June 28, 2011
Random Views on U.S. Default
From WSJ Washington Wire:
Mark Zandi, chief economist of Moody’s Analytics, said the market impact of failing to raise the $14.29 trillion debt ceiling by Aug. 2 could become severe by late July.
At a breakfast hosted by the Christian Science Monitor, here’s how Mr. Zandi told reporters things could play out.
“I think if we get on the other side of July, particularly as we move to the second and third week of July and nothing is happening, if the world looks like it is today, I think people are going to start getting nervous one investor at a time. And it’s going to start showing up in rising bond yields, a weakening equity market. Then all of the sudden we’re going to get to a day when we’re going to get a critical mass of investors saying, ‘You know what, this may not happen, we better attach a probability to an Aug. 2 misstep.’ And markets are going to start going south. And of course the rating agencies are going to start responding too...so if, we get to the end of July, I think the policy makers will see it quite clearly.”
He said if the ceiling isn’t raised by Aug. 2, “it’s going to be a TARP moment,” referring to the day in late 2008 when the House of Representatives voted down the creation of the $700 billion Troubled Asset Relief Program and stock markets plummeted.
And then what?
“The dark scenario is so dark I can’t imagine it,” he said.
As Republican leaders indicate tax revenues are off the table, so that all deficit reductions have to be derived from spending cuts [EK], this scenario seems ever more plausible.
By the end of the day of the vote, the Dow Jones had 214 dropped over 770 points, its largest ever one-day drop in points -- wiping out about $1.2 trillion dollars worth of stock value. ... The TED spread [which] was hovering around 1 percent ... rocketed above 3 percent, and it kept going, to an unprecedented maximum of 3.87 percent. ..."
Here's a graphical depiction of the drop in equity prices.
Figure 1: Dow Jones Industrial Averages, 9/15/2008-10/20/2008. Source: St. Louis Fed FREDII.
I thought it is of interest to see what the Kauffman survey of bloggers thought should be done, with respect to the debt ceiling.
Figure 2: from Kauffman Economic Outlook: A Quarterly Survey of Leading Economics Bloggers, Second Quarter 2011
In any case, I agree with Jim, for the sake of the country, the debt ceiling is the wrong place to draw a line in the sand. Saying that all deficit reduction must come from spending reductions, and none from tax revenue increases is the heighth of irresponsibility. (Others agree, even if even the default is "small" -- see here. Some estimates of the impact on spreads here).
Update: 7pm Pacific More from Stan Collender at Capital Gains and Games.
Update: 10:45am Pacific 6/29: From Reuters, "Report predicts chaos if U.S. prioritizes payments":
Any attempt to prioritize federal payments if Congress fails to raise the U.S. debt limit and the country defaults would rapidly descend into chaos, according to an independent study released Tuesday.
If the U.S. government cannot borrow more money to meet its obligations past Aug. 2 -- the Treasury's deadline for raising the federal borrowing limit -- it will be unable to pay between 40 to 45 percent of the 80 million payments it makes every month, the report says.
After analyzing thousands of publicly available documents, including the Treasury's daily cash outlays, the Washington-based Bipartisan Policy Center concludes that prioritizing payments to avoid default -- which some conservative Republican lawmakers advocate -- is essentially impossible.
For example, in one scenario, the center used projected August revenues to fully fund six major programs or obligations: interest on government debt; Social Security payments; Medicare and Medicaid; unemployment insurance benefits, and defense vendor payments.
Those six would eat up the entire month's revenues, leaving other obligations, including active-duty troops, the Justice Department and the Education Department, entirely unfunded.
"So to fund any of the unfunded items, you would have to cut from the six major programs," Powell said. "It would be chaotic and unfair. Treasury would be picking winners and losers. There would be public uproar."
Powell said the Treasury makes 3 million payments each day. Trying to override government computer systems, which are programmed to make payments as they fall due, would be a Herculean task, he said.
The report is here. It makes sobering reading. Of course, those who don't believe in models and are innumerate are unlikely to be convinced, so for those readers, please feel free to skip. Here is a graph showing the BPC's estimate of the "X-date"...
Figure 3, date at which default occurs, from Bipartisan Policy Center.
Update: 2:21pm Pacific: Given that Ezra Klein has concluded the talks on lifting the debt ceiling have failed, and the parties are positioning themselves for the default (technical or more-than-technical), I have been wondering what a person with no direct holdings of Treasurys should do. Really, my question is, if my bank goes belly-up, then are my savings and checking accounts really guaranteed, if the government cannot borrow (and FDIC reserves are insufficient). Inquiring minds would like to know.
