July 12, 2011
Jeff Frankel: "The Federal Government Races to the Cliff"
At the NBER meetings, I have been asking around what will happen if the Federal government defaults, and Treasurys go down a notch in ratings. Keep in mind pension funds and financial institutions are constrained to hold at least some AAA rated securities. What happens if those securities are downgraded; should we expect a smooth, re-balancing of portfolios worldwide?
Jeff Frankel dissects why we are in this situation, using fable (well, a movie fable):
In the 1955 movie Rebel Without a Cause, James Dean and a teenage rival race two cars to the edge of a cliff in a game of chicken. Both intend to jump out at the last moment. But the other guy miscalculates, and goes over the cliff with the car.
This is the game that is being played out in Washington this month over the debt ceiling. The chance is at least 1/4 that the result will be similarly disastrous.
The game is not symmetric. The Republicans are the ones who are miscalculating. Evidently they are confident of prevailing: they rejected the President’s offer, even though he was willing to cut entitlement programs.
The situation is complicated because there are a number of different people crammed into the Republican car. There is one guy who is obsessed with the theory that, come August 3, the federal government could retain its top credit rating if it continued to service its debt by ceasing payment on its other bills. But this would mean failing to honor legal obligations that have already been incurred ... This is like observing that the cliff is not a 90 degree drop-off, but only 110 degrees. It doesn’t matter: the car would still go crashing into the ocean far below. The government’s credit would still be downgraded and global investors would still demand higher interest rates to hold US treasuries, probably on a long-term basis.
There are other guys (and gals) in the car who are even more delusional. They are dead set on a policy of immediately eliminating the budget deficit (e.g., those opposed to raising the debt ceiling no matter what, or those campaigning for a balanced budget amendment), and doing it primarily by cutting nondefense discretionary spending. This is literally impossible, arithmetically. But they honestly don’t know this. It is as if they were insisting that the car can fly. Sometimes it can be a good bargaining position to adopt a very extreme position. But if you are demanding that the car flies, you are not going to get your way no matter how determined you are.
It seems likely that the man in the driver’s seat - House Speaker John Boehner - does realize that his fellow passengers don’t have the facts quite right. But there is also a game of chicken going on within the Republican car. The crazies have said they will oppose in the next Republican primary election any congressman who votes to raise the debt ceiling or to raise tax revenues.
On a related point, here is the position of one of the drivers listed above.
Posted by Menzie Chinn at July 12, 2011 04:03 AMdigg this | reddit
I can't understand why Obama has been so stubborn. He and his Democrat allies refuse to produce a budget for FY12, it's not like he hasn't been spending wildly since he got in office, and we know that more tax revenues will come in once the economy revives (without any increasae in tax rates). Why does he threaten default just to stick with his big government plans?
Posted by: Rich Berger at July 12, 2011 05:19 AM
I wouldn't worry about the AAA constraint on pension funds if TSY securities are downgraded as in most cases, especially large funds, this is not a requirement. Also remember these guidelines are just on paper and easily changed.
Posted by: Hondo at July 12, 2011 05:27 AM
Why is a default necessary? According to the last monthly treasury statement, the Feds took in about $175BN in May, and are averaging about $185BN per month so far this FY. Outlays were $233BN in May, averaging about $301BN per month so far this FY. Clearly there is more than enough revenue in to take care of debt service, so a default can be avoided. The real rub is that there would not be enough coming in to cover all outlays. If Obama were honest, he would say that unless the debt ceiling is raised, I will not be able to maintain the level of spending I have become accustomed to.
Given also that Fed revenues peaked at 2.57 TN in 2007 and were at 2.16TN in FY 2010, it is clear that if the economy were humming again, there is a potential for $450BN plus in additional revenue coming in without changing the tax rates. If Obama would just get the government out of the way, including repealing Obamacare, deficit reduction would follow. Since that is not on his agenda, we have to wait for a change in administration in 2013 for relief.
Posted by: Rich Berger at July 12, 2011 06:04 AM
@Rich. Obama has not been spending wildly. Discretionary spending is flat, adjusted for inflation and population growth.
Note how the economy performed under Clinton tax rates and how it's performing under Bush rates.
Posted by: foosion at July 12, 2011 06:12 AM
There was a lot more money coming in under the Bush tax rates, even though Clinton had no recessions during his administration and also had the advantage of the victorious end of the cold war. See http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/hist.pdf page 31, constant 2005 dollars.
Posted by: Rich Berger at July 12, 2011 06:24 AM
Clinton reduced the role of government by some 3% of GDP; and he balanced the budget. Hence, higher tax rates were not associated with higher spending. Not the case with Obama. Were Obama to argue for higher taxes and reducing govt spending in GDP to say, 30% (from around 40-41% currently), I would gladly suffer a tax increase now, because I would have confidence that tax rates would be manageable over time. But that's not where we are today.
Posted by: Steven Kopits at July 12, 2011 06:30 AM
It wasn't that the other guy miscalculated; part of his jacket got stuck to the car door handle. One could say that's miscalculation but the idea is different. That was an accident. I'm not sure we could say the same thing about this game of chicken.
Posted by: jonathan at July 12, 2011 07:15 AM
First, the question that no one is asking and President Obama definitely doesn’t want to address.
When will you stop increasing the debt and deficit and how?
The last increase in the debt ceiling was February 12, 2010. That increase in the debt ceiling was to give congress and the President time to address the debt problem. At the end of February 2010 the debt was $12,440B as of the end of December 2010 it had increased $1,585B to $14,025B. Obviously they did not address the problem.
We are pushing into territory we have never been before as a country. The debt will soon approach 100% of GDP consuming every bit of production in the US. If there is any delusion, as Frankle calls it, it is anyone who believes that increasing the debt ceiling will change anything.
Certainly not increasing in the debt ceiling will be a drastic move, but the only way to shake the politicians from their delusion of perpetual debt is to take drastic action.
