June 14, 2011
A game of chicken
Making a political game out of the debt ceiling is playing with fire.
Treasury Secretary Timothy Geithner has been warning of serious repercussions if the debt ceiling is not raised, for example, in this letter written May 13 to Senator Michael Bennett (D-CO):
Failure to raise the debt limit would force the United States to default on these obligations, such as payments to our servicemembers, citizens, investors, and businesses. This would be an unprecedented event in American history. A default would inflict catastrophic, far-reaching damage on our Nation’s economy, significantly reducing growth, and increasing unemployment.
A default would call into question, for the first time, the full faith and credit of the U.S. government. As a result, investors in the United States and around the world would be less likely to lend us money in the future. And those investors who still choose to purchase Treasury securities would demand much higher interest rates, reflecting the increased risk that we might default on our obligations again.
Default would not only increase borrowing costs for the Federal government, but also for families, businesses, and local governments – reducing investment and job creation throughout the economy. Treasury securities set the benchmark interest rate for a wide range of credit products, including mortgages, car loans, student loans, credit cards, business loans, and municipal bonds.
Others question whether it's really such a big deal. Here's former Governor Sarah Palin (R-AK):
I don't believe Tim Geithner as he cries wolf for the fourth time now, telling us that there is a drop-dead date and crisis will ensue, and economic woes will befall us even greater than they already are if we don't increase the debt limit.
The truth is that there is no drop-dead date. This is because the debt ceiling is an inherently mushy concept. There are plenty of accounting gimmicks that the government can use, and is using, to postpone the crisis Geithner sketched in the quote above. Indeed, in his letter to Congress dated April 4, Secretary Geithner described the measures the government is using at the moment. These derive from the fact that much of the debt that the government has accumulated is owed to itself or to other branches of the government, such as State and Local Government Series Treasury securities, the Civil Service Retirement and Disability Fund, Government Securities Investment Fund (G Fund) of the Federal Employees' Retirement System Thrift Savings Plan, and the Exchange Stabilization Fund. Intragovernmental obligations subject to the debt ceiling are essentially IOU's from the government to itself, which could in principle be swapped with less formal IOU's in order to stay within a statutory ceiling. The government can also redirect funds appropriated but not spent or postpone accounts payable and tax refunds.
Keith Hennessey, who served as Director of the National Economic Council under George W. Bush, warned last April that the mushiness of this boundary is precisely what makes the game of brinkmanship very tricky:
A temporary continuing resolution has a hard deadline, while a debt limit increase does not. Everyone knew that if no agreement was reached and no new CR was enacted by midnight last Friday, the government would shut down at that moment. That precise deadline created pressure on both sides to make decisions.
The debt limit works differently. You have to increase the debt limit, but there isn’t a precise deadline. Treasury has tools to manage its cash and borrowing from financial markets. There are tricks Treasury can use to dip into other, special purpose emergency reserves of cash (or other borrowing authorities) so that the debt subject to limit doesn’t increase quite as quickly as under normal operations.
I know the pressure to define every problem in terms of a "drop-dead date". I talk to reporters all the time who always want me to summarize any situation, whether it's government debt, oil prices, or the Fed's balance sheet, in terms of when the "tipping point" is really going to be reached. I always try to explain that the world doesn't work that way. Instead, there are risks that gradually increase as the pressures become more significant. How far is too far? I don't know. But why would you voluntarily choose to pile up the risks?
Some of Wall Street's biggest banks are preparing to cut their use of US Treasuries in August as a precaution against any turbulence that could follow if warring Republicans and Democrats fail to increase soon the US debt ceiling, a senior bank chief said.
One strategy, which bank executives only agreed to discuss without attribution due to the political sensitivities related to discussing Treasury debt, is to have more cash on hand to put up as collateral against derivatives and other transactions, decreasing the financial system's reliance on Treasuries.
If buyers of U.S. Treasuries are already getting nervous and making plans for alternatives, I would have some concerns, about how the dynamics of a Greek default could play out if it were to occur, for example, next week, even though we still have a month to go before the supposed drop-dead date.
Josh Barro summed up this way:
It's important to step back and consider the stakes here. Republicans say it is important, above all else, to rein in federal government spending. But the risk with excessive spending is not that government will literally become unaffordable or that we will be unable to service our debts....
It does not make sense to create a risk that U.S. Treasuries will be dislodged as the world's safe-haven investment as a strategy to shift the size of government by a percentage point of GDP or two. Winning this fight is not so important that it makes sense to throw caution to the wind, but that is what Republicans in Congress appear willing to do. The gamble looks even worse when you consider that a debt-limit-impasse-gone-wrong would not necessarily lead to Republicans getting their way on the long-term fiscal adjustment.
I agree. Republicans have picked the wrong line to draw in the sand.
Posted by James Hamilton at June 14, 2011 04:51 PMdigg this | reddit
It's also important to keep in mind that the mushiness of the exact date is two-sided; that is, the Treasury could run out of tricks sooner than 2 August. The Treasury's "drop dead date" is based on planned disbursements, but if vendors get nervous they could start to deliver goods sooner than the contractual delivery schedule. What then? Will the government refuse to sign the DD-250 forms accepting delivery of critical parts needed for the military? How will that look? BTW, this actually happened once before when the government refused to accept early deliveries because cash balances at the Treasury were dangerously low. Word has a way of getting around and businesses don't just sit their passively waiting to get shut down at the Treasury window.
Unfortunately it's not just clueless Republican politicians who don't understand the consequences of playing chicken with the debt ceiling. It seems that even 150 supposed grown-up economists who seem to think the Republicans are onto a good idea here. Hopeless. Don't these clowns understand that they effectively voted to raise the debt ceiling when the voted to cut taxes and when they passed a budget? How many bites at the apple do they think they're entitled to?
Posted by: 2slugbaits at June 14, 2011 05:20 PM
It doesn't make sense if your stated policy as a party is a strong dollar, if you're arguing that the administration is debasing the dollar. It does make sense in two cases: either you have a deep belief in the rightness of your cause no matter the consequences or you are willing to gamble because you really don't believe in a strong dollar, etc. My money is on a combination of the two: some are true believers, which means they're dangerous, and the GOP showed over the last decade they didn't care at all about the dollar's value (or the deficit). The "moderates" are afraid of the believers, afraid they won't escape their party primaries. That will only change when the believers start to lose seats.
Posted by: jonathan at June 14, 2011 05:21 PM
The second paragraph of Barro's passage reads equally as true if you substitute "Democrats" for "Republicans".
Let's not forget that it takes two to stalemate. Republicans are not the only ones drawing lines.
Posted by: Jeff at June 14, 2011 06:55 PM
If the government seemed to be using the money sensibly, like by financing bubble mortgages that are still current at a very low rate, I'd agree.
If I thought there was any prospect of the congress adopting a sensible budget, I'd disagree.
I think a hitting the ceiling is what we need. The problem is that I don't see us responding appropriately to the prospect.
Given the current state, I say raising the ceiling will likely make things worse in the long run. We need to face to the facts we should have 3 years ago.
Posted by: aaron at June 14, 2011 06:55 PM
aaron: "We need to face to the facts we should have 3 years ago."
I assume you mean "facts" like "tax cuts pay for themselves."
