Tag Archives: debt ceiling

Debt ceiling dynamics revisited

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First, I’d guess the President will sign anything Congress passes, including short term measures.

But he might not.

And yes, there are options that allow the executive branch to continue to deficit spend if it wanted to, ranging from issuing a multi trillion dollar platinum coin to spending under cover of the 14th amendment.

However, there’s a real possibility Congress won’t pass anything for the President to sign, or that the President vetos what they do pass, and that the Treasury honora the current debt ceiling and limits spending to tax revenue.

Should that be the case, the US govt, as widely discussed, immediately goes to a ‘balanced budget’ mode, prioritizing interest payments, so there is no default by the US Treasury.

That means a lot of other bills won’t get paid.

Chairman Bernanke said that this could cut 6% off of GDP and send the US into a recession with GDP going from positive to negative.

However, falling GDP means falling revenues which means more spending cuts, and revenues falling further.

It also means the automatic fiscal stabilizers of rising transfer payments will not be funded by deficit spending and therefore not provide the support they have provided in all prior downturns.

In other words, for the first time the US would experience an unchecked downward spiral, which could make the downturn that much more severe than the Fed Chairman suggested.

And as difficult as it might be for the US, the euro member nations may be looking at something even more catastrophic.

The drop in US consumer, business, and govt spending will mean a drop in sales for euro zone exporters, possibly sending that region into negative GDP growth and falling govt revenues.

This means their current solvency and funding issues further deteriorate as the entire euro zone could experience a funding barrier and general default.

While the ECB can, operationally, write any size check required to fund the entire region, it doesn’t want to do that, and can be expected to wait until things deteriorate sufficiently to the point were there is no other choice.

Ironically, the US debt ceiling, a seemingly innocuous relic of the gold standard, where it once served to protect the nation’s gold supply and should have been eliminated when the US dollar ceased to be officially convertible into gold, could now bring down the entire world economy, and threaten the world social order as well.

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Business doesn’t create jobs, consumers do/more debt ceiling comments

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Business doesn’t create jobs – consumers do!

It is an article of faith by all parties involved that businesses are the job creators, particularly small businesses, and hence their every move is predicated on helping businesses create jobs.

Mercy! Can’t they get anything right?

Businesses hire to service consumers. A restaurant that’s full doesn’t layoff anyone, no matter how much he hates the government, and the same goes for department stores, engineering firms, etc.

And when stores are empty, there’s no way they will or should hire. It’s a waste of human endeavor. In fact, business serves public purpose best by producing and selling its output with as few employees as possible. That’s called productivity, which is what makes us rich in real terms.

Labor is inherently a scarce resource. There are only so many of us to get all the work done. We lost eight million jobs in 2008. Why? Because eight million people all of a sudden decided they’d rather go on the dole than work?

No. It’s because sales collapsed. In a heartbeat, car sales went from near 17 million/yr to just over 9 million/yr. And why did sales collapse? Because we all lost our credit cards.

How do we get back sales and all the lost jobs, and then some? How about we stop taking FICA (Social Security and Medicare taxes) out of the paychecks of people who work for a living, so sales can resume from income rather than from consumer debt? What’s wrong with that?

And how about suspending FICA for businesses as well, to lower their costs and help keep consumer prices from rising. That would also be a good thing.

So why don’t our fearless leaders just do it? Because they think they need those taxed dollars for Social Security and Medicare.

Can’t they get anything right?

Federal taxes regulate demand (our spending), they don’t ‘bring in’ anything. The federal government ‘collects taxes’ simply by lowering the balance in our bank account. No gold coin drops into some government bucket. It’s just data entry, just the Federal Reserve changing numbers on their spreadsheets.

Chairman Bernanke has told us repeatedly how the federal government actually spends, including Social Security and Medicare spending: they just use their computer to mark up the numbers in our bank accounts. They don’t call China for a loan and they don’t check with the IRS to see how collections are going.