Holding the debt ceiling where it is would:
1. Be as good as passing a balanced budget amendment.
2. Force congress to pay for their spending.
3. Force the President and his Treasury to make tough spending decisions.
4. Demonstrate to the world that the US is serious about deficit spending.
5. End frivolous spending or unnecessary projects.
Any who have managed budgets know that when the credit runs out the spending must stop. They also know that all bills do not come at once and so must be carefully scheduled to stay within the budget. They also know that sometimes they have to negotiate with their creditors to reorganize payments until they can deal with the problem. But those who have managed budgets also know that if the answer to a budget overrun is increasing the amount without funding the amount that those spending will simply continue to spend.
Anyone in the real world managing a home budget at its limit knows that first you stop spending. Then you have a garage sale and sell the non-essential assets. Then you cut expenses.
It is time for the people to hold congress to their budget. Resolving such problems is why they make the big bucks. We don't have to touch snale darter research, or the mating habits of inner city prostitutes. It is actually easy. Until congress balances the budget we just stop paying them and their staffs, and stop buying them things. That would save $1.3B per year. And since they are all rich this should be no burden on them. And this kind of redistribution of wealth is right on target with the policies of the President and his party of redistribution from the wealthy to the poor and middle class.
Posted by: Ricardo at July 12, 2011 07:31 AM
Why not just go back to 1994 spending levels? The budget was balanced, the economy rolling along, sounds good to me. Just implement the 1994 spending levels and tax rates, done. Why reinvent the wheel?
Posted by: David Penwell at July 12, 2011 07:35 AM
On the Interest first crowd:
The Treasury has indicated that the current legal opinions offered by both Treasury and WH lawyers is that neither the Treasury nor the President has the legal authority to pick and choose what gets paid and what doesn't. It might sound simple to simply say we are going to pay interest to bond holders (debt service) but in a situation where the government can't meet it's obligations what entitles bondholders to advance their claims to the front of the line over contractors billing the government for services or individuals who have a claim on social security? I suspect that none of the politicians in Washington have really thought through what happens when the average senior citizen goes to the mailbox and finds out the check isn't there and it's because the largest banks in the country are being paid interest on bonds instead. If you want to focus people into a rage quickly the bond interest first plan will do it.
The simple fact is that the debt limit ceiling has always been a fake debate. Congress in the past spent the money through appropriations AS AN INSTITUTION and that implies an obligation to raise the money they have spent whether through taxes or loans. Just because one party doesn't like that doesn't mean they get a pass on taking the responsibility of serving the nation's interests as a whole. The debt ceiling up until now has never been used as a political threat to advance a partisan position. Efforts in the past to attach conditions to a debt ceiling increase have been rejected by the leadership of both parties because the debt ceiling is a fundamental statement of credit worthiness of the country rather than a political statement like budget bills are.
If any political party can say to the world and the country we simply won't pay for whatever laws the opposition passed before the election you can bet we are headed for a major disaster. You don't like entitlement spending, fine, repeal it. But don't pretend that defaulting on the US debt is the best way to accomplish your political goal or is in any way a responsible act of leadership.
Posted by: dsj at July 12, 2011 07:42 AM
So let me ask this, rolling over the maturing debt (servicing the debt) raises the debt? Yes, no?
Rolling over/redeeming the SSTF special treasuries raises the debt? Yes, no?
Rolling over/redeeming the employee/military retirement TFs raise the debt? Yes, no?
Increasing spending over existing revenues increases the debt? Yes!!!!
So, when you hear default, remember these above questions. Some one is using hyperbole to further even more fear mongering re: borrowing and the debt ceiling.
We know that the discretionary budget has been essentially stabilized. Where is that budget growth? Medicare/medicaid demands. Where is the increased borrowing coming from? Less revenues and growth in the unfunded entitlements.
Is focusing on the debt ceiling the best solution? Is ignoring economic growth for 30+ months, or worse slowly responding to a obvious stimulus failure republicans or even Congress's fault?
With this president a real solution is unattainable!
Posted by: CoRev at July 12, 2011 07:57 AM
the purpose of the 14th amendment is to ensure that the U.S. government does not need to negotiate with fiscal terrorists. Its an enormous equalizer.
Posted by: dwb at July 12, 2011 08:08 AM
No one has disputed that discretionary spending (adjusted for inflation and population growth) hasn't increased under Obama, yet you claim spending is out of control.
Here's a chart of surplus/deficit
Posted by: foosion at July 12, 2011 08:16 AM
Remember when we had to have TARP or the world would collapse? Remember when we had to have the stimulus or the economy wouldn't revive? Or when we had to pass Obamacare ASAP or we would drown in spending (bend the curve?). Or when we had to bail out GM and Chrysler? Or when we had to have Dodd-Frank?
Saith Mencken - "The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary." Describes Obama and the Dems to a T.
Posted by: Rich Berger at July 12, 2011 08:16 AM
jonathan: It wasn't that the other guy miscalculated; part of his jacket got stuck to the car door handle. One could say that's miscalculation but the idea is different. That was an accident.
John Boehner decided to play a game of chicken but his jacket got caught on the Tea Party and now he can't jump out. He didn't miscalculate. It's just an accident. Is that what you're saying?
Posted by: Anonymous at July 12, 2011 08:35 AM
In my opinion, no one in either political party (with a couple of notable exceptions), at least not in public anyway, is willing to address the real problem, to-wit, that we have seen a measurable and ongoing post-2005 decline in global net oil exports.
The bottom line is that the US, and most other OECD countries, simply cannot afford our current level of government spending. And borrowing money in an environment of constrained global oil supplies will just make things worse in the long run.