Posted by: Joseph at June 14, 2011 10:21 PM
I agree with Aaron.
The United States is bankrupt, in that its obligations at a fair value, far exceed its assets. Nothing anyone in Washington has proposed goes a fraction of the way towards solving that problem. At a very minimum, several government departments need to be shut down, several entitlements need to be cancelled, and new taxes need to be imposed.
The prospect of that happening in the current configuration is zero. If we default now. The next election can entertain serious proposals to rebuild the system.
Posted by: Walter Sobchak at June 14, 2011 10:28 PM
We simply need to prioritize debt and temporarily shut down some functions 'til we have a half sane budget.
Posted by: aaron at June 15, 2011 03:51 AM
The banks are addicted to the FEDs/Treasury manufactured arb opportunity. Cutting them off from the treasury could pressure them to lend to actual people and businesses at rates low enough to not brake 'em.
Maybe consider doing the right thing and either lower rates or write of a portion of principle on bubble debt (being that bank policy largely inflated prices and appraisers should have been more accountable). The high interst people have payed on principal higher than value has more than covered the difference in principal and value over the past few years. Banks are making a mint by not allow people to refi at 4% or below like they should.
Posted by: aaron at June 15, 2011 04:05 AM
Bankruptcy is not defined as inadequate assets vs liabilities. It is the inability to pay liabilities. We are not liquidating assets in an effort to pay. The US indeed has the ability to pay its liabilities, either because its credit is good or because it can raise revenue through taxes and fees. Those who do not understand the basics (that's you in this case, and aaron to, apparently) really aren't in a position to take informed positions.
On an unrelated issue, it would be nice if our Treasury Secretary showed an actual understanding of the expression "full faith and credit". It's original constitutional sense has nothing to do with borrowing money.
Posted by: kharris at June 15, 2011 04:54 AM
Let's talk briefly of the basis of the problem. If you are a Liberal/Democrat you believe government is the solution. If you are a Libertarian/Conservative/Republican you believe the government is the problem.
Pulling the covers back from this issue, which side is more correct? Did the public or expanding government cause this problem? Which side has a better answer more/less government and/or more/less deficit spending?
Most of the discussions center on the smaller details, as does this article and its comments. Regardless, continuing to concentrate on these smaller details/issues just delays the inevitable, a bond tipping point.
The fear of a bond tipping point is justified, as many believe continuing on the current path will have us reach that point as early as 2015.
Posted by: CoRev at June 15, 2011 04:59 AM
Since according to the Republicans, ending ethanol subsidies counts as a tax hike (only 34 dissenting) rather than a cut in spending despite its clear manipulation of the market principles they claim to hold dear, might one submit that most members of either party could'nt find their own arse with both hands and hoping that they correctly anticapate the effects of either an increase or hiatus in the debt level is the sort of hazy optimism usually associated with fans of chrystal meth.
The US needs to pay its debts. The US also needs to sort out its spending. The two are not mutually exclusive.
Posted by: LadyH at June 15, 2011 05:30 AM
It's difficult to take the people arguing for a default seriously. To describe them as deluded would be an understatement.
In 1979 there was technical default, and it caused a 60 basis point rise in the price of US debt - which didn't go away. The cost of that would be TRILLIONS.
But Republicans are so far gone that they don't care what the actual risk is.
Posted by: fladem at June 15, 2011 05:33 AM
Kharris: You would be correct based solely on the 1978 Bankruptcy Code. I really did not want to write a treatise on the subject, so I wrote: "in that its obligations at a fair value, far exceed its assets".
That was the definition of bankrupt prior to 1978. Given the unique ability of the United States to pay its obligation by running the "printing press", the current definition of bankruptcy is, at best, irrelevant.
To me the question is: When do you you want to tackle the real problems? Harry Reid wants to wait for 15 or 25 years. I don't.
Posted by: Walter Sobchak at June 15, 2011 05:48 AM
The fear of a bond tipping point is justified, as many believe continuing on the current path will have us reach that point as early as 2015.
Posted by: CoRev at June 15, 2011 04:59 AM
This is an amusing, but frequently made argument coming from the right.
They are worried that our credit situation might fall apart at an unspecified future date, CoRev picks 2015 out of a hat, yet the solution is to speed that 'credit falls apart' date up to this fall. Thats brilliant.
Im having trouble coming up with other industries where this approach works. Worried about your house flooding in the future but dont have free cash flow this month to pay for fixes? Do you call the guys who will repair the pipes over time? Or do you call the guys who will just go ahead and flood the house tomorrow?
Posted by: jason11 at June 15, 2011 06:08 AM
I thought the most ludicrous idea was that a few days default wouldn't matter. If it actually came to default the number of days wouldn't matter, having failed to avoid it, there would be no incentive to compromise, positions would harden and situation would become intractable.
Posted by: Lord at June 15, 2011 06:11 AM
Would it be unreasonble to dis-allow banks from charging interest on the underwater portion of single mortgage bubble debt?
Posted by: aaron at June 15, 2011 06:17 AM
flamden, I think most are not arguing for a default. Raising the debt ceiling is not required to prevent default. Rebudgeting could easily solve our problem were it politically feasible.
Would it be unreasonble to dis-allow banks from charging interest on the portion of single mortgage bubble debt not supported by asset value?
Posted by: aaron at June 15, 2011 06:26 AM
The fact that 60 point rise in treasury rates could break us highlights the irrationality of increasing borrowing.
Posted by: aaron at June 15, 2011 06:28 AM
James Hamilton says:
"Republicans have picked the wrong line to draw in the sand."
So Professor, what or where is the "right" line? With debt hitting $14 trillion, huge unfunded liabilities, huge payments to special interests that no politician is willing to cancel (and voters sheepishly approve, like farm subsidies), where is the "right" line?
I am surprised that you talk about the "wrong line", while you teach and work in a state that is basically bankrupt, and probably will need a bailout from the rest of us.
One more thing, Professor Hamilton claims that "this game of chicken is playing with fire". How do you know, Prof, that perhaps, maybe, *just maybe*, FIRE is exactly what the federal budget needs? What if this "fire" is not the wake-up call that politicians and sheepish voters need to actually DO something about all those unfunded liabilities, and NOT continue kicking the can down the road?
Posted by: Manfred at June 15, 2011 06:31 AM
(Borrowing to spend, borrowing to refi at lower rates would make sense. Reducing our cost of servicing debt, public and private, would free up a lot of disposable income and reduce risk and uncertainty greatly over a modest period of time.)
Posted by: aaron at June 15, 2011 06:31 AM
I concur. The Dems want to treat the debt ceiling and spending control as separate items, and they also want to push the next showdown past the 2012 elections. The public is broadly in favor of cutting spending and against tax increases. The trick is to cut spending in such a way that the usual interest groups cannot mobilize. The entitlement growth cannot be solved instantly, but the long term course has to be changed. The Dems are resisting this; they want a crisis where they can say they have no alternative but to raise taxes. They just don't want the crisis now.
Posted by: Rich Berger at June 15, 2011 06:43 AM
History is providing for references in the tax versus spendings laboratory tests.This epilogue is overstretched,but worth as a reduction to absurd reasoning.