Update: 8:14pm Pacific: Reader JWG provides a higher frequency graph demonstrating how the sell off on Wall Street coincides with the EESA/TARP rejection (and provides a counter to reader
Dick Ricardo's bizarre assertion that investors had little time "to digest the news":
Figure from CNN Money "Stocks Crushed".
Posted by Menzie Chinn at June 28, 2011 04:13 PMdigg this | reddit
The debt ceiling can be avoided with a budget.
Posted by: aaron at June 28, 2011 04:36 PM
But CoRev is just sure that failure to raise the debt ceiling won't affect Social Security recipients. He's just sure of it.
Oops....looks like he's wrong:
NEW YORK (CNNMoney) -- Here's what Americans can look forward to if lawmakers fail to raise the debt ceiling in time: Treasury would not be able to pay between 40% and 45% of the 80 million payments it needs to make every month.
That's the estimate from a new analysis by the Bipartisan Policy Center, a think tank in Washington founded by four former Democratic and Republican Senate majority leaders.
A delay in raising the debt ceiling could affect Social Security checks, food stamps, federal worker and military paychecks, government contractor bills and payments to Medicare and Medicaid providers.
"Handling all payments for important and popular programs (e.g., Social Security, Medicare, Medicaid, defense, active duty pay) will quickly become impossible," the report's authors noted.
But not to worry.
aaron The debt ceiling can be avoided with a budget.
Not sure I'm following you. We already have a budget. Budgets and debt ceilings are two completely different things. Congress has already approved all of the spending needed to keep the govt running through the fiscal year. What the govt doesn't have is authority to offset cash shortfalls through public borrowing. The spending will continue irrespective because we already have a budget that mandates certain levels of spending. So the Executive Department must spend what Congress has already appropriated. Failure to spend is unconstitutional because it is Executive impoundment of funds. So the govt will continue to spend throughout the balance of the fiscal year...it's just that no one will get paid. Contracts will be let, the govt will continue to run up bills; they just won't pay for stuff until Congress raises the debt ceiling.
The Fed will be faced with a nasty dilemma. One option would be to just let the Treasury default on bonds and operate with minimal disbursements. The other option would be for the Fed to buy existing bonds from the Treasury at a price above par...the functional equivalent of rolling the printing presses.
Posted by: 2slugbaits at June 28, 2011 05:15 PM
2slugs, or Congress can just use the 96 solution, use the SSTF to create the borrowing authority head space.
Posted by: CoRev at June 28, 2011 05:29 PM
A failure to raise the debt ceiling, a moratorium on interest payments and principal refunding to US trust funds and foreign holders of US debt, slashing or halting Social Security and US gov't pension payouts and benefits, and defunding federal highway projects and non-essential gov't functions would be among the few actions on a much longer list of actions the US gov't will be required to take in the next decade and beyond.
Consider today's episode as one of several dress rehearsals in preparation for the really big show coming soon to a town and city near you.
Posted by: Bruce at June 28, 2011 05:56 PM
CoRev You have completely misunderstood "the 96 solution." Badly misunderstood it. I know it's a popular Fox News talking point, but Brad Delong, who was one of Rubin's assistants at the time, apparently got tired of hearing it because he has a nice piece blowing your argument out of the water. Like I said, you have badly misunderstood the arrangement that Rubin had with Congress.
Posted by: 2slugbaits at June 28, 2011 06:07 PM
I don't understand why the Democrats would risk a default by their insistence on maintaining current spending levels and raising taxes. How reckless can they be?
Posted by: Rich Berger at June 28, 2011 06:20 PM
Rich Berger: If you haven't been reading, then it may come as a surprise to you that the Democrats have proposed spending reductions. It's the Republicans who have stated a requirement that all adjustment be on the spending side.
Posted by: Menzie Chinn at June 28, 2011 06:57 PM
That Kauffman survey certainly has some leading questions in it.
It shouldn't be surprising that "reduce regulatory burdens and fees on new firm formation" is popular, and that "subsidize new firm formation" is unpopular. For example if "Assist" were substituted for "subsidize," I'm sure we'd draw very different conclusions here.
Garbage in, garbage out.
Posted by: DavidS at June 28, 2011 09:11 PM
We "know" that the Dems want to tax the rich, but we don't know much about the cuts that they propose. All we get are leaks. http://thehill.com/homenews/senate/168437-sen-sessions-debt-talks-need-to-be-public
The Dems prefer to keep the talks secret (like their overall budget plan), while the Repubs want the public to see. We have a spending problem and the Dems don't want that to be the main focus.