My version of the "Cliff" metaphor:
The OECD “Thelma & Louise” Race to the Edge of the Cliff
“Thelma and Louise” is an American movie that ends with the two main characters committing suicide by driving off the edge of a cliff. I’ve often thought that this cinematic moment is an appropriate symbol for the actions of many developed OECD countries that are in effect borrowing money to maintain or increase current consumption. The central problem with this approach is that as my frequent co-author, Samuel Foucher, and I have repeatedly discussed, the supply of global net oil exports has been flat to declining since 2005, with “Chindia” so far consuming an ever greater share of what is (net) exported globally. Chindia’s combined net oil imports, as a percentage of global net exports, rose from 11.2% in 2005 to 17.6% in 2010.
At precisely the point in time that developed countries should be taking steps to discourage consumption, many OECD countries, especially the US, are doing the exact opposite, by effectively encouraging consumption. Therefore, the actions by many OECD countries aimed at encouraging consumption in the face of declining available global net oil exports can be seen as the OECD “Thelma & Louise” Race to the Edge of the Cliff. I suppose that the “winner” could be viewed as the first country that can no longer borrow enough money, at affordable rates, to maintain their current lifestyle. So, based on this metric, Greece would appear to be currently in the lead, with many other countries not far behind them.
Posted by: Jeffrey J. Brown at July 12, 2011 09:24 AM
Sorry, Jonathan. I apologize for misinterpreting you. You are saying that in the case of Boehner, its no accident.
Posted by: Anonymous at July 12, 2011 09:27 AM
Saith Mencken - "The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary."
Depends on what keeps you up at night. Kinda like how hyperinflation is right around the corner (any minute now...testing...testing...is this thing on??) Obama has made the dollar worthless (um) the Chinese Communists are gonna drink our milkshake, and the invisible bond vigilantes are gonna suck us dry with their demand for high interest rates!?!
Pot, meet kettle!
Posted by: irobot at July 12, 2011 09:37 AM
OT: Oil Stats
July EIA STEO just out today:
US oil consumption continues anemic, with June down 1.7% compared to June a year ago. Europe is down 2.1% (are those high fuel taxes really feasible in Europe?).
June oil supply is up 1.8% over a year ago; total world consumption up 1.1%. The easing in oil prices? All Saudi Arabia, with Saudi production up 600 kbpd over May output levels.
China's oil consumption is up 8.9% in June compared to a year ago.
If I run numbers on an "as expected" basis, global consumption should be 90 mbpd, up 2.8% from June last year. That is, we're currently 1.5 mbpd production lower than we need to be for the same supply/demand balance we had in June last year. The difference in oil price is about $30 / barrel compared to last year June. Thus, increasing oil production by 1.5 mbpd would reduce oil prices to the $75 range (RAC basis).
Given the lack of adequate supply growth, China is simply wringing demand out of the OECD countries, just as it has been doing for the last four years now.
Posted by: Steven Kopits at July 12, 2011 10:26 AM
the lesson O learned from Rs is that they did not get tagged that much for even considering this.
im amazed that nobody on any blog I see commenting that HE THREATENS TO SHUT GOVT HIMSELF if Rs only pass a short term, 3 months or less extension. Do you all think he completely blowing smoke?
this fits the basic proposition that with this divided govt either side can wreck it a dozen different ways?
Posted by: AWH at July 12, 2011 10:32 AM
CoRev at July 12, 2011 07:57 AM: A constant level of spending requires an increase in the debt. This is because the deficit is a flow and the debt is a stock. Specifically, the deficit is equal to the change in the debt. A constant deficit requires continual increases in debt.
Even substantial decreases in spending from current levels will still require an increase in the debt.
Posted by: JDH at July 12, 2011 12:21 PM
Note that the Dems have not yet proposed a budget for FY12 (the FY11 spending was done by continuing resolution). I think the Repubs should give Obama a 91 day temporary increase and instruct him to come back with a budget for FY12. Forget the grand bargains, let's see your hand for this year, and we will cut from there. I don't want to leave this up to Obama - let the voters decide who gets to set the long-term trajectory.
Posted by: Rich Berger at July 12, 2011 12:32 PM
Obama just put on the table a $4 trillion dollar package of cuts in the debt ceiling negotiations including a measure to raise the eligibility age for medicaid... if that isn't a plan for fiscal spending changes favorable to GOP interests I don't know what is. That it wasn't yet written into a budget proposal for FY12 is irrelevant. The GOP has rejected any compromise possible even on the very best terms the GOP could imagine just a year ago. It seems that we are going to have to embrace the insanity of an unnecessary default to prove how incredibly irresponsible the House GOP can be. The voters will set the long-term trajectory and by wide margins they are rejecting the deep entitlement cuts that the GOP just walked away from. They just walked away from the best deal they were likely to get --- proving this isn't about the debt, the deficit, or spending but about staying right with the hardest of the hard right voters.
Posted by: DSJ at July 12, 2011 01:28 PM
Dis.spending outside DoD has fallen quite a bit since the 60's and has pretty much stayed the same since the 90's.
I think people miss this fact. The reason for deficits is because of 9-11 and security state spending that followed(including the wars). Coupled with tax cuts that failed to ignite a boom, you have problems.
Sounds like a battle between the 10% who want taxes and spending % of GDP in the low 10% range(say 10-15%) while you have the 20% gang across the isle(20-25%). So you have one side that has taxes about where they want them(14%) Maybe a little more off the top, but it would require huge cuts to bring spending down. The real problem they have is with security spending cuts. How much do they factor in considering it is a party cash cow.
The otherside believes taxes are to low and are actually a "burden" on the real economy as the wealthy oversave while the middle class scrapes by. They approve current spending levels but don't like the predisposition of it. Less security state spending and more internal domestic spending to boost jobs and growth.
Of course O'bama is trying to take it down the middle. He would be party of the "18%" club.
Sounds like a real real problem. Nobody can get consensus on anything budget related. It will be mayhem while until they do.