Federal government spending doesn’t ‘come from’ anywhere. Everyone inside the Federal Reserve knows it, and has always known it. They know that suspending FICA taxes does not alter their ability to make Social Security and Medicare payments. They all laugh off the idea that FICA actually funds anything – a ‘useful fiction’ as it’s been called since the program began in the 1930’s.

That ‘useful fiction’ is no longer seems very useful, unless you’re trying to destroy the US economy.

Even with sky-high unemployment we can easily afford to both suspend FICA and truly strengthen Social Security and Medicare by increasing the minimum benefits and closing the donut holes.

This is not ‘adding stimulus’. It’s removing drag by removing massively regressive and punishing taxes. And it allows consumers to drive sales until they’ve created all the private sector jobs we need.

And I see no harm, along the way, in sustaining the public infrastructure that serves public purpose, and tossing the states a per capita payment to make up for what the federal government did to them in 2008. And, as should go without saying, there should be an $8/hr federally funded transition job for anyone willing and able to work, to facilitate the transition from unemployment to private sector employment.

But that’s not what’s going to happen.

It looks to me like there are too many members of Congress who can’t vote for any package, due to prior pledges: Democrats who can’t vote for cuts in Social Security benefits or eligibility, Republicans pledged not to ever vote to raise taxes, and some pledged to never vote to raise the debt ceiling for any reason. The compromise packages lose votes from both sides from those who are pledged to never compromise.

This means a partial federal shutdown is a high probability, with a sudden cut in spending cutting into sales and therefore jobs, as just described.

Treasury rates will stay low and probably fall further, with the Fed rates presumed to stay low for a lot longer. Energy and commodities will deflate, the dollar will get stronger, stocks will fall as top line growth forecasts fall, Europe and Asian stocks will fall as their largest export market becomes at-risk. And, as sales fall and unemployment rises, the US deficit will rise via the automatic stabilizers of falling tax revenues and increased transfer payments – if the government pays them…

And if, alternatively, a compromise package is reached, the deficit reduction plan will cause the same things to happen, only not as severely, and it’s back to death by a thousand cuts.

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MMT to President Obama and Members of Congress:

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Comments welcome, and feel free to repost:

MMT to President Obama and Members of Congress:
Deficit Reduction Takes Away Our Savings

SO PLEASE DON’T TAKE AWAY OUR SAVINGS!

Yes, it’s called the national debt, but US Treasury securities are nothing more than savings accounts at the Federal Reserve Bank.

The Federal debt IS the world’s dollars savings- to the penny!

The US deficit clock is also the world dollar savings clock- to the penny!

And therefore, deficit reduction takes away our savings.

SO PLEASE DON’T TAKE AWAY OUR SAVINGS!

Furthermore:

There is NO SUCH THING as a long term Federal deficit problem.

The US Government CAN’T run out of dollars.

US Government spending is NOT dependent on foreign lenders.

The US Government can’t EVER have a funding crisis like Greece-
there is no such thing for ANY issuer of its own currency.

US Government interest rates are under the control of our Federal Reserve Bank, and not market forces.

The risk of too much spending when we get to full employment
is higher prices, and NOT insolvency or a funding crisis.

Therefore, given our sky high unemployment, and depressed economy,

An informed Congress would be in heated debate over whether to increase federal spending, or decrease taxes.

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CBO Congressional Report- U.S. Could Face European-Style Debt Crisis

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How about the accounts sticking to accounting.

Just in case you thought there was any hope:

But most ominously, the CBO report warns of a “sudden fiscal crisis” in which investors would lose faith in the U.S. government’s ability to manage its fiscal affairs. In such a fiscal panic, investors might abandon U.S. bonds and force the government to pay unaffordable interest rates. In turn, the report warns, Washington policymakers would have to win back the confidence of the markets by imposing spending cuts and tax increases far more severe than if they were to take action now.

U.S. Could Face European-Style Debt Crisis: Congressional Report

June 22 (AP) — The rapidly growing national debt could soon spark a European-style crisis unless Congress moves forcefully, the Congressional Budget Office warned Wednesday in a study that underscores the stakes for a bipartisan group working on a plan to reduce red ink.