On August 4th feudal tax rights are abolished,later the 'dime" tax allocated for the maintenance of social and charity support,then all taxes are abolished.The French citizens are no longer paying taxes.We are 1789.
Necker a banker in charge of the public finance (time when a banker was owning the bank and made responsible to the extent of his estates) is alarmed,the fiscal income is covering half of the public expenses only.
Necker still thought that borrowings was more socially inoculate than taxes,but expenses were running faster.The assets of the crown were supplemented by the assets of the clergy.We are in 1790 and the public expenses are still increasing,the borrowings are now guaranteed by the assets of the crown and clergy and coupled with a tax supported by Mirabeau 25% of the income when above 400 livres. Public expenditures are still running higher,the assets appropriation of the clergy is the remedy.New assignats (government bonds )are issued,the Law system is still in the memory and the assignat is depreciating in price.Before expiry date of the principal repayment, the government is purchasing at par the assignat,whilst the private market is giving a steep discount value to the bond.
At the Napoleonic period the assignat will be written off and paid at a 30% of its nominal value,the public finances had improved.
Posted by: ppcm at June 15, 2011 06:49 AM
Fladem said: "In 1979 there was technical default, and it caused a 60 basis point rise in the price of US debt - which didn't go away. The cost of that would be TRILLIONS.
But Republicans are so far gone that they don't care what the actual risk is."
Missing the obvious point that adding to the national debt by ~9-10% per annum adds no risk and cost.
That's worth a Sheesh!
Walter, as I pointed out above, some think we are sitting on the razor's edge of a tipping point. Whether it occurs months to a very few short years from now, how deluded to the potential risks are the Democratic leaders?
Posted by: CoRev at June 15, 2011 06:52 AM
Thanks. It is good to have different perspectives on the debate.
David Malpass puts it all into perspective. He details why the debt limit is a farce, why the Republicans will lose the debate as it is currently framed, and, most importantly, he gives a way out of our morass. Check out his interview with Steve Forbes.
Posted by: Ricard at June 15, 2011 07:50 AM
CoRev: Pulling the covers back from this issue, which side is more correct?
That's an easy question. It's hard to believe that people could forget so quickly, but just a decade ago liberals created a budget surplus. Remember that the liberals passed a tax increase in 1993 that Republicans claimed would doom the economy and destroy the country. Not one single Republican voted for that tax increase. In fact Al Gore as vice-president had to cast the deciding vote in the Senate. This led to record budget surpluses, the first in 30 years.
Perhaps you recall Greenspan and other Republicans in 2000 argued that the budget surplus was a great danger to the economy as justification for their massive tax cuts for the rich. In 2001 and 2003 Republicans put their tax cuts in place and it quickly led to record deficits. Even today those tax cuts remain the single largest component of the deficit and yet Republicans refuse to deal with the biggest cause of the current deficit.
So the answer to your question is obvious.
Posted by: Anonymous at June 15, 2011 08:39 AM
The current debt ceiling fight is apparently already having a negative effect on financial markets:
"The best indication of all that the market has already started reacting negatively is the current trading of credit default swaps on U.S. debt. As of late May, the number of CDS contracts — essentially insurance policies on the possibility of a default — had risen by 82 percent. Equally as important, the cost of a CDS — the best indication of how much riskier U.S. debt has become — rose by more than 35 percent from April to May. Last week I spoke to a number of people who calculate such things for a living, and they said this change means that the interest rate the U.S. government has to pay has already increased by as much as 40 basis points compared with what it otherwise would be. This means higher federal borrowing costs and deficits, and overall higher interest rates on everything from car loans to mortgages to credit cards.
Except when something unexpected occurs, the initial changes in market psychology and behavior start with just a few investors who act either because they are more or less risk averse, have better information, or are smarter. That means there are usually small signs of change before a market tsunami hits. In this case, there is now clear evidence that the uncertainty over the federal debt ceiling is already having the negative impact on financial markets that the Republican leadership has said will not occur. Just because it may not yet be obvious to everyone doesn’t mean it’s not happening."
And this caught my eye the other day (part of which is quoted here):
"One strategy, which bank executives only agreed to discuss without attribution due to the political sensitivities related to discussing Treasury debt, is to have more cash on hand to put up as collateral against derivatives and other transactions, decreasing the financial system’s reliance on Treasurys.
“We’re planning to lower our reliance on the use of Treasurys in early August and have more cash on hand as a contingency measure,” said a U.S. bank chief."
Combine this with an ECB planning to raise their policy rate next month potentially tripping off a major default and/or exit (Greece?)and we have the potential for parallel financial crises that would likely lead to a huge surge in the demand for dollars. How bad would that be?
The Federal Reserve has completed its purchases under QE2 and the 2 year zero coupon inflation swap, a measure of inflation expectations, has already below 2.0% from it's high of 2.7% in early May:
And look at the history of inflation expectations. The last rumblings of potential eurozone default over a year ago caused 2 year inflation expectations to fall from 1.5% to 0.9% over the course of the summer and led to a weakened economy (and which led to QE2).
Such decreases in inflation expectations have real consequences as they implicitly reveal aggregate demand expectations. After all it was a huge decline in inflation expectations from July to September of 2008, from 3.4% to 1.2%, that preceded the collapse of Lehmans, the run on money markets, and the freezing of credit markets and the Great Recession.
So much for the economic consequences of debt default. What about the political consequences of debt default?
Here is what Tom Donohue, president of the U.S. Chamber of Commerce, said on Monday in Atlanta:
"In one of the funnier moments during his Rotary talk, Donohue was asked if Congress was going to raise the debt ceiling.
Yes, it will be raised, Donohue answered, mainly because the country can not afford to not pay its bills. To those newly-elected representatives who say they aren’t going to raise the debt ceiling and will shut down government, Donohue said the U.S. Chamber has its own message: 'We’ll get rid of you.'"
Now the typical Republican response to all of this is that we are facing a fiscal crisis. Are we really?
Of course not. According to CBO estimates, if we merely do nothing (what the CBO calls the Extended-Baseline Scenario):
1) Let the Bush Tax Cuts expire (this alone will save $5.6 trillion in debt between FY 2013 and FY 2021 according to the CBO).
2) Let the Doc Fix end.
3) Let the ACA go into effect.
then the budget more or less goes into primary balance by FY 2014 and stays that way through at least 2080 (Figure A-1 page 68):
Sure, healthcare spending will consume two thirds of noninterest Federal spending by 2080 (20% of GDP). But that is not symptomatic of a fiscal crisis. That is symptomatic of a healthcare costs crisis. And so far the only Republican plan for addressing the healthcare costs crisis (Vouchercare) will according to CBO estimates will make it much worse:
So let's review.
1) Debt default will likely lead to very serious economic consequences (Depression redux?)
2) Debt default will alienate the US Chamber of Commerce.
3) The Republicans maintain there is a longrun fiscal crisis when there isn't one.
4) The only plan the Republicans have for addressing the healthcare costs crisis (Vouchercare) actually makes it worse.
5) According to the polls the Republicans have already alienated the senior vote with Vouchercare.
I'm looking forward to 2012.