Posted by: The Rage at July 12, 2011 01:37 PM
Good test case. Gold has somewhat stabilized around $1,550 (actually today it went to $1,569 but hopefully will slip back down). Based on this oil is underpriced right now. Oil should slowly move up to a normal price of between $100-105.
I doubt you will see $75 oil again in your lifetime. Gold would have to drop around 30% for that to happen and with that kind of drop we would experience a serious deflationary recession.
Posted by: Ricardo at July 12, 2011 01:53 PM
JDH said: "A constant level of spending requires an increase in the debt." Only if there is a difference in revenues to the spending.
I can agree with the remainder of your comment until the end where you said: "Even substantial decreases in spending from current levels will still require an increase in the debt."
Here the answer is yes, but... The but is if the revenues equal and preferably exceed spending then debt varies by the differences minus interest paid. If that difference is higher than the interest paid than the debt will go down.
IIRC some folks were amazed that in some years under Clinton the budget was balanced and debt still increased.
This is what I said:
"So let me ask this, rolling over the maturing debt (servicing the debt) raises the debt? Yes, no?
Rolling over/redeeming the SSTF special treasuries raises the debt? Yes, no?
Rolling over/redeeming the employee/military retirement TFs raises the debt? Yes, no?
Increasing spending over existing revenues increases the debt? Yes!!!"
Except for adding precision to the Y/N answers with a (depending on interest), do you disagree?
Posted by: CoRev at July 12, 2011 02:22 PM
If I may add to all the metaphors and analogies flying around lately:
Government is a three legged stool (Judicial, Executive, Legislative). Now, one leg isn't supposed to be political by design—the Judicial. The other two are political by design and intent. In the midterms the GOP won 1/2 of one leg, the Dems have 1 and a half legs. This 1/2 leg is about to make the stool fall. Most likely this part of the design was NOT intended.
Posted by: edgolb at July 12, 2011 02:41 PM
Ricardo Anyone in the real world managing a home budget at its limit knows that first you stop spending.
Big news story...the government is not a household. Macroeconomic policy is not household budgeting. The immediate priority should be to get the economy up and going. Failing to do that makes all else irrelevant. The macroeconomic problem today is that there is too much saving, so the govt has to be the borrower of last resort. Second, the govt does face a long run budget constraint, but your formulation is completely wrong because you have the wrong model in mind. Finally, if you want to look to household budgeting, then why not consider what most real households do when they are spending more than they earn. They will try to cut back spending, but they will also try to earn more money. Translation, the govt should look to increase taxes once the economy is back on its feet.
We need a strategy for getting out of this hole. The strategy should be to forget about the short run deficit and do what it takes to get the economy moving again. Then after the economy is on the right path, cut spending and increase taxes on a glidepath that puts us in balance over the next 15-20 years. But our idiot politicians want to do it all in some mad rush to meet a stupid deadline. When was the last time you did something in a hurry and didn't have regrets?
Posted by: 2slugbaits at July 12, 2011 02:48 PM
Normally the stool doesn't fall, just because it's not fully in one party's control. BUT this 1/2 leg is like no other 1/2 leg we've ever had. They lack core democratic values which is why they can't compromise. They seem to be unashamed fascists, convinced of the rightness of their cause, ready to smash 60 years plus of post war prosperity, all in the name of getting their way. That's what fascists do.
Posted by: edgolb at July 12, 2011 02:54 PM
Rich Berger Clearly there is more than enough revenue in to take care of debt service, so a default can be avoided. The real rub is that there would not be enough coming in to cover all outlays. If Obama were honest, he would say that unless the debt ceiling is raised, I will not be able to maintain the level of spending I have become accustomed to.
I guess you missed Frankel's line about a 110 degree angle rather than a 90 degree angle. Do you honestly believe it would make an real difference to this country's credit rating if we avoided a technical default by effectively defaulting on non-bond payments? Are you that out of touch? So in your world not paying your utility bill won't hurt your credit rating as long as you pay your Visa bill? Is that how it works? If that's how you manage your personal finances, then I'd love to see your credit scores!
And speaking of not being able to manage personal finances, a few weeks ago there was a nice story about all those freshman Tea Party congress critters that have very large personal credit card debt and only their Congressional salaries as primary income. One freshman GOP clown from Texas (where else!) had a credit card balance of over $160,000, no income other than his govt salary, and the chutzpah to stand in the Congressional well to deliver a speech about how the govt needed to learn fiscal responsibility. And he did this with a straight face. How does a congressman run up a $160,000 credit card balance? Didn't Rep. Paul Ryan tell him that when you go out for dinner in D.C. with lobbyists and spend $700 on two bottles of wine, that the lobbyist is supposed to pick up the tab? Like Rep. Ryan you only have the restaurant amend the check if you get caught on camera.
Posted by: 2slugbaits at July 12, 2011 03:02 PM
DSJ, I thin you are are wrong here: "Obama just put on the table a $4 trillion dollar package of cuts in the debt ceiling negotiations including a measure to raise the eligibility age for medicaid... if that isn't a plan for fiscal spending changes favorable to GOP interests I don't know what is."
All I have seen printed is ~$1.7T in cuts defined in the Biden negotiations with the remainder of the $4T made up with revenue/tax hikes. That's a long way from what you have claimed here.
Posted by: CoRev at July 12, 2011 03:30 PM
CoRev IIRC some folks were amazed that in some years under Clinton the budget was balanced and debt still increased.
Total debt increased, but that's because the economy was humming along at 4% unemployment and the FICA surpluses were piling up. Those FICA surpluses were converted into SSTF bonds. Debt held by the public went down throughout Clinton's second term. I'm not sure that today's crop of clueless freshman Tea Partiers understand that.
Posted by: 2slugbaits at July 12, 2011 03:57 PM
CoRev It was $3.2T in spending cuts and $0.8T in revenue increases.