Posted by: Rich Berger at June 29, 2011 01:21 AM
California lawmakers passed a budget--mostly cuts and hopes for increased revenues. And they did it quickly, because they're not receiving pay until the budget is passed.
Personally, I would prefer incentives be aligned around the maximization of long-term growth subject to budget balance. Good pay would draw talented people into government--and not just lawyers. (It would also make economists highly compensated!)
For $10 per household, the every member of the US Congress could receive a bonus of $2 million per year, assuming steady GDP growth and no growth in debt. For me, that's a price well worth paying.
Posted by: Steven Kopits at June 29, 2011 04:26 AM
I don't know why anyone would care what Moody's thinks. They have zero credibility.
Sensible people realize that this is political theater and nothing more.
When a Republican is in the White House, all this ridiculous austerity crap will be forgotten and we'll get a much needed stimulus package (which Paul Krugman will oppose).
Posted by: Max at June 29, 2011 04:27 AM
There are only a few possible legal actions, IMHO. Keep in mind the government has ALREADY run out of borrowing authority. Aug 2 is an estimate of when they'll run out of accounting gimmicks. So the idea that we'll just use accounting gimmicks on Aug 3 wrong. We can sell assets. I wonder whether this was part of the motivation for dipping into the strategic petroleum reserve. And Timmy notwitstanding, the governement has actual gold as well as black gold. Of course when you increase the supply of commodities, the price tends to go down. Now of course the treasury could simply print dollars without going through the Federal Reserve. Back in the day, they called them United States Notes, as opposed to Federal Reserve Notes. Now that the vast majority of money is electronic rather than paper, I have no idea how this would work. I don't think that any payment system is designed to keep track of two different kinds of US dollars. And I have a vague recollection that congress may have passed a law barring this when we approached the debt limit in the past.
Posted by: Jim A at June 29, 2011 05:16 AM
So far, here in the comments section, all those who think there is some way to make not raising the debt ceiling or want to make a case that it's all the bad old Democrats' fault have been shown to be mistaken.
Funny how that works - strong opinions based on ignorance. The facts, as it is possible for reasonable people to know them, are more or less as Zandi laid them out. There will be substantial disruptions to the US economy, lots of innocent bystanders will be hurt by the effort to turn the debt ceiling into a way to over turn election results - putting Republicans in control of the government after voters decided otherwise. But our ignorant friends would like to pretend otherwise.
Posted by: kharris at June 29, 2011 05:43 AM
Says Professor Chinn:
"Saying that all deficit reduction must come from spending reductions, and none from tax revenue increases is the heighth of irresponsibility."
IMHO, what was "the height of irresponsibility" was to dramatically increase government spending with stimulus money that did not work, cash for clunkers that was a total waste, "clean energy" subsidies that are just corporate welfare, ram down an ObamaCare law that half the country (and counting) hates, pass regulations to the wazoo that stifle private investment, and along the way, take every chance Obama got to insult every entrepreneur who tried to invest and make some money. But it seems that in cushy tenured settings all this does not matter. The only thing that matters is the "irresponsibility of Republicans" who (some of them, not all of them) actually try to do SOMETHING about the massive resource absorption by government.
Says also Professor Chinn:
"Rich Berger: If you haven't been reading, then it may come as a surprise to you that the Democrats have proposed spending reductions. It's the Republicans who have stated a requirement that all adjustment be on the spending side."
If this claim is true, why did President Obama's *own budget" lose 97 to ZERO, *no Democrat voting for it*, in the Senate? So much for proposing anything of substance.
Posted by: Manfred at June 29, 2011 06:02 AM
"lots of innocent bystanders will be hurt" ...
Friend ... lots of innocent bystanders are being hurt today because of the economy.
I actually would suggest that those being hurt today are much more likely to be actually innocent than those currently being picked as winners by Washington and Wall Street.
Tax banksters 95% on those bonuses being paid for by the Fed financial tollway commission
Posted by: ArkansasAngie at June 29, 2011 06:27 AM
From a perspective outside the US, I have to say it is just unbelievable that Americans refuse to tax themselves enough. The no-tax line has absolutely no credibility to anyone looking on from outside. It is loopy, plain and simple. You have to do everything you can to amend your budgetary situation: you have to raise taxes, reduce spending and yet find ways to support growth and restore confidence. The dysfunction that passes for politics in Washington risks a catastrophe. It just beggars belief.