Posted by: Mark A. Sadowski at June 15, 2011 08:45 AM
"It was just one logical jump for Hamilton to perceive that the national debts accumulated by the young nation during the Revolutionary War were also assets of increasing value, not worthless paper as people seemed to think; and in this case they were valuable possessions of the whole nation. Many prominent people, among them Thomas Jefferson, Albert Gallatin, and later Andrew Jackson lacked the imagination to grasp this simple but counter-intuitive truth, and fought it bitterly. When Hamilton proclaimed that, "A national debt is a national treasure," it was not viewed as a brilliant insight, but a sign of insanity"
Philadelphia Changes the Nature of Money
Posted by: anonymous at June 15, 2011 09:18 AM
Jason11 in response to my argument of a possible bond interest tipping point as early as 2015 says: "They are worried that our credit situation might fall apart at an unspecified future date, CoRev picks 2015 out of a hat, yet the solution is to speed that 'credit falls apart' date up to this fall. Thats brilliant."
In the end he adds little to the conversation that actually provides a solution. Moreover, he appears to believe there is no issue.
Jason11, what we are seeing is the voters finally getting the attention of Congress on one of their major issues, government spending. Please remember how I framed the problem: "Let's talk briefly of the basis of the problem. If you are a Liberal/Democrat you believe government is the solution. If you are a Libertarian/Conservative/Republican you believe the government is the problem.
Pulling the covers back from this issue, which side is more correct? Did the public or expanding government cause this problem? Which side has a better answer more/less government and/or more/less deficit spending?..."
We can guess which position you take, but please tell us how you would fix the overall problem without sarcasm and ridicule?
Finally, balancing the budget is the solution! It is simultaneously a simple math exercise (more in and less out, until the amounts balance), and a complex and difficult political exercise. That ole rule of countervailing forces still prevails in politics. The shift in force alignment is causing most of the angst and discussions.
Posted by: CoRev at June 15, 2011 09:35 AM
anonymous/AKA (a frequent commenting Federal employee from his Govt computer?) said this: "It's hard to believe that people could forget so quickly, but just a decade ago liberals created a budget surplus. Remember that the liberals passed a tax increase in 1993 that Republicans claimed would doom the economy and destroy the country. Not one single Republican voted for that tax increase. In fact Al Gore as vice-president had to cast the deciding vote in the Senate."
So in Keynesian terms the 93 tax bill was implemented to fix a structural deficit? And the 2001 tax cuts were not to fix a structural surplus. Surpluses are good when they are predicted to go on forever? Dunno, but the overall logic seem to be a little suspect.
I am always amazed at the logic of Dems who consistently point back to St Bill, ignoring the impacts of that ole Republican Congress that followed. Bad/unpopular legislation has election impacts: "The Republican Party won a majority of the votes cast for Congress for the first time since 1946 in 1994, which featured only the second significant increase in mid-term turnout in a quarter century."
What is also easy to answer was: which, bigger or less Federal Government, is the solution? Hint: check the Federal Government size and growth trend lines during St Bill's tenure. So was it a tax increase? Or was it smaller Federal Government? Or was it largely just plain luck, having nearly a full decade of technology bubble growth, most of it under a single president with a penurious Congress?
You can guess where I put my beliefs, and surprisingly that is what we will see when the dust settles around this political issue.
Posted by: CoRev at June 15, 2011 10:07 AM
We have had government gone wild for almost 2 1/2 years now. It has failed miserably - time to change course.
The Dems do not want to cut spending and they don't want to revisit the debt ceiling before the 2012. Maybe the Repubs should offer them two choices - a debt ceiling that has no cuts, but which has to be raised again in the second quarter of 2012, and a debt ceiling with significant cuts, but which should hold into 2013.
One silver lining of default - the welfare state is probably finished.
Posted by: Rich Berger at June 15, 2011 10:19 AM
In a nice, neat, model debt has its place. In the real world ... a debt ceiling is the only way to keep yahoos from spending money. So long as TBTF banksters take money from Washington and Ben Bernanke's printing press, I don't give you permission to spend one more red cent.
Frankly I would just as soon there be a little chaos amongst those who have been bailed out. Moral hazard applies to systems, too.
Am I crazy? Maybe. Am I stupid? No. Am I fed up with Washington? Yes.
Posted by: ArkansasAngie at June 15, 2011 12:43 PM
Although I understand a default of our debt has the potential to be catastrophic, in the end I still agree with the comment above by Manfred. At some point we have to get our fiscal house in order. We can't keep kicking the can down the road. We're nearing the end of the road, and if we kick the can again it's liable to bounce off a brick wall and hit us in the head. The party's over. Increasing the debt ceiling without significant (multi-trillion $) cuts is like giving an alcoholic another drink. There's no time like now to sober up.
Posted by: Brian at June 15, 2011 01:00 PM
Failing to raise the debt ceiling may cause assets to fall in price, which will give banks an opportunity to buy cheap, and then sell them once debt ceiling is raised.
James, CR has got it : "The debt ceiling debate is a charade, and it helps to point out that at some point even the phony posturing will be "self-defeating"."(by CalculatedRisk on 6/14/2011 02:45:00 PM).
Posted by: Johannes at June 15, 2011 01:51 PM
Let's talk briefly of the basis of the problem. If you are a Liberal/Democrat you believe government is the solution. If you are a Libertarian/Conservative/Republican you believe the government is the problem.
This is a cartoon version of things, straight from the minds of those geniuses at Fox News. As usual, you are conflating two very different issues. The question of what percent of GDP should be consumed by a structural level of government spending is a political issue that generally cuts along liberal/conservative lines. And that's a political issue. But that's not what we're talking about here. The issue is how best to handle a cyclical problem. It's a purely economic issue. Keynesian economics does not mean "let's have big government." Keynesian economics is not Bolshevism-Lite. The issue on the table is how to best handle a weakness in aggregate demand. Modern market economies are prone to persistent disequilibrium with people and businesses wanting to save too much relative to investment demand. In order to bring the two into line the market has to shrink income. The Keynesian answer is to avoid the pain and have the Federal Reserve lower interest rates. And if interest rate already at zero, then it is up to the government to soak up excess saving through fiscal policies. That doesn't have a damn thing to do with one's vision of government. It's a technical question of closing deviations between AD and potential GDP. I realize that Fox viewers not formally trained in economics prefer the cartoon version of "liberals versus conservatives," but that's not economics. It's theater. But for Fox News viewers and Tea Party types, math and real economics are just too hard.
The fear of a bond tipping point is justified, as many believe continuing on the current path will have us reach that point as early as 2015.
I'm sure many do believe that. A lot of people believe in all kinds of stupid things. The surest way to make that come true is to allow the Treasury to default on the debt. And the next best way to guarantee that result is to cut fiscal stimulus at the very time when the economy needs it most. Look, Adding $1T in the necessary stimulus to get the economy back up to full employment would cost the Treasury roughly $20B per year in real interest costs. Defaulting on the debt in order to squeeze out ill-advised spending cuts would possibly add a near permanent increase of at least 100 basis points to the 10 yr interest rate. That would be applied against all outstanding debt held by the public. That would far exceed the $20B in debt servicing costs. Sorry, but the GOP position here is just ridiculous. People who can't figure it out should not be allowed to vote.