Posted by: 2slugbaits at July 12, 2011 04:15 PM
I agree get the economy rolling.
I had to chuckle at your other comment because it was also spot on and it applies to every major piece of legistlation the progessives rammed/bribed through congress!
When was the last time you did something in a hurry and didn't have regrets?
Think pelosi, "you have to pass the bill to find out what's in it" LOL.
Posted by: tj at July 12, 2011 04:44 PM
2slugs, are you talking about Clinton's 2nd term totals?
Posted by: CoRev at July 12, 2011 04:48 PM
Posted by: 2slugbaits at July 12, 2011 06:58 PM
Does anybody know where we can find the details of Obama's budget plan?
Posted by: Rich Berger at July 13, 2011 05:38 AM
Might be time for a review of the impact of a Greek, and an increasingly likely Irish, default, no? Last week, this prospect had the skies falling. This week, it appears life may just go on. So where are we really?
Posted by: Steven Kopits at July 13, 2011 05:49 AM
Can anyone provide three examples of successful fiscal stimulus by the US government?
Posted by: Rich Berger at July 13, 2011 06:07 AM
Obama, playing power politics, says he can not guarantee that Social Security checks will go out on August 3. Since that decision will clearly be his to make, how do you think he will blame the republicans? Bush?
Can anyone predict his story line if he does make that decision? I just can not see how he can make any political ground.
Posted by: CoRev at July 13, 2011 06:18 AM
Rich - Good questions this morning.
I don't see how Obama and the Democrats can claim the high ground here, given that they haven't even passed a budget going on 900 days now. How responsible of them.
Posted by: Brian at July 13, 2011 06:57 AM
Mr. Obama is a liar and a thief. Now he is threatening to kill Granny if he doesn't get the dough! That makes him a three time loser and unfit to serve anywhere, let alone as President of the United States. He has destroyed the economy by causing capital flight and playing a brutal game of class warfare. It is my fervent hope that the folks in Congress, both Dems and Reps tell the dope addict, NO! No more! It's time for rehab and it starts no! COLD TURKEY!
Posted by: Steve at July 13, 2011 07:41 AM
P.S. Granny can come on home an live with me. Run of the house, no bills and an allowance. It is the least I can do for family!!! I'm betting a lot of Americans feel the same way, but for crying out loud Washington, balance the budget, clean up the regulatory environment, institute a flat tax or a consumption tax, eliminate all taxes on personal income and pay down the debt.
Posted by: Steve at July 13, 2011 07:53 AM
The threat of a government shutdown is a time-honored tactic in the Democrat playbook. Now it's a variation - the threat of default. The Republicans seem to have thrown them a bit off balance and the fear tactics are losing some of their bite. I think that the Repubs have grabbed the initiative, but the situation is fluid.
BTW - has anyone seen or heard Prof. Chinn? Not a peep out of him since the initial post. I am still waiting to hear about those three instances of successful fiscal stimulus in the US and some details of Mr. Obama's budget plan.
Posted by: Rich Berger at July 13, 2011 08:16 AM
Steven Kopits wrote:
Might be time for a review of the impact of a Greek, and an increasingly likely Irish, default, no? Last week, this prospect had the skies falling. This week, it appears life may just go on. So where are we really?
What a great question!!
Antonis Samaras is the new head of the New Democracy Party in Greece. If he is elected to replace Papandreou he will refuse any more bailout money. He understands that all a bailout does is shift debt from the banks to the taxpayers.
If Greece stops taking bailouts and then weathers the economic problems it will show the lie of all the sudden hysteria over the debt ceiling.
Here is something I wrote on the Supply Side Forum site.
In 2008 Antonis Samaras was elected to the leadership of the New Democracy party. Samaras is a supply side economist even though he has an MBA from Harvard. Samaras has proposed lowering the Greek corporate tax rate to 15% and slashing other taxes on personal income. Samaras also led his party to vote down the five-year 28 billion euro austerity plan and he is also leading them to reject the ECB bailout.
Last month he met with German Chancelor Angela Merkel and French President Nicolas Sarkozy where he was pressed to join the troika of the EU, the EDB, and the IMF in their recovery plan. It is reported that Samaras told them that his program offers the only solution for Greece. He is quoted to have told Chancelor Merkel, "Look, if your plan works, then I am wrong, but if it doesn't work, then you are going to need a new plan and I'm the one who can bring that about."
Samaras and the New Democracy party are climbing rapidly in the polls. If Papandreou falls there will be a new wind in Greece, and I will be looking for a Greek ETF.
Posted by: Ricardo at July 13, 2011 08:27 AM
If history is any indicator, granny can not come home. In the early 70's in California Reagan turned out thousands of mentally ill from state institutions. The reasoning was that they would be accepted in their families homes, and the tax payer would save $. Too many were not accepted into their families homes, private hospitals sprung up and the mentally ill when they were in conflict with officials of the law were deposited here. In the end, the tax payers saved nothing, the money was just shifted from state to private hospitals.
Posted by: edgolb at July 13, 2011 08:37 AM
You seem to be doing OK after all these years on the outside.
Posted by: Rich Berger at July 13, 2011 08:45 AM
Yeah, if it's not too many stupid people having babies, the end of technological innovations, the end of minerals, peak oil, peak water, ice ages, warming trends, population growth, or in this case, a default: every generation people always scream we're all going to die, yet each century life gets better for more and more humans...
Why do we still listen?
Posted by: Michael S. Langston at July 13, 2011 09:07 AM
Michael: "every generation people always scream we're all going to die"
I assume you are not asserting that we are all now immortal?
In any case, as lots of people have noted, everything is fine given an exponential rate of increase in the consumption finite resource base, until consumptions stops increasing, and then declines.
Global crude oil production has been below 73 and 74 mbpd since 2005 (except for 2009), and as noted above, Global Net (oil) Exports (GNE) have been at or below the 2005 annual rate for five straight years, with Chindia so far taking an ever greater share of what is (net) exported.