Posted by: DL at June 29, 2011 06:28 AM
Saying that all deficit reduction must come from spending reductions, and none from tax revenue increases is the heighth of irresponsibility.
I couldn't agree more. Great point!
The Democrats are insisting to have a debt ceiling deal that tax rates must be raised on the rich, but we all know - because Christina has told us so - that raising tax rates reduces tax revenue. The Democrat's position is totally irresponsible.
Christina has also told us that reducing tax rates will increase tax revenue and growth. So it is easy to see that the right policy mix - and Bob Mundell tells us there are no economic costs from the right policy mix - is a reduction in tax rates to increase tax revenue, and a reduction in government spending shifting production back to the more efficient private sector. (Just for the record Mundell tells us this is the right policy mix.)
It is amazing how we can come to an agreement when we just sit down and talk. :-)
Posted by: Ricardo at June 29, 2011 06:33 AM
My personal belief is that the government takes in more than enough revenue as is. We should simplify and flatten corporate and personal taxes, but the level of revenue is more than enough. What Washington has is a spending problem. Why do we even have, for example, a Department of Education? Real per-pupil spending is up 2.5 times its 1970 level, yet students are no smarter than they were back then. Can't Energy be trimmed down and combined with the Department of Commerce? What does HUD do that couldn't be done at the state level just as well if not better?
Those are my personal beliefs. You may have different personal beliefs. But your beliefs are no better (or worse) than mine.
Posted by: Brian at June 29, 2011 06:39 AM
Brian Wrote: [b]You may have different personal beliefs. But your beliefs are no better (or worse) than mine.[/b]
If you believe we live in a world without an objective reality, sure, all beliefs are equally valid and no one can be wrong. Or if you believe there are no consequences to being wrong, then nobody need be challenged about holding wrong beliefs.
In the world we live in you're not only wrong, but wrong in an extremely destructive way, and the sooner you realize that the better off we'll all be.
Posted by: Anonymous at June 29, 2011 07:30 AM
What is the insistence by some in this comment section of reducing government spending during a recession??
So our options are don't raise the debt ceiling and hurt America OR raise the debt ceiling but only if we reduce spending during a recession and hurt America.
How about we focus on JOBS and increase targeted spending on infrastructure, then once the economy is growing and unemployment starts dropping, start the spending cuts.
However, if we MUST decrease spending now, let's start looking at our massive defense spending, which continues to grow year after year.
Posted by: Gridlock at June 29, 2011 07:49 AM
"From a perspective outside the US, I have to say it is just unbelievable that Americans refuse to tax themselves enough. The dysfunction that passes for politics in Washington risks a catastrophe. It just beggars belief."
This is the biggest problem with the debt ceiling debate, it's absolutely mind-blowing that supposedly responsible people are playing chicken on this scale! I think the only reason bond markets haven't already collapsed is because investors just can't bring themselves to believe this game is even happening.
Sure, negotiations go down to the wire to maximize leverage, but even a little risk aversion to trembling hands ought to lead us away from this sort of brinksmanship. It is madness to be potentially one month away from financial catastrophe caused by an inability of 536 people to come to a reasonable consensus about something that really should not be that difficult to accomplish.
Posted by: Tudor at June 29, 2011 08:30 AM
Congressional pay based on GDP - government spending. I like it.
Posted by: aaron at June 29, 2011 08:46 AM
A budget that ignores basic constraints is no budget.
Posted by: aaron at June 29, 2011 09:20 AM
Take a look at Menzie’s graph of the DJIA.
Notice that going into the original vote on TARP by the House, Monday, September 29, 2008, the stock market dropped off significantly in anticipation of it passing the House. Though the House voted TARP down, it was not until 2:00 PM and the market had little time to digest the news before the close. The DOW closed down -653.59 points.
The day after the House voted TARP down, Tuesday, September 30, 2008, when traders had sufficient time to digest the vote, the DOW had a significant recovery up +479.08, as can be seen in Menzie’s chart. After the vote a CNNMoney poll revealed that 58% of those responding were against a reconsideration of TARP.
On Wednesday, October 1, 2008, the Senate engaged in a gimmick that totally violated the spirit of the constitution by amending a previous revenue bill from the House that had nothing to do with TARP. Even though revenue bills are required to originate in the House, the Senate now had a TARP revenue bill which they passed and sent back to the House. The DOW closed down slightly -16.33. Again refer to Menzie’s chart to see the market slipping after the affirmative Senate vote.