Republicans seized on the non-partisan report to renew their push to reduce costs in federal benefit programs such as Medicare — the federal government health care program that benefits the elderly.

The report said the national debt, now $14.3 trillion, is on pace to equal the annual size of the economy within a decade. It warned of a possible “sudden fiscal crisis” if it is left unchecked, with investors losing faith in the U.S. government’s ability to manage its fiscal affairs.

Democrats and Republicans have been stepping up budget talks aimed at averting what could be the disastrous first-ever default on U.S. government debt. A bipartisan group led by Vice President Joe Biden tasked with reaching an agreement has not made the politically difficult compromises on the larger issues, such as changes in Medicare, or tax increases.

The study reverberated throughout the Capitol as Biden and negotiators and senior lawmakers spent several hours behind closed doors. The talks are aimed at outlining about $2 trillion in deficit cuts over the next decade, part of an attempt to generate enough support in Congress to allow the Treasury to take on new borrowing.

Biden made no comment as he departed, except to say the group would meet again on Thursday and probably Friday as well.

The CBO, the non-partisan agency that calculates the cost and economic impact of legislation and government policy, says the nation’s rapidly growing debt burden increases the probability of a fiscal crisis in which investors lose faith in U.S. bonds and force policymakers to make drastic spending cuts or tax increases.

“As Congress debates the president’s request for an increase in the statutory debt ceiling, the CBO warns of a more ominous credit cliff — a sudden drop-off in our ability to borrow imposed by credit markets in a state of panic,” said Republican House Budget Committee Chairman Paul Ryan.

The findings aren’t dramatically new, but the budget office’s analysis underscores the magnitude of the nation’s fiscal problems as negotiators struggle to lift the current $14.3 trillion debt limit and avoid a first-ever, market-rattling default on U.S. obligations. The Biden-led talks have proceeded slowly and are at a critical stage, as Democrats and Republicans remain at loggerheads over revenues and domestic programs like Medicare and Medicaid.

With Republicans insisting that the level of deficit cuts at least equal the amount of any increase in the debt limit, it would take more than $2 trillion in cuts to carry past next year’s elections. House Republican leaders have made it plain they only want a single vote before the elections.

That $2 trillion-plus goal is proving elusive. And a top Senate Democrat warned Wednesday that it would be insufficient anyway.

“While I am encouraged by the bipartisan nature of the leadership negotiations being led by Vice President Biden, I am concerned by reports the group may be focusing on a limited package that will not fundamentally change the fiscal trajectory of the nation,” said Senate budget Committee Chairman Kent Conrad, a Democrat. “That would be a mistake.”

Democratic leaders, however, held a news conference Wednesday to argue for more economic stimulus measures such as a proposal floated by the White House to extend a payroll tax cut enacted last year. The move demonstrates the continuing appeal of deficit-financed policy solutions — suggested even as warnings of the dangers of mounting debt grow louder and louder.

“We absolutely need to reduce our deficit. We know that,” said Demoratic Senate Majority Leader Harry Reid. “But economists tell us that reducing spending is only half the equation. The other half is measures to create jobs.

President Barack Obama planned to meet with House Democratic leaders Thursday to discuss the status of the deficit reduction talks. The meeting comes as Democrats want the president to rule out Medicare benefit cuts as part of any budget deal.

The White House said the meeting will address deficit reduction through a “balanced framework,” a term the White House uses to describe cuts in spending coupled with increased tax revenue.

With the fiscal imbalance requiring the government to borrow more than 40 cents of every dollar it spends, the CBO predicts that without a change of course the national debt will rocket from 69 percent of gross domestic product this year to 109 percent of GDP — the record set in World War II — by 2023.

The CBO’s projections are based on a scenario that anticipates Bush-era tax cuts are extended and other current policies such as maintaining doctors’ fees under Medicare are continued as well. The debt would be far more stable under the budget office’s official “baseline” that assumes taxes return to Clinton-era rates and that doctors absorb unrealistic fee cuts.