Our work suggests that the US is well on its way to "freedom" from our reliance on foreign sources of oil, as we are forced to take a declining share of a falling volume of GNE.
Posted by: Jeffrey J. Brown at July 13, 2011 10:02 AM
Rich Berger: Ja wohl! Gee, cut me a little slack -- I have a day job (which entails what you have been reading about). My question for you is why you keep on asking this question; you got answers the last time you asked it. Then, since you dismissed my example (without providing any empirical basis for your rejection), I ask myself why bother responding to someone immune to data analysis. So please forgive me for not jumping to respond immediately.
Posted by: Menzie Chinn at July 13, 2011 11:06 AM
Thank your for your prompt response - I did not mean to be rude to you. I always appreciate that you and Jim maintain this blog for our appreciation and education, and a bit of controversy, too.
I will reread your post, but my question was a bit different, not about the 2009 stimulus, but about successful stimuli in the past. I am skeptical of the effectiveness of stimulus, in general, and am asking if you, or anyone else, can point me to historical examples of successful fiscal stimulus in the US.
Posted by: Rich Berger at July 13, 2011 11:27 AM
Wow! Today before congress in answer to a question by Ron Paul Ben Bernenke gave us the solution to raising the debt ceiling. You see the only reason that the US is holding gold in its vaults is because of tradidion. That being the case all we have to do is reverse tradition and use the gold in Ft. Knox to pay our bills. Bernanke is a genius!
Posted by: Ricardo at July 13, 2011 11:59 AM
Rich Berger: On 6/23 11:28 AM, you wrote:
Can you give me three examples of a successful fiscal stimulus in the US?
Dirk and spencer responded as well.
Posted by: Menzie Chinn at July 13, 2011 12:32 PM
Interesting poll. Gallup- 22% for raising debt ceiling 42% against.
Posted by: Ricardo at July 13, 2011 12:48 PM
I already knew that cuts in marginal tax rates spur growth - I read the Romers' paper. FDR's first term? Gee, I wouldn't have guessed that. The ARRA? Don't make me laugh.
Reagan's first term had a tax cut that was partially reversed due to Stockman's worries about the deficit and the "grand bargain" that Reagan was tricked into with Tip O'Neill and the Democrats. So it took a while for the cuts to work themselves in. By 2 1/2 years into the Reagan presidency, inflation was down sharply and the economy was cooking. Of course, that was the Recession That Dare Not Speak Its Name, lest the current administration's approach be called into question. For those who claim that military spending worked as a stimulus, why didn't Obama try that approach?
I am surprised that someone didn't cite WWII. I don't think the case for stimulus efficacy is very well founded. I don't think that borrowing money to pay people to do things that are not wanted makes sense. After you stop paying them, they still have to find real jobs.
Posted by: Rich Berger at July 13, 2011 01:20 PM
CoRev Obama, playing power politics, says he can not guarantee that Social Security checks will go out on August 3. Since that decision will clearly be his to make, how do you think he will blame the republicans?
If you go to the SS Trustees site they have something that shows the cyclical pattern of FICA receipts. August is the worst month. FICA receipts will be far below the amount needed to meet scheduled SS payments. And the on-budget revenues will almost certainly not cover the balance. Statistically it is highly unlikely that there will be enough cash in the Treasury's hands come 3 August to meet all scheduled SS disbursements. If retirees get their full SS checks, it will be because the random nature of cash balances gives the Treasury one or two more days cash onhand than expected when they did their last update. Of course, randomness works both ways and it may turn out that the drop dead date is advanced a day or two ahead of 2 August.
You also underestimate the complexity of having to prioritize payments. Treasury has gone to great efforts to make sure that bills are paid on a first-come-first-served basis. Changing that business rule would take some programming time and then it would have to be reversed almost immediately if Congress extends the debt limit. In other words, there are practical concerns that Treasury has to worry about. And can you imagine what would happen if it leaked in advance who would get preferential treatment?
And what's wrong with "power politicts?" Isn't that what the GOP is doing with the debt ceiling crisis? Isn't turnabout fair play?
It's been kind of a bad 36 hours for the GOP. First McConnell cracks and then the GOP loses all 7 special elections (6 in Wisconsin and 1 in California).
Posted by: 2slugbaits at July 13, 2011 01:50 PM
I hope obama tells the US public that it will be too big of a hassle to redirect some funds from less important spending, to social security!
He is trying to push the debate to the last minute so he can follow his pattern of rushing something through at the last minute that is packed with progressive agenda items. It will no doubt be a 1000+ page bill/'deal' delivered so late that nobody has time to read it.
Posted by: tj at July 13, 2011 02:44 PM
tj Why should Social Security retirees be given preferential treatment over everyone else? Why should SS payments trump Medicare or Medicaid payments? Remember, the GOP rode to victory in 2010 largely due to retirees voting overwhelmingly for Tea Party cranks. Why should they be insulated from the consequences of their decisions? The fact is that on average retirees have more wealth than the workers actively contributing to FICA. The ONLY reason Obama is mentioning grandma in this debate is the exact same reason that the GOP lobbied grandma in 2010. And that's because grandma votes in big numbers. The GOP caught a gray wolf by the ears when they demagogued Obamacare with all that "death panel" BS, and now that the gray wolves put the crazies in control of Congress the crazies whine when the wolf bites back. Like CoRev said, this is power politics.
BTW, I'm part of the LBJ clan, so I'm quite comfortable with power politics. I just wish Obama had a little more "Uncle Lyndon" in him.
Posted by: 2slugbaits at July 13, 2011 03:39 PM
tj It will no doubt be a 1000+ page bill/'deal' delivered so late that nobody has time to read it.