All day Thursday, October 2, 2008 arms were being twisted in the House in an effort to reverse the vote. Uncertainty caused the DOW to essentially remain flat. The House had resisted pressure before and might again. Once again refer to Menzie’s graph.
On Friday, October 3, 2008, the bill was brought back up in the House, and the DOW slipped lower on uncertainty. At 2:22 PM the House reversed its previous vote and passed the bill. The DOW closed down -158.58. Again this is clearly seen on Menzie’s chart.
The results of the week were digested over the weekend. The bill had been signed into law by President Bush within an hour after passage so any hope of a veto was gone. On Monday the DOW closed down -367.02 and on Tuesday it closed down -508.31, 8.5% in two days. Before TARP the DOW was flat but after it was in total free fall through Friday, October 10, 2008, again clearly evident on Menzie’s chart. The DOW fell from the Friday close the day TARP was signed from 10,325.38 to 8,451.19 in one week, a massive decline of 1,874.19 points, over 18%.
Menzie’s chart seems to show that the crisis was over as the Dow seems flatten, but this was simply a quick breath as the Dow continued down. By the time the DOW bottomed, Thursday, November 20, 2008, it had fallen to 7,552.29, down 27% from the day TARP was signed. Contrary to the spin that has been offered, TARP did nothing to prevent the crash of 2008 and by all signs was actually the catalyst that started the market crash.
So comparing the signing of the TARP bill to our current discussion on the debt ceiling is to say that additional government spending will continue to drive the economy down. But in truth TARP and the debt ceiling debate have no relationship. Whether the Democrats succeed in blocking a debt ceiling agreement or not, a decision either way on the debt ceiling will not cause the long anticipated double dip.
Posted by: Ricardo at June 29, 2011 09:26 AM
Debt crisis solved!
Obama said he is willing to cut spending by $1 trillion over 10 (or 12) years. Kool. He's willing to reduce reduce the deficit by a whopping $90-100 billion a year...via defense cuts and a willingness to look at cuts in entitlements (he's gonna look behind a tree).
GREAT leadership--Dem BS behind the smoke and mirrors.
I guess this is why the stock market is up the last two days.
Posted by: Dave at June 29, 2011 10:02 AM
Mark Zandi--8 of his last 3 predictions have been correct. A Keynesian genius comedian.
Posted by: Sandy at June 29, 2011 10:24 AM
Aaron - Thank you for the second on incentive pay.
Jim, Menzie - Could we not have a graduate student do a thesis on "What's a Politician Worth?" As opposed to so many thesis papers, this one would actually be fun to write!
Posted by: Steven Kopits at June 29, 2011 10:55 AM
Looking at it as realistically as I can, I conclude this whole issue is anticlimatic. We all know that if we approve this debt ceiling, Congress will never decrease the debt and we will be back in a few years raising it again. Maybe we default now at $14T rather than some day down the road a $18, $20T? Bottom line is I am positive we are destined to default at some point in the upcoming years, it's just a question of how far do we want to kick the can down the road. Maybe a default would teach this country that money does not fall from trees planted by the government.
Posted by: John D at June 29, 2011 11:41 AM
The debt ceiling will be raised. Global investors know this. The US is not going to default.
If the issue is not resolved until after the Aug 2nd deadline, the sum in arrears will initially be a small one. The annual deficit computes at $4 billion per day. Thirty days can go by and still the shortfall would amount to only $120 billion. Such a temporary shortfall can be met in myriad ways: delaying accounts payable which businesses and households do all the time, delaying payments to civilian employees, tweaks on thousands of programs (pre-defunding programs that are going to be cut anyway), and so on. Interest and principal payments on the debt, Social Security, active and retired military salaries, and Medicare and Medicaid need not be touched over any short horizon. Most of the talk about default is politically-driven and not honest analysis.
The benefit of holding the debt ceiling hostage to spending cuts is glaringly obvious to global investors. The US government must put its house in order. And not by the route of tax hikes which are inimical to the economy’s growth in a way that spending cuts are not, which is precisely the GOP’s point. My empirically-based prediction is there will be no more than a ripple in the bond market. As is so often the case, factors on each side of the scale will mostly offset each other.
There is a higher aspiration in all this – that of Liberty. This is not just about economics. Many of us believe the State has grown far too intrusive. Those with their hands out want a bigger state; those who work hard in the private sector want a smaller one. Cutting spending will not only salubriously leave more income and spending in the private sector and with free enterprise – which is manifestly more productive than government – cutting the size of government will also revive the liberty this country cherishes.