Posted by: 2slugbaits at June 15, 2011 02:01 PM
CoRev Missing the obvious point that adding to the national debt by ~9-10% per annum adds no risk and cost.
This is a red herring because no one (except perhaps Republicans opposed to tax hikes) is talking about permanent deficits of 9-10% of GDP per year. The whole point of biting the bullet now with a fiscal stimulus large enough to do the job is precisely so we won't have to run huge deficits in the outyears. We can easily affort deficits of 15% of GDP for the next year or two. The long run effect would be trivial given very low debt servicing costs. What we can't afford is an economy that stays in the dumper for another decade, which is exactly what we're headed for if we follow the GOP's advice. And I'm sorry, but "aspirational goals" of 5% real GDP growth through tax cuts is not a plan.
What's needed is a big stimulus program to close the output gap, a big round of QE3, and then some major tax hikes and spending cuts around 2013/2014. Austerity economics has failed miserably in Britain...no reason to believe it would fair any better here.
Posted by: 2slugbaits at June 15, 2011 02:11 PM
Rich Berger The public is broadly in favor of cutting spending and against tax increases. The trick is to cut spending in such a way that the usual interest groups cannot mobilize.
Excuse me, but "the usual interest groups" that are most resistant to entitlement spending represent the core of the GOP. We're talking about older, white, conservatives living in rural areas. They are the primary constituency for Medicare, Medicaid (two-thirds goes to the elderly), defense spending, and farm subsidies. And the other half of the problem is a revenue shortfall. Guess which constituency is most resistant to tax hikes? Yep, older, conservative, white, rural GOP voters. Finally, a little bit of inflation would go along way towards getting rid of debt overhang. Again, guess which constituency is most against that? You guessed it. So which voters are the real drag on economic recovery? Look in the mirror.
Posted by: 2slugbaits at June 15, 2011 02:18 PM
Manfred What if this "fire" is not the wake-up call that politicians and sheepish voters need to actually DO something about all those unfunded liabilities, and NOT continue kicking the can down the road?
A "fire" that serves as a wake-up call to do something incredibly stupid is not what we need right now. People don't usually do their best thinking when they're reacting to a fire. The debt is a long-run problem that cannot be solved overnight, but yet the GOP wants to solve the problem before 2 August. This is nuts. Do you really think crash programs thrown together by people with no economic training or understanding is a smart way to manage a very serious problem? Look, the Congress should just pass a debt ceiling limit along with some immediate plans to deal with the output gap. Let's deal with the immediate problem right now. That doesn't mean Congress and the President shouldn't simultaneously be looking at longer term solutions to the structural debt, but calling for trillions in FY2012 spendng while the economy is on wobbly legs is just plain stupid. But yet that's what the Tea Party types are demanding.
Posted by: 2slugbaits at June 15, 2011 03:31 PM
Other historical instances where things didn't turn out as expected:
The Civil War, people went out to picnic and watch because they thought it would be over in a day.
WWI, let's go to war, it'll be over quickly and a new better order will be established.
WWII, see above.
Iraq war, "They will welcome us as liberators."
2011 Debt ceiling limit, see Sara Palin quote from previous commenter.
Posted by: edgolb at June 15, 2011 03:36 PM
The Repubs need to offer the Dems a poison pill that they'll choke on.
Posted by: Rich Berger at June 15, 2011 04:20 PM
Brian At some point we have to get our fiscal house in order. We can't keep kicking the can down the road.
Is there anyone here who disagrees? The question is when is the right point in time. Tea Party types think the right time to cut government spending is when households and businesses are trying to repair their balance sheets by cutting back on spending and investments. So in the mind of the typical Tea Party supporter it (somehow) follows that if private citizens and private sector businesses must tighten their belts and save more, then so too must government. Huh? You do understand that a necessary condition for more private sector saving is that there has to be a corresponding borrower? You do know that, don't you? And if demand for private sector borrowing is depressed, which it is, then it is up to government to act as borrower of last resort. The time to start acting on getting our fiscal house in order is when the private sector has recovered and government borrowing begins to crowd out private sector demand for funds. We're nowhere near that point right now.
Posted by: 2slugbaits at June 15, 2011 04:33 PM
CoRev Finally, balancing the budget is the solution!
No, it's not. It's a recipe for bigger problems. The solution is to dramatically increase the deficit in the short run, have the Fed push out QE3 and a 4% inflation target, and keep doing that until the output gap closes and government borrowing begins to crowd out private sector demand. Then cut back fiscal spending, raise taxes, run a primary budget surplus and let the Fed do the heavy lifting once open market operations regain traction. That's how you solve the problem. This is not intellectually difficult.
Posted by: 2slugbaits at June 15, 2011 04:42 PM
If only the policy was borrow and lend instead of borrow and spend.
Posted by: aaron at June 15, 2011 05:13 PM
This just in. The USA CDS rose above the Brazilian CDS today:
"SAO PAULO, June 15 (Reuters) - For the first time, investors saw Brazilian debt as less risky than highly rated U.S. debt, which Finance Minister Guido Mantega said on Wednesday was a reflection of Brazil's economic resilience and soundness."
"The cost of insuring U.S. debt for one year through the use of credit default swap contracts USGV1YEUAC=MP, or CDS, rose on Tuesday to 40.35 basis points, the highest in more than two years, compared with 39.97 basis points for comparable Brazilian CDS BRGV1YUSAC=MP, according to Markit.
"Economists, however, cautioned that using one-year CDS as a sovereign risk barometer could mislead investors on the quality of Brazil's credit-worthiness, because those contracts are not as widely traded as other longer-termed CDS.
In addition, they noted that the political deadlock that has prevented the U.S. government from raising its debt ceiling has led some investors to take a more cautious approach towards U.S. instruments."
"If the U.S. went into bankruptcy, Brazilian CDS wouldn't resist anyway. If we went through a worldwide change in the dollar's use as a reserve currency, CDS wouldn't make any sense anymore", said Jose Francisco de Lima Goncalves, chief economist at Sao Paulo-based Banco Fator.
Brazil's most recent default happened in 1987, when then-President Jose Sarney declared a moratorium on some bond payments. Brazil at that point was the world's most indebted country.
After reeling from boom and bust cycles and bouts of hyperinflation, the government implemented a new currency, the real BRBY, and normalized debt payments in 1994.
A combination of robust growth, rising international reserves and sound fiscal policies helped shield the country against the 2008-2009 global financial crisis.
The United States, on the other hand, is facing a political deadlock over the government debt ceiling. Federal Reserve chairman Ben Bernanke urged Congress to raise the debt limit before an Aug. 2 deadline, warning of potentially devastating economic consequences."
And that's not all. The USA CDS rose above the Italian CDS today (Italy?!?):
So the debt ceiling delay isn't affecting the financial markets? Isn't it time the Republicans put on their big boy pants?
Posted by: Mark A. Sadowski at June 15, 2011 05:18 PM
2slugs, normally I would respond, but your solution is so funny, I can't stop laughing.
BTW, out of curiosity, which problem were you trying to solve?
Posted by: CoRev at June 15, 2011 06:11 PM
"I agree. Republicans have picked the wrong line to draw in the sand."
Why them? Why not blame the recalcitrant Democrats?