If you can't read a 1,000 page bill in an afternoon, then it's time to take an Evelyn Wood class. We're talking BIG BIG BIG fonts with equally big top, bottom and side margins. I read the guts of the healthcare bill over lunch.
Posted by: 2slugbaits at July 13, 2011 03:45 PM
"There are other guys (and gals) in the car who are even more delusional. They are dead set on a policy of immediately eliminating the budget deficit (e.g., those opposed to raising the debt ceiling no matter what, or those campaigning for a balanced budget amendment), and doing it primarily by cutting nondefense discretionary spending. This is literally impossible, arithmetically."
I don't see why closing the deficit by cutting spending is arithmetically impossible. The problem with the deficit is spending more than is being earned. When I don't have enough money to pay for all the stuff I get, I cut back on my spending. The size of the number doesn't change anything. I think it's overall a bad precedent that whenever Washington runs out of money they just take more from people who have to actually work for that money. I know it's not new, but now is as good a time as any to stop it. Also, this whole "discretionary" vs "non-discretionary" distinction is absurd. It's all discretionary.
Posted by: PrometheeFeu at July 13, 2011 04:13 PM
2slugs, you do know that the WI elections were Dem primaries? What is funny, republicans ran against the Dems to ensure a primary was needed, buying time for the actual recalled republicans to raise money and campaign. Open primaries can be fun sometimes.
Posted by: CoRev at July 13, 2011 04:26 PM
2slugs, I've been trying hard to teach you some Federal Cash Flow processes. You still insist on being wrong (fumbling even again.) There's much to highlight in your comment below, but I'll be kind.
You said: "If you go to the SS Trustees site they have something that shows the cyclical pattern of FICA receipts. August is the worst month. FICA receipts will be far below the amount needed to meet scheduled SS payments. And the on-budget revenues will almost certainly not cover the balance. Statistically it is highly unlikely that there will be enough cash in the Treasury's hands come 3 August to meet all scheduled SS disbursements. If retirees get their full SS checks, it will be because the random nature of cash balances gives the Treasury one or two more days cash onhand than expected when they did their last update. Of course, randomness works both ways and it may turn out that the drop dead date is advanced a day or two ahead of 2 August."
Listen very carefully to the testimony from the SS actuarial in hearings this AM. You can find it here: http://hotair.com/archives/2011/07/13/video-social-security-chief-actuary-confirms-a-decision-to-withhold-checks-would-come-from-the-treasury/
For those who may not have the band width to watch the video here is a summary of the dialog between Mr Goss from SSA and Cong Huelskamp.
"Goss confirmed the decision to send out Social Security checks (or not) would, indeed, be a Treasury Department (a.k.a. the administration’s) decision.
“The responsibility of the Social Security Administration per se, my boss, Commissioner Astrue, is to in fact determine how much in the way of benefit payments people are supposed to receive,” Goss said. “We send that information actually over to the Department of the Treasury. They are the ones who actually send out the payments, whether it’s electronic funds, transfers, or check.”
At that point, Huelskamp called out — in an admirably wry, polite way (a question is far friendlier than an accusation!) — what everybody in that hearing room already knew:
“I guess we’ll have to ask the Department of the Treasury and we’re having difficulty getting answers from them, but I see under no circumstances unless it was a political decision that the administration would refuse or withhold Social Security checks because there are sufficient receipts,” Huelskamp says in the video. “Can I ask you to ask the Treasury Department — because the administration just really doesn’t want to provide information and when you stand on the evening news and make a statement that 40-some million Americans are going to not receive their checks — would you ask the administration are they planning on withholding those checks and is there a reason they wouldn’t make those payments on Aug. 3?”"
Your whole argument is wrong. You still do not understand how the SSTF works. Please note that Goss confirmed that rolling over SSTF bonds to publicly owned bonds does not add to the debt. I will add, that if there SSTF bonds are of higher interest, they may actually slightly lower the debt by that difference.
Posted by: CoRev at July 13, 2011 05:07 PM
CoRev Yes, I know they were Democratic primaries; but the reason the Wisconsin GOP advanced fake Democrats was to forestall the inevitable. The Democrats only need to win 3 of the 6 seats to take control of the senate. There are also three Democratic seats up for recall, but those are not supposed to be in any serious jeopardy. The fact that the GOP couldn't muster significant opposition to the "real" Democratic candidates tells us where the energy is in those campaigns. The GOP is in trouble in Wisconsin. And Gov Walker will be recalled in January, and I think he knows it. According to the polls a rather large majority of Wisconsin voters now say that if the election were held today they would have voted for the Democratic gubernatorial candidate. Like I said, they will get their chance in January.
Posted by: 2slugbaits at July 13, 2011 05:56 PM
CoRev This is a strawman. No one disputes that legally and formally the decision is ultimately with the Treasury. Remember, you're the one who claimed a few weeks ago that Congress had a role. My point was that as a practical matter the Treasury does not have a lot of room to maneuver simply because Treasury went to a lot of effort and expense to guarantee that bills get paid on a FIFO basis. It would take some nontrivial time to program and reprogram all Treasury computers (and that's assuming zero test time...something that I wouldn't recommend).
There mightbe sufficient TOTAL govt receipts to pay out SS claims, but there clearly would not be sufficient FICA receipts. Since the FICA tax holiday that has been a consistent deficit on the FICA side of the house. And note that one can only say "might" be because we do not know what govt receipts would be each day. Cash balances would have to go from zero to enough to pay out SS benefits within 24 hrs.
In a "stock" sense rolling over SSTF bonds does not add to govt debt...that's true. But it doesn't accomplish anything either. The problem is one of liquidity, not swapping debt instruments. You cannot liquidate SSTF bonds into cash without adding to govt debt. That's the problem. And like I said, you have completely misunderstood the Rubin approach. Rubin took excess FICA receipts and did not issue a bond, only a verbal promise. That's how he was able to liquidate without increasing the debt. That won't work today because there are no excess FICA receipts. Go look at the SSTF monthly accounts.