Economists warn that rising debt threatens to devastate the economy by forcing interest rates higher, squeezing domestic investment, and limiting the government’s ability to respond to unexpected challenges like an economic downturn.

But most ominously, the CBO report warns of a “sudden fiscal crisis” in which investors would lose faith in the U.S. government’s ability to manage its fiscal affairs. In such a fiscal panic, investors might abandon U.S. bonds and force the government to pay unaffordable interest rates. In turn, the report warns, Washington policymakers would have to win back the confidence of the markets by imposing spending cuts and tax increases far more severe than if they were to take action now.

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former President Clinton on the debt ceiling issue

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Just in case you thought former President Clinton ever understood the monetary system:

Bill Clinton: Brief Debt Default ‘Might Not Be Calamitous’

“We regret if there has been a misinterpretation of a comment President Clinton made about raising the debt limit. President Clinton did not in any way mean to suggest that a default would not be highly damaging for the economy even for a very short period of time. He inadvertently misspoke. What he meant to say was that if a vote to extend the debt limit failed in advance of a default, that might not be harmful for a couple of days, but that if people thought that we might actually default, that in his words ‘we were literally not going to pay our bills anymore, then they would stop buying our debt.'”

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GDP Gain Just 1.8%

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No actual evidence, but my point remains that if the executive branch can cut spending they don’t like simply by not spending what’s authorized by Congress, they can take the pressure off demands for other spending cuts.

Also, again conjecture on my part, the QE and zero rate ‘tax’ (reduced interest income) may be what’s keeping a lid on growth here much like what’s happened to Japan for nearly 20 years.

As previously discussed, with 0 rates seems to me taxes can be quite a bit lower for any given size govt (larger deficit) without being ‘inflationary’. Unfortunately our fearless leaders are all going the other way.

Economic Growth Disappoints as GDP Gain Just 1.8%

May 26 (Reuters) — Surging gasoline prices and sharp cutbacks in government spending caused the economy to grow only weakly in the first three months of the year. Consumer spending slowed even more than previously estimated.

The Commerce Department says the overall economy grew at an annual rate of 1.8 percent in the January-March quarter.

That was the same as the government’s first estimate a month ago. Consumer spending grew at just half the rate of the previous quarter. And a surge in imports widened the U.S. trade deficit.

Many economists believe the economy is growing only slightly better in the current April-June quarter. Consumers remain squeezed by gas prices near $4 a gallon and renewed threats from Europe’s debt crisis.

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Poll: Public opposed to raising debt ceiling

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Poll: Public opposed to raising debt ceiling

By Jordan Fabian

May 13 — The public remains opposed to raising the nation’s debt ceiling as lawmakers struggle to develop a plan to hike the legal borrowing limit, a new poll released Friday shows.

Forty-seven percent say they don’t want their member of Congress to vote to raise the limit, compared to 19 percent who do. Thirty-four percent say they don’t know enough to say, according to a Gallup poll.

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The other Warren (Buffet) gets MMT?

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Waiting for the day when he adds:

‘There for federal taxes function to regulate aggregate demand, and not to raise revenue per se.’

Warren Buffett: Failure to Raise Debt Limit Would Be ‘Most Asinine Act’ Ever By Congress

By Alex Crippen

April 30 (CNBC) — Warren Buffett says if Congress fails to raise the U.S. debt limit, it would be its “most asinine act” ever. But he told shareholders today there’s “no chance” lawmakers will fail to do so, despite “waste of time” debates on Capitol Hill.

While Buffett doesn’t want the nation to keep increasing its debt relative to GDP, he says there’s shouldn’t be a legislated debt limit to begin with, because circumstances change.

Buffett says the U.S. will not “have a debt crisis of any kind as long as we keep issuing our notes in our own currency.” Inflation resulting from a “printing press” approach, however, is a serious threat.

Charlie Munger’s view: the political parties are competing with each other to see who can be the most stupid, and they keep topping themselves.