Posted by: don at June 15, 2011 07:30 PM
Posted by: aaron at June 15, 2011 07:59 PM
I didn't know what to think at first, but once I realized it was parody, I really enjoyed it.
His best comment, evah!
Posted by: Rich Berger at June 16, 2011 05:44 AM
First I was thinking it was like driving a 4 wheeler off road, but I think it was more like sailing - "Hoist the mainsail, scutter the jib and then just tweak the ballast. Steady as she goes, mates!"
Posted by: Rich Berger at June 16, 2011 06:19 AM
"A "fire" that serves as a wake-up call to do something incredibly stupid is not what we need right now. People don't usually do their best thinking when they're reacting to a fire. The debt is a long-run problem that cannot be solved overnight, but yet the GOP wants to solve the problem before 2 August. This is nuts."
Nuts? Nuts was to spend 800 bazillion dollars for nothing. Nuts was to bail out the millionaires and billionaires of Wall Street. Nuts was to ram through (in the middle of a huge recession) a health-care sector legislation that NOBODY understands, that nobody (not even the President) read, and nobody has a clue what kind of consequences it will have. Nuts was to ram through a financial sector legislation that also NOBODY has a clue what kind of consequences it will have. And all this in the middle of a big recession.
So, if we talk about "nuts", there is enough "nuts" to go around.
Furthermore, the representation that the Republicans want to slash and burn and solve EVERYTHING by August 2nd, is simply not true. Yes, they want cuts, which seems to me pretty reasonable.
One final thing: WHEN is the right time to start doing it? When? It seems to me that it is NEVER the right time, ever. So yes, Tea Party members and Republicans in general decided that now is as good a "right time" as any other. Professor Hamilton talked about the "wrong line in the sand", but he did not offer his version of the right line. Well, Republicans have, because if history is any guide, for decades and decades, there was never a right time to start doing something, and the current President is simply not willing to be proactive in this issue.
Posted by: Anonymous at June 16, 2011 06:49 AM
Rich, it might have also been, I luvs stone soop master, can i have mo pleez?
Posted by: CoRev at June 16, 2011 07:19 AM
The apparent irrationality of the Republican position becomes understandable when you realize that their purpose is not to fix the economy but to make it worse. As Mitch McConnell clearly said, their most important mission is to make Obama a one-term President, even if it means keeping tens of millions out of work. At this point it is no to anything that might conceivably help, even a payroll tax cut for employers. Their purpose is clear and they really don't care who gets slaughtered in the process.
Posted by: Joseph at June 16, 2011 07:52 AM
Anonymous Nuts was to spend 800 bazillion dollars for nothing.
Except that the stimulus didn't "do nothing." The stimulus was quite effective to the extent that the stimulus was still in effect. The stimulus did succeed in stopping the bleeding. Part of the problem was that, as we now know, Secy Geithner didn't want the stimulus to go beyond merely stopping the bleeding. Then again, Geithner is not an economist either.
As to people not knowing or understanding the healthcare and financial reform bills, sorry, but this is a laugher. If people didn't understand those things, then why were there so many lobbyists lined up against it all claiming with certainty that it would do this or do that. Are you trying to tell us that Republicans and Tea Party types were frantically arguing against Obamacare even though they didn't understand it? If they didn't understand it, then why were they passionately opposed to it? Both pieces of legislation were debated to death, so excuse me if I find it a little hard to swallow the argument that people didn't understand them. Republicans like Sen. Shelby know all too well what the financial regulation legislation means for his campaign donors...that's exactly why he's working overtime to try and gut it. Trust me, Sen. Shelby isn't throwing up roadblocks because he doesn't understand the bill. He's trying to protect his fat cat donors.
Furthermore, the representation that the Republicans want to slash and burn and solve EVERYTHING by August 2nd, is simply not true.
Well, yes it is true. The Tea Party types are demanding trillions (with a "t") in spending cuts effective FY2012. If that's not slash and burn, then I don't know what is.
Yes, they want cuts, which seems to me pretty reasonable.
Except it's not reasonable in the face of a continuing large output gap and high unemployment. It's quite stupid.
One final thing: WHEN is the right time to start doing it?
That's easy. When the output gap closes enough that the Fed regains traction using conventional monetary policies. At that point fiscal stimulus will no longer be necessary and it will be time to start raising taxes and cutting back spending. We'll know when we're at the point because we will see crowding out instead of crowding in, and the NAIRU clearing interest rate will be positive.
Posted by: 2slugbaits at June 16, 2011 01:59 PM
Much of the problem with economics is its lack of solid empirical grounding, far too much theorizing and math and all too often not enough about what the data actually say. What we know about the topic here is that the GOP wants spending cuts while Democrats want to raise the debt ceiling without committing to spending cuts. The threat of the debt ceiling being held hostage in this way has been clearly enunciated by the Secretary of Treasury and others. But what do the data say? We know the main actor is Congress, with the bond market being the anonymous yet powerful arbitrator. For if the bond market didn’t care, there would be no bite to the threat of default consequences and this whole discussion would be moot.
We have day-by-day news coming from Capitol Hill under the new Congress, on one side committee votes and announcements that emphasize the need for long-term spending cuts, on the other side statements that raising the debt ceiling should take precedence. The bond market swiftly incorporates this news into price. Global investors give a thumbs down for news that raises the probability of a potential default, and conversely give thumbs up to any prospects for a reduction in the supply of Treasury’s coming to the market over the next decade. For example, on Jan 17th GOP House members announced opposition to raising the debt ceiling. The test of this news being significant or not is simple – mention on the front page of the Wall Street Journal. Another example on May 12th, Republicans questioned the urgency of the debt ceiling deadline. From Jan 3rd to mid-May there were 20 or so such days. The net movement of bond prices across all these days was a mere two points down in price, or about 16 basis points up in yield on the 10-year Treasury, with the appropriate sign being duly attached to the news that affected the market on those days (positive for bond prices on news implying budget cuts and on news of greater probability the debt ceiling would be raised in time and therefore default less likely; and vice versa). Obviously other news (like economic releases) flowed all this time too, but a reasonable assumption on these days is that the other news was offsetting over time. If you don’t like this simplifying assumption you can go back and parse the data finer yourself, but you will find that the overall result is little affected.
The market is telling us there are two offsetting forces – pretty evenly balanced to the market’s way of thinking, which is of course what counts – and that most of the comments here and in the press are more ideologically driven than anything else. Moreover, this is the way science proceeds. By gathering observations on the pertinent variables and then seeing what the empirical results say. Of course all of this is replicable by researchers willing to get their hands dirty with the data (which includes not just numbers on the ceteris paribus variables and the daily movement of bond prices, but also the pertinent qualitative information coming out of Congress ever since the 112th was seated).
Permit me to make a more general observation. You must throw away data, that of the bond market’s movement on day’s bereft of news coming out of Congress. In the first half of the calendar year there are 26 weeks of 5 trading days, minus five or so holidays where the market is closed to trading, tallying to something on the order of 125 days. Only a subset of these days is relevant. By including more than the relevant days in any type of econometric analysis, a clear bias is imparted. What conceptually happens is the beta hats generated by even the most sophisticated econometric models will homogenize pertinent information with non-pertinent. This averaging process is at the heart of what is wrong with all too many studies in the literature. The universe does not operate on the average; it operates on the margin.
