay and putting in cuts that take affect in year eight of ten so none of them will be around to be held accountable. Why?
The GOP came up with Paul Ryan’s plan. They passed it. They took bullets. The GOP put him in a witness protection program and dropped it like a hot potato.
So then the GOP passed Cut, Cap, and Balance and the Democrats beat them up and again accused the GOP of killing grandma. The leadership was lukewarm to it and never fought for it. And immediately after voting for it, the leadership said, “Now, let’s move on to the third plan.”
Are these all just symbolic votes? If so, I’d rather some substance. This symbolism is getting the GOP killed with nothing to show for it.
Why the hell are we on our third plan when the Democrats haven’t even come up with one plan? They haven’t even passed a budget in over 800 days. We’re in this mess because Harry Reid, in December of 2010, refused the raise the debt ceiling so the GOP could own the problem. The GOP fell into the trap with eyes wide open.
And the Republicans are falling for it yet again.
And now I’m being accused of thinking this is all a game even by long time RedState readers. I do not think this is all a game.
I know the credit rating is going to be downgraded and I don’t want it to happen. You people who want the deal are so worked up in emotion that you are ignoring all the facts. Here are the facts:
1. S&P says we need a deal of at least $4 trillion in cuts to avoid a credit rating drop.
2. Neither Boehner nor Reid get us there.
3. The only plan that gets us there is Cut, Cap, and Balance and the GOP is running away from it as fast as they can. The GOP already passed it and it just four votes shy of a majority in the Senate.
No one wants to fight. “No, we’ve already had that vote. It can’t pass the Senate,” they say.
There will be no default on August 2nd. We know it will not happen. How do we know? Because we have more money coming in each month than is needed to pay principle and interest on our national debt. And we have had multiple prior occasions where we have gone passed the deadline and the world did not suddenly end. It is all political rhetoric. Shame on you for succumbing to fear.
Barack Obama does not want to be remembered as the President on whose watch the nation defaulted. His leverage goes away on August 3rd and the GOP holds all the cards. We won’t default. We can improve our negotiating position.
The GOP could hold the line. And because they won’t hold the line, they are tanking our credit behind a bunch of smoke and mirrors. If the Democrats blame the GOP when the credit rating drops, the GOP will damn well deserve the blame if they stick with Boehner’s plan.
They could at least fight to turn the tide. They could at least hold the line.
Posted in Deficit, Government Spending, Obama, Political, TREASURY, USA | 18 Comments »
Posted by WARREN MOSLER on 28th July 2011
Somewhat misleading headline.
It reflects the odds of being able to deliver a specific treasury bond to the insurer at par.
By Michael Mackenzie and Nicole Bullock
May 25 (FT) —Insurance Cost Against US Default Hits Record
Published: Wednesday, 27 Jul 2011 | 10:14 PM ETText Size
By: Michael Mackenzie and Nicole Bullock in New York
The cost of buying insurance against a default by the U.S. rose to a record on Wednesday, in a sign of growing unease that gridlock in Washington over raising the federal debt ceiling may result in the Treasury failing to pay interest to bondholders.
In a CDS, a buyer of protection is compensated by the seller should there be a default or missed payment, known as a “credit event”. Premiums for one-year U.S. sovereign CDS rose sharply this week and traded at about 90 basis points in London on Wednesday, overtaking the previous high set in March 2009.
In the event of a U.S. credit event, the buyers of CDS would locate the February 2039 Treasury bond, currently priced at less than $88, and deliver that to the writers of insurance and receive $100 back, or par.
Posted in TREASURY, USA | 1 Comment »