This blog namby-pambies around counting Keynesian multipliers on the head of a pin instead of airing the fuller story of liberty along with economy and having an honest debate. The debate shapes up along the lines of whose ox is gored. Academics, government workers, those working for corporations with government contracts on the one side, against free enterprise advocates on the other. Unfortunately the unwashed masses know not much about what it takes to grow an economy (including incentives, incentives, incentives). The fault lies not with them but with our liberal universities who promulgate the dying Keynesian paradigm whose predictive success is of sandlot proportions, and with the media they feed.
I predict interest rates will not be much affected, ceteris paribus, unless the ceiling does not get raised until well into the fall. Long before then someone will blink. In a few months we shall see. And who looking for the unvarnished truth on this issue would pay attention to Moody’s (Zandi) or the rest of Wall Street or anyone else whose interests are directly affected by whatever ripples (hardly tsunamis) might occur in the market, especially this politically-motivated Treasury and Oval Office?
Posted by: JBH at June 29, 2011 12:11 PM
I'm so so SO glad we're emigrating to Canada.
The US is a tragic, sick joke, the butt of which is about 300 million innocent victims.
Godspeed, USA. You were once great. You are now a punchline. Tomorrow you will be 3rd world.
Posted by: RN at June 29, 2011 02:43 PM
Ricardo because Christina has told us so - that raising tax rates reduces tax revenue.
Ugh. I thought we already went through this. No, you have completely misread the Romers' study.
Christina has also told us that reducing tax rates will increase tax revenue and growth.
Re-re-re-re-read the Romer & Romer paper. It says that tax increases hurt aggregate demand, and presumably tax cuts stimulate aggregate demand. That probably implies a growth in tax revenues, but nowhere do Romer & Romer claim that an increase in tax revenues will be greater than the increase in the deficit. Tax cuts are not self-financing. And keep in mind that Romer & Romer also said tax increases for the purpose of debt reduction do not hurt growth. The Romers are claiming something that is 180 degrees from what you are claiming. So why do you keep bringing up their paper?
John D Maybe we default now at $14T rather than some day down the road a $18, $20T? Bottom line is I am positive we are destined to default at some point in the upcoming years, it's just a question of how far do we want to kick the can down the road.
Since 1917 the debt ceiling has been raised 102 times. Evidently we can kick the can down the road for a very long time.
Brian What Washington has is a spending problem. Why do we even have, for example, a Department of Education?...
The Dept of Education and HUD are not what's driving the long run deficit problem. What's driving the long run deficit are exploding healthcare costs for the elderly. Almost entirely. And what's driving the exploding cost of Medicare & Medicaid are healthcare costs in general. If you want to fix the budget, then you have to fix healthcare. That's pretty much the end of the story. Go look at the CBO charts on the structural deficit.
Posted by: 2slugbaits at June 29, 2011 03:07 PM
JBH If the issue is not resolved until after the Aug 2nd deadline, the sum in arrears will initially be a small one.
We actually have some historical data on this. There was once a technical default that lasted a few hours, but all sides knew that a deal was imminent. But even with this knowledge that the Treasury would only be withholding payments for a few hours the market reacted with a 60 basis point jump in interest rates. I think it's safe to assume that a default on 3 Aug with no sign of a deal in the works will have a lot bigger effect on interest rates. And that interest rate hike will be permamently locked into existing debt as it rolls over at a higher rate long after the debt ceiling issue is resolved. It will end up costing us trillions in higher debt servicing costs. And the lost fiscal spending will have an immediate effect on aggregate demand because people won't be getting paid.
The fault lies not with them but with our liberal universities who promulgate the dying Keynesian paradigm
Translation: math is hard and I don't understand it, so egghead economics must be bunk.
Posted by: 2slugbaits at June 29, 2011 03:16 PM
Our Dear Leader told us that we would be cutting the weather service if we agreed with the Republicans. I note that his 2010 budget was $3.6 trillion and he has no budget for this year. Bush's 2008 expenditures were $2.98 trillion. One question - was the weather service underfunded in 2008? This President really thinks the electorate is stupid. I cannot wait to eject him from office in 2012.
Posted by: Rich Berger at June 29, 2011 03:23 PM
"The US is a tragic, sick joke, the butt of which is about 300 million innocent victims."
No RN, not innocent and not victims. They voted for it. Especially in the last Presidential election.
Posted by: Manfred at June 29, 2011 03:31 PM
Rich Berger said:
"Our Dear Leader told us that we would be cutting the weather service if we agreed with the Republicans. I note that his 2010 budget was $3.6 trillion and he has no budget for this year. Bush's 2008 expenditures were $2.98 trillion. One question - was the weather service underfunded in 2008? This President really thinks the electorate is stupid. I cannot wait to eject him from office in 2012."