Posted by: JBH at June 16, 2011 04:19 PM
You take a lot of words to say very little.
Posted by: Rich Berger at June 17, 2011 08:15 AM
JBH For if the bond market didn’t care, there would be no bite to the threat of default consequences and this whole discussion would be moot.
I have no idea how you came to this conclusion. Bond holders are only one in a long line of people who will be hurt by a Treasury default. The bond holders are probably the least of our worries, and if the leaked rumors reported in the WaPo are correct, the bond holders (especially foreign bond holders) will be at the end of the line in terms of priority. Unless the debt ceiling is raised the Treasury will only be able to make disbursements at a rate equal to receipts. For example, retirees who received their first SS check prior to 1997 are scheduled to get their SS check on 3 August. Will the Treasury pay them 100% of what's owed, or will it be discounted to only the level of receipts? Government workers will be paid a couple days later. Will there be a haircut there? Will workers be told to go home? Will military contractors and other vendors be paid for material and materiel that was delivered under contract? Will states get federal monies to pay for highway construction in August? Will the Treasury try and hold back monies for SS recipients scheduled to get checks in the middle of August, or will they be left out entirely? Those are all tough questions for Secy Geithner. And contrary to what CoRev seems to believe, the GOP in Congress doesn't have any authoritiy here...it's strictly a Treasury call under current law.
Posted by: 2slugbaits at June 17, 2011 02:19 PM
2slugs asks what will happen to the poos SS recipients? They will receive full amounts, borrowed from the SSTF. Just as is happening today!
And, no it is not only DO Treasury's decision only. The Prez, Y'ano the boss, OMB and even Congress will be involved in the rack and stack decisions.
Posted by: CoRev at June 17, 2011 07:53 PM
CoRev SS recipients will only receive the full amount of their checks if and only if revenue receipts in the 24 hours between 2 Aug and 3 Aug are sufficient to equal disbursements. You clearly do not understand how this process works. The Treasury cannot borrow from the SSTF just as they do today because if there is a debt ceiling they cannot increase any borrowings. When a SS Trust bond comes due the SS Trust goes to the Treasury window and Treasury pays out. Except that cash balances may not be sufficient to meet the SS Trustee demands. Remember, there has been a FICA tax cut so FICA receipts are not sufficient to meet SS payouts.
Ben Bernanke addressed exactly this problem in his speech last Tuesday:
Some have suggested that payments by the Treasury could be prioritized to meet principal and interest payments on debt outstanding, thus avoiding a technical default on federal debt. However, even if that were the case, given the current size of the deficit and the uneven time pattern of government receipts and payments, the Treasury would soon find it necessary to prioritize among and withhold critical disbursements, such as Social Security and Medicare payments and funds for the military. Moreover, while debt-related payments might be met in this scenario, the fact that many other government payments would be delayed could still create serious concerns about the safety of Treasury securities among financial market participants. The Hippocratic oath holds that, first, we should do no harm. In debating critical fiscal issues, we should avoid unnecessary actions or threats that risk shaking the confidence of investors in the ability and willingness of the U.S. government to pay its bills.
But not to worry, noted expert CoRev insists that there is no problem here.
And I believe we all know that the Secy of the Treasury works for the President. My point had to do with what those of us in government call "program execution." And no, Congress has no authority here. I'm sure plenty of congress critters will be pleading their cases to Secy Geithner just as you or I could petition the Treasury, but that's ad hoc. The Treasury is under no legal obligation to pay attention to either Congress or us.
Posted by: 2slugbaits at June 18, 2011 07:09 AM
2slugbaits: Is there a good resource you know off the top of your head to figure out how the mechanics of Treasury receipts and disbursements work. You seem to know more about it than most.
Never commented before so not sure if my email will show up, but I would appreciate it if you would post or email me where to learn about the mechanics of it all.
Posted by: Gravy at June 18, 2011 10:02 AM
2slugs, you obviously do not understand the difference between redeeming SSTF treasuries, which does not add to the debt and borrowing which adds to the debt. SSTF special treasuries are already calculated in the "overall debt" limited by the ceiling. When redeemed, they actually just change status from intra-governmental to publicly held. No change in the overall debt.
Now, it may take a Congressional amendment to allow it to happen, but that is simple. Such an amendment would allow the DOTreasury (DOT) to redeem the SSTF. What I expect to see is the DOT redemption limited to pay SS, and FICA be transferred into the General Fund to pay the remaining non-SSA bills. Another accounting class would be added to DOT tracking.
But such an amendment may also not be necessary, as one was not needed to redeem the various other TFs already being raided.
What is it that makes you think one TF is significantly legally different from another?
BTW, you quoting Bernanke, who is without a seat at the racking and stacking table is interesting. He has far less influence than Congress at that table,which has appropriation/authorization and review authority!
Posted by: CoRev at June 18, 2011 10:05 AM
Gravy Interesting question. I'm sure there's stuff on the web somewhere, but most of what I know about Treasury operations comes from on-the-job training and government classes & seminars. I'm a govt puke and I've worked a fair amount of cash management and currency management projects with the comptroller types.
CoRev you obviously do not understand the difference between redeeming SSTF treasuries, which does not add to the debt and borrowing which adds to the debt
Ugh! And just how do you think those SSTF bonds are redeemed? As you said, SSTF bonds are exactly like bonds held by the public except that they are held by the SS Trustees and not marketable. And just as public bondholders would be told to go home, so too would the SS Trustees. The only way Treasury redeems bonds (be they SSFT held bonds or publicly held bonds) is through tax revenues that go into the Treasury's "bank" accounts. Just where do you think the Treasury gets the cash to redeem those bonds?
I wasn't quoting Bernanke because of his status in the "racking and stacking" action. I was quoting Bernanke because his speech confirmed my point that failure to pass a debt ceiling extension would result in discontinuance of SS benefits, Medicare payments, Medicaid payments, civil service retirement payments, federal worker paychecks, and payments to those delivering contracted goods to the government. You said that wouldn't happen. Here's your quote:
what will happen to the poos SS recipients? They will receive full amounts, borrowed from the SSTF. Just as is happening today!
I said you were wrong. Geithner says you're wrong. Bernanke says you're wrong. Even Stan Collender at the WaPo says you're wrong. The only person that seems to agree with you is Rep. Michelle Bachmann. Guess what, you're wrong.
Posted by: 2slugbaits at June 18, 2011 04:58 PM
2slugs, as an example of how Congress plays a role and also how easy it is to modify SS payment processes, Geithner in his 4/42011 letter to Sen Reid had this foot note: " Specifically, in 1996, in order to enable Treasury to pay the March 1996 Social Security benefits, Congress passed legislation that permitted Treasury to issue a limited amount of Treasury securities that were temporarily excluded from being counted against the debt limit. In addition, Congress passed legislation that temporarily excluded from being counted against the debt limit the new Treasury securities that Treasury issued to federal trust funds in March 1996 to invest new trust fund receipts and to reinvest the proceeds of maturing trust fund investments. Those exclusions from the debt limit expired on March 30, 1996."
IOW, Treasury was allowed to borrow to continue SS payments. The SSTF is much different today. It now is projected, with just minor tweaking of SS revenue and benefits, to never be exhausted.