If the debt limit is not raised, the government would run out of money, forcing a significant shutdown.

The current $14.3 trillion limit expires on May 16, although the administration has said it will be able to juggle some funds so that a shutdown would not happen immediately.

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Joe Firestone post on sidestepping the debt ceiling issue with Coin Seigniorage

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Joe Firestone has a new post on Coin Seigniorage, where he gives credit to our own Beowolf’s comment on this website.

As far as I’ve been able to determine, it does work operationally. It seems the US Treasury is already legally empowered to simply mint it’s own platinum coin in any denomination it wants and effectively deposit it in its Fed account, rather than sell bonds to the public to fund its Fed account.

This process doesn’t change actual govt spending, so doing it this way doesn’t add to inflation, nor does it change the fact that govt deficit spending adds income and net financial assets to the other, non govt sectors. It’s just that the new financial assets will simply be new reserve balances at the Fed, rather than new Treasury securities (which are also simply accounts at the Fed).

What issuing these coins does do is remove the legal need for the debt ceiling to be raised, and also reduce the amount of outstanding Treasury securities, which is what is called govt debt. So while both reserves and Treasury securities are, functionally, govt liabilities and differ in name (and sometimes duration) only, the headline rhetoric does make that distinction. So technically, this process eliminates the ‘national debt’ and removes any (misguided) notion of solvency risk:

Links to the post on various websites:

Correntewire

Firedoglake

Our Future

Daily Kos

The most discussion is at Kos.


The best comments are at Correntewire.

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Debt ceiling dynamics

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My best guess is there will be little or no fight over the debt ceiling extension.

I think the President will agree to pretty much whatever the Republicans want, and get more than enough Democrats to join him.

Best I can tell, the entire Congress agrees the deficit is a long term problem that absolutely must be addressed. The only arguments against ‘fiscal consolidation’ that I’ve see are the ‘bleeding heart’ arguments which don’t cut it when they all believe Greek type insolvency looms.

Also, the ball is in the Republican’s court, as they can’t just be against raising the debt ceiling.

So it will be up to them to take the lead and offer terms and conditions for their votes, after which enough Democrats will pretty much agree to it all, including cuts in Social Security and Medicare expenses, of one type or another, current and future.

All of which dooms the US economy to suffer from a severe lack of aggregate demand for the foreseeable future.

The one very faint glimmers hope are the Senators from CT- Joe Lieberman and Richard Blumenthal, only because they alone know better.

Both have read my book, the 7 Deadly Innocent Frauds of Economic Policy, and have engaged me in thorough discussion, and both know as a fact of monetary operations that:

1. The federal govt can’t run out of money.

2. Paying off China is nothing more than debiting their Fed securities account and crediting their Fed reserve account, with no grand children writing any checks.

3. The Social Security issue, therefore, can’t be about solvency, only potential inflation.

4. For a given size of the federal govt there is always a level of taxation that corresponds to full employment

5. The trade deficit is an enormous benefit, and we can set taxes at a level where we have enough spending power to support both domestic full employment and the purchase of anything the rest of the world wants to sell us.

However, it is highly unlikely they will even attempt to be heard, because, based on their history, they don’t act with specific regard to public purpose. They are more micro oriented, acting solely for political gain from their immediate constituents. So on this issue they will likely play along with what think is their voter’s understanding of these issues, and make no effort to educate them for the public good.

The words that come to mind when that happens are ‘intellectually dishonest.’

But I do hope I’m wrong and that at least one of them comes through for all of us.

There are also others outside of Congress who could come through and save the day. Current and senior Fed officials in the Department of Monetary Affairs are more than well versed in monetary operations, and know for a fact that operationally, federal spending is in no case revenue dependent. And much of the CBO, including former heads, know as a fact of accounting federal deficit spending equals and is in fact the only source of net savings of financial assets for the rest of us. But it’s highly doubtful any of them will come forth to save the day.

Bottom line- believing we could be the next Greece continues to keep us on the path of becoming the next Japan.

(Feel free to republish and otherwise distribute)

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