Well I know the one member of the electorate named Rich Berger is stupid. Your argument makes less than no sense.
Posted by: RN at June 29, 2011 04:46 PM
"No RN, not innocent and not victims. They voted for it. Especially in the last Presidential election."
You're exactly right; I stand corrected.
A democracy comprised of the uneducated can't stand, and the current US democracy in which more than half the voters are right wing idiots who don't understand the repercussions of what they're voting for won't stand much longer either.
Posted by: RN at June 29, 2011 04:50 PM
My empirically-based prediction is there will be no more than a ripple in the bond market. As is so often the case, factors on each side of the scale will mostly offset each other.
Since you claim your prediction is empirically based what about you present the empirical evidence here that you have.
Cutting spending will not only salubriously leave more income and spending in the private sector and with free enterprise
You say, when government spending is cut, then private enterprises will have more income and spend more in result from that. How? By the magic of some GOP shamans?
The debate shapes up along the lines of whose ox is gored. Academics, government workers, those working for corporations with government contracts on the one side, against free enterprise advocates on the other.
Where the last ones are the ones who supposedly work hard, in contrast to academics and government workers with their lazy asses. Or do you just think a society doesn't need any academics or government services and government spending for those is wasted? Is it that?
Posted by: rootless at June 29, 2011 05:05 PM
Rich Berger wrote: "The Dems prefer to keep the talks secret (like their overall budget plan), while the Repubs want the public to see."
That's because the Republicans are not cutting programs that are popular with Republican voters. They can continue to wear two santa suits.
Posted by: joe at June 29, 2011 05:56 PM
This hourly graph of the DOW on September 29, 2008, shows a dramatic sell off starting at approximately 2:00 pm, the time, according to Ricardo, when the House voted down TARP.
Posted by: JWG at June 29, 2011 07:37 PM
".....The US government must put its house in order. And not by the route of tax hikes..."
This has been the Greek attitude as well: the budget has to be balance, but not if it means paying tax.
This is a farce. The US fiscal position has become so perilous precisely because Americans have been unwilling to adequately tax themselves in the past. And having been unable to tax themselves hitherto, they now wish to decline to tax themselves into the indefinite future.
This is just nonsensical. It is not about liberty. It is about choosing to accept responsibility for your debts.
Posted by: david at June 30, 2011 06:50 AM
You seem seriously embarrassed by the Romer's paper. :-)
Posted by: Ricardo at June 30, 2011 07:32 AM
A couple of articles related to tax increases and stimulus:
A good description of President Flounder's performance at yesterday's press conference from Ace of Spades - "It was his usual mix of arrogant, misleading and petulant."
I didn't listen to the presser when it was happening yesterday ( I was listening to Rush), but I read the transcript and heard a few bites later. What a whiner! He sure got some easy questions from the press. I guess when you are not qualified to be mayor of Wasilla but you have been flattered for years, and you discover that you are in a job that's way beyond you, one approach is to act like Obama does.
Posted by: Anonymous at June 30, 2011 08:53 AM
Rootless The bond market moves swiftly on all news. Since the seating of the 112th Congress there have been 29 trading days where significant news about the debt ceiling emanated from Congress, the Treasury, or one of the rating agencies. If a rating agency threatens a downgrade, that is unambiguously bad for Treasury bond prices. The same on days the Treasury Secretary warns the ceiling must be raised. Not so for Congress however, since holding the debt ceiling hostage to spending cuts has two opposing effects: it raises the risk of default but it also increases the odds of swifter reduction in the deficit over the next decade. Global investors reveal their sentiment via the marginal daily changes in price. For those 29 trading days the cumulative net change in bond yields was plus 20 basis points. The flow of economic reports, auction results, flight-to-safety from events abroad, etc. also affected the market on these days. But years of experience with this kind of analysis lead me to believe the bias is not large.
You can follow the market in like manner yourself in coming weeks. You need not rely on preconceived notion, textbook theory, what the Chairman of the Fed or the Secretary of the Treasury or others say. Instead you can let the data speak. The null hypothesis is that the debt ceiling is mostly a non-issue to bond yields, with the caveat that Congress not run past Aug 2nd more than 30 days or so without raising it. Parenthetically you might make note that for a host of reasons bond yields have just turned up (likelihood>70%). That is, the trend changed this week and it has little to do with the debt ceiling as there has been no new news on that front. Good luck.