It's a very small step from that projection to finding ways to use this new found source of borrowing. Unless of course you are leery of losing the "third rail" of politics.
Posted by: CoRev at June 18, 2011 05:33 PM
in 1996, in order to enable Treasury to pay the March 1996 Social Security benefits, Congress passed legislation that permitted Treasury to issue a limited amount of Treasury securities that were temporarily excluded from being counted against the debt limit. In addition, Congress passed legislation that temporarily excluded from being counted against the debt limit the new Treasury securities that Treasury issued to federal trust funds in March 1996 to invest new trust fund receipts and to reinvest the proceeds of maturing trust fund investments.
Brilliant! Only the Republicans could out-Orwell Orwell by simply declaring debt to not be counted as debt. Who knew it was that simple! See, we kept our promise not to increase the debt limit. And of course, Tea Partyers are dumb enough to fall for it.
Posted by: Joseph at June 18, 2011 11:23 PM
2slugs, I'm not wrong about how SSTF treasuries are redeemed. The do not add to the debt! Since their amounts were already included in the debt totals it would be double counting when they are moved from one accounting class to another.
So, when is it calculated and added to the debt? When the excess funds are first xferred to the General Fund. Then as interest is calculated upon those xferred funds, it is also added to the debt. Redemption? No! Just a status change.
People, including many Dem pundits, often get confused over the "overall debt" and "publicly held debt." That ole third rail has been misused for so long and so many times it has lead to a serious level of misunderstanding.
The other major misunderstanding is that "it's the law!", while forgetting they are talking about the "law makers". Nearly every piece of legislation changes these simple math/accounting operations, and they "are all the law!" That is until changed again.
Just like that ole "third rail" has been changed many times over. Mostly to add benefits and buy even more votes. And that process is behind the debt issues in today's political discussions, because eventually you do run out of money to pay for them.
Regardless, your understanding of the SSTF redemption and accounting processes is seriously flawed.
Posted by: CoRev at June 19, 2011 04:55 AM
I forgot to emphasize this in the Geithner foot note: "Congress passed legislation that temporarily excluded from being counted against the debt limit the new Treasury securities that Treasury issued to federal trust funds in March 1996 to invest new trust fund receipts and to reinvest the proceeds of maturing trust fund investments." Invest and reinvest is legislative-speak for what I am proposing will likely happen if the debt ceiling is not raised.
It has happened in the past with a vastly smaller trust fund, but with an overall (but not on a daily basis) surplus in FICA revenues versus payments.
In 2009 intra-governmental debt was ~41% of overall debt, but I believe it is now less. Can you guess why?
Posted by: CoRev at June 19, 2011 06:23 AM
Joseph, what an amazingly ignorant statement.
Posted by: CoRev at June 19, 2011 08:58 AM
CoRev Honestly, I have never seen anyone as completely confused about this as you are. You keep repeating that SSTF doesn't add to the debt because it's already part of the debt. Duh! No kidding. Who has said otherwise? That's not the issue. The point is that unless receipts exceed disbursements the Treasury is unable to redeem those bonds. Treasury has to have money in the bank before they can redeem those bonds. It's at that point that the debt ceiling issue becomes a cash management issue. What the Treasury cannot do is liquidate a bond...any bond, be it a publicly held bond or one held by the SSTF unless the Treasury has cash in the bank. It's a liquidity issue. Clear? No one is saying that SSTF isn't counted as part of the total debt. The issue that Geithner and Bernanke are talking about is a liquidity problem.
Why do you think you understand Treasury operations better than Geithner or Bernanke?
Posted by: 2slugbaits at June 20, 2011 05:08 PM
Sigh! 2slugs asks: "I have never seen anyone as completely confused about this as you are." after making this statement: "The only way Treasury redeems bonds (be they SSFT held bonds or publicly held bonds) is through tax revenues that go into the Treasury's "bank" accounts. Just where do you think the Treasury gets the cash to redeem those bonds?" They get cash via tax revenues and/or borrowing.
You forgot the other source, borrowing. And in the case for the TFs redeeming their treasuries (borrowing) does not count against the debt ceiling when they are redeemed. Just an accounting class change occurs moving them from from intra-governmental to publicly held. That step refreshes the treasury cash reserves.
They have been redeeming SSTF treasuries for two years as FICA payments are less than payouts, and not out of tax revenues as they are even less.
Why do you think I am arguing with Geithner and Bernanke, they are proceeding with exceptional, well understood processes to keep the Govt afloat. They know what they are doing. You do not!
You really are fumbling this one.
Posted by: CoRev at June 20, 2011 07:24 PM
Why do you think I am arguing with Geithner and Bernanke
Because both Geithner and Bernanke are saying that failure to raise the debt ceiling risks the government's abiilty to make SS payments. That's why I provided you with the quote from Bernanke. He was quite specific and what he said does not square at all with what you are claiming.
And in the case for the TFs redeeming their treasuries (borrowing) does not count against the debt ceiling when they are redeemed.
This is nonsense. Reread what you wrote. If FICA receipts are not sufficient to pay out SS claims, then the SSTF goes to the Treasury with one of those IOUs and hands it to the Treasury window for payment, just as you or I would. If the Treasury has cash on hand, they pay out of general revenue. If they don't, then Treasury goes out and borrows from the public. In the event of a debt ceiling limit the Treasury cannot go out and borrow from the public to meet those IOUs because they are already up against the limit. Why is this so hard?
Posted by: 2slugbaits at June 21, 2011 02:50 AM
2slugs, for heaven's sake, think instead of emoting. Saying this: "In the event of a debt ceiling limit the Treasury cannot go out and borrow from the public to meet those IOUs because they are already up against the limit. Why is this so hard?"
"If the Treasury has cash on hand, they pay out of general revenue."
Why is it so hard for you to understand such a simple cash management concept? New borrowing, if it is to redeem "special non-transferable treasuries" does not count against the debt ceiling, because its original amount and any interest "assigned" was already calculated into the original debt. To add the borrowed amount would double count it.
Secondly, why would Treasury to pay SS benefits (not covered by available FICA collections) from available tax revenues, when they can use the revenues to pay for other high priority obligations? They are allowed/mandated to use the SSTF for those expenditures. Its why we have the SSTF.
Your understanding of daily Treasury operations implies they are poor managers of their cash responsibilities. They are not!
I've asked before, why is it you think it perfectly legitimate to use the retirement TFs' treasuries without raising the debt ceiling and not the SSTF? What makes one more unique for redemption accounting purposes than the other? Hint: there is none!
A simple amendment to the SS law and they have $trillions of "head room," and another simple amendment to tweak SS around the edges adds many decades of life to the SSTF. BTW, that's not necessarily a good thing.
Finally, as I have said, you are really tripping and fumbling this one. In times of balanced budgets or surpluses your understanding of how/when tax revenues are used to redeem SSTF treasuries might happen, but in times as this, it really is bad management.
Posted by: CoRev at June 21, 2011 10:58 AM
2slugs, CoRev and cohorts understand economics as well as he understands climatology. Absolutely everything is colored by a far right wing political viewpoint. No exceptions that I've ever seen based on his writing.
Posted by: Jim S at June 25, 2011 01:33 AM