Posted by: JBH at June 30, 2011 05:07 PM
JBH Not so for Congress however, since holding the debt ceiling hostage to spending cuts has two opposing effects: it raises the risk of default but it also increases the odds of swifter reduction in the deficit over the next decade.
So let's see if I got this right. In your world a debt default that has the effect of permanently raising the interest rate on all outstanding debt will somehow lead to a "swifter reduction in the deficit." Right. Sure it will.
The truth is that no one really knows exactly how the bond markets will react. I suppose it's possible that investors long ago looked at the crackpots in the Tea Party and concluded the US is a banana republic. If so, then investors may have already discounted economic idiocy into current bond prices. I suppose that's possible. But it's also possible that just as no one completely understood or even imagined the deep implications of a Lehman Brothers collapse, the sheer horror of a US default cannot be comprehended either. In other words, bond markets may just be temporarily frozen not quite believing that the GOP would be that stupid. But when the dam breaks you should expect all hell to break loose.
I think we see a similar dynamic in the Greek debt problem. Bankers keep wanting to hear the bedtime story that Greece is only facing a temporary liquidity problem and not a solvency problem. They're wrong and eventually they'll find out the hard way. On the other hand, idiot Tea Party politician seem to think the US govt has a solvency problem when what we really have is a liquidity problem. They have things completely backwards.
Finally, there is a more sinister explanation for Eric Cantor's position. We just found out that he bet a lot of money on investments that will make a lot of money if Treasury yields spike in August due to a debt default and he will lose a lot of money if that default doesn't happen. So Cantor is guilty of a conflict of interest. This isn't the first time Cantor has literally bet against the US economy with his own money and then tried to enact policies that would lead to a trainwreck. He made a $40,000 bet in 2009 as well.
Posted by: 2slugbaits at June 30, 2011 06:45 PM
I know, binary outcomes are easy, but the reality is likely more nuanced.
Two scenarios are far more likely:
1. Executive branch decides the debt ceiling is unconstitutional because it implies default, and the 14th amend specifically prohibits default. In fact, the legislative history suggests the whole point of section 4 was to remove debt repudiation from the realm of ordinary politics (see link below). SCOTUS has opined, albeit in 1935, that Congress does not have the contitutional authority to repudiate obligations like debt. This would extend to any contract written on the full faith and credit (including leases, service agreements, employment contracts, etc). Seeing as how congress can control revenue, spending, the debt ceiling, but not all three when the debt is binding due to the deficit, there is a clear constitutional mandate not to default. And: the constitutionally, the president cannot raise revenues and Congress authorized the spending.
2. the govt COULD print money. The Fed could buy the bonds required to be issued in case of market dislocation. The govt has plenty of assets to use as collateral. blah blah blah.
I realize that we are used to the sportcenter-like sudden death overtime headline-grabbing end-of-the-world events from the financial media, but the outcome is not binary and it would be more useful to look at the more likely outcomes - protracted litigation while the fed buys the treasury bonds, and so on.
Posted by: dwb at July 1, 2011 08:23 AM
forgot the link to my earlier post - includes a link to the legislative history of 14th amend (to remove default from the arsenal of ordinary politics).
Also: the 14th amendment specifically says pensions, which would include social security.
The government CANNOT constitutionally default. Which means that either the president ignores the debt ceiling, the government prints money (maybe literally-fiat currency is great!) or some combination of both.
Posted by: dwb at July 1, 2011 08:29 AM
dwb Good to see this 14th Amendment argument is finally starting to get some traction. I started pitching it here a couple months ago and over at Mark Thoma's blog back in January...Thoma asked what readers predicted would be the biggest economic issue for 2011 and I said extension of the debt ceiling. Just call me Cassandra.
Posted by: 2slugbaits at July 1, 2011 06:15 PM
"Rich Berger: If you haven't been reading, then it may come as a surprise to you that the Democrats have proposed spending reductions. It's the Republicans who have stated a requirement that all adjustment be on the spending side."
1. The Democrats could have raised the debt ceiling last year, but chose not to for political reasons.
2. The Democrats could have passed an FY2011 budget, but chose not to for political reasons.
3. The Democrats could have passed a debt ceiling increase in the US Senate by now, but chose not to for political reasons.
4. The Democrats have NOT proposed specific spending cuts and have only criticized Republican plans ... for political reasons.
The failure to get a debt ceiling increase done is in the lap of the Democrats. If the Democrats wanted it done, it would be done by now.
Posted by: Pat at July 4, 2011 03:16 PM