Posted by: 2slugbaits at July 14, 2011 02:44 AM
Mitch McConnell's proposal seemed to create confusion in Republican ranks, but The Won seemed to have bailed him out.
I have to question the Republicans' overall strategy: why negotiate a long-term deal with someone who can't even get the next year's budget together? Also, why negotiate a long-term strategy with someone whose view of government is so opposed to yours?
Give Obama a 91-120 day extension and tell him to come back with a credible budget for FY12. We'll negotiate from there. Leave the long-term for the 2012 elections and let the electorate decide which future they want.
Posted by: DontCallMyBluff at July 14, 2011 05:47 AM
For heaven's sake 2slugs, get a grip. You're not a very clear thinker, are you. You said this: "In a "stock" sense rolling over SSTF bonds does not add to govt debt...that's true. But it doesn't accomplish anything either. The problem is one of liquidity, not swapping debt instruments. You cannot liquidate SSTF bonds into cash without adding to govt debt."
Had you said something about "publicly owned" debt in a "stock" sense you would have been technically correct, but just doing more of your obfuscating.
You also said: "There mightbe sufficient TOTAL govt receipts to pay out SS claims, but there clearly would not be sufficient FICA receipts. Since the FICA tax holiday that has been a consistent deficit on the FICA side of the house. And note that one can only say "might" be because we do not know what govt receipts would be each day. Cash balances would have to go from zero to enough to pay out SS benefits within 24 hrs."
You still misunderstand how the SSTF works. Let me explain again. The SSTF ~$2.5T+ is already included in the debt calculations. If you listened to the video you would have heard Mr Goss say all SS checks are paid out of the SSTF. It is there to cover the differences between FICA receipts and SS payouts. Ifd there were a liquidity issue it would be from two causes: 1) political decisions to make it an issue, 2) really poor planning by Treasury for not having enough cash on hand from redeemed SSTF special treasuries.
You also continued your position that Congress has no role. Ignoring the ongoing negotiations between Congress and the administration, you continue to assert I was some how wrong: "Remember, you're the one who claimed a few weeks ago that Congress had a role." I guess in your mind what is going on will not effect Treasury decision making if they need to prioritize.
Since the focus of our current discussion is on Social Security, with your new found understanding (rolling over SSTF bonds does not add to govt debt) there is no liquidity problem with paying SS checks.
If you are just talking about a liquidity issue in general, well duh! Your grasp of that obvious is commendable, but not on the congressional role in resolving it and the prioritization issues.
Posted by: CoRev at July 14, 2011 06:16 AM
The longer you keep Obama off the golf course, the testier he gets. As far as I can tell, he last golfed on June 26th. He has a golf jones, and he's starting to crack.
Posted by: DontCallMyBluff at July 14, 2011 07:33 AM
Big news story...the government is not a household. Macroeconomic policy is not household budgeting.
Thanks, now it all makes sense. Our government is so screwed up because they have no idea how to run a household budget.
Kind of like Obama never having to balance a budget in his life or make a payroll and now that idiot Mitch McConnell whats to give him total responsibility for totally running our government.
If McConnell wants to play this game why are we paying him. If he doesn't want to do his job he should go home.
Posted by: Ricardo at July 14, 2011 09:02 AM
Thanks for making my point. The trickery isn't in the 'guts' that you read over lunch. You are also calling Pelosi a liar, because she said you have to pass the bill to find out what's in it!
I think the solution is easy. Let the dem's choose what to cut and the amount they cut gets added to the debt ceiling $ for $. There is only so much defense and nondiscretionaries to cut before they have to get serious about spending reform.
Posted by: tj at July 14, 2011 09:40 AM
CoRev You also continued your position that Congress has no role. Ignoring the ongoing negotiations between Congress and the administration, you continue to assert I was some how wrong:
Now you're just obfuscating or suffering from Alzheimers. Not sure which. You were not merely claiming that Congress would be involved in the debt ceiling negotiations, as you are now pretending was your claim. You were specifically claiming that the Treasury did not have total legal authority over how the Treasury set up the prioritzation of debt payments. Go reread the discussion.
Since the focus of our current discussion is on Social Security, with your new found understanding (rolling over SSTF bonds does not add to govt debt) there is no liquidity problem with paying SS checks.
Once again you are pretending that we were talking about something else, so let me refresh your memory once again. No one was disputing that Treasury could pay out 100% of SS payments if the combined FICA receipts plus on-budget receipts were at least equal to the total amount due to SS recipients. What you were claiming was that Treasury could magically make up any shortfall through some kind of unexplained vehicle for creating "headspace." Now you're trying to backtrack.
Here's the liquidity problem. Suppose the total debt limit is $20 and the SSTF is currently holding $10 in bonds and the public holds another $10 in bonds. So the debt limit has been reached. Now suppose SS recipients are due $1, but only 90 cents is received in FICA taxes. Normally this would not be a problem...just get an old 10 cent bond sitting in the vault and give it to Treasury in exchange for 10 cents in coin. And this would not be a problem if the Treasury also received 11 cents in tax revenue from the on-budget side of things. Suppose the Treasury decided to give 10 of those 11 cents to the SSTF in exchange for the 10 cent bond and the remaining penny was spent on other obligations. After doing this there would only be $19.90 total debt, so the Treasury could then borrow another 10 cents bringing it up to the limit...assuming of course that anyone would lend to the Treasury knowing that it had just defaulted on a bond in order to satisfy SS demands. This could go on for quite awhile. But the point that Geithner and Bernanke were making was that Treasury receipts and disbursements are lumpy. Remember the Bernanke speech that I linked to? If things are lumpy, which they are, then this whole scheme falls apart pretty quickly. If the combined FICA receipts and on-budget receipts are less than the total amount of SS disbursements due, then there is no way around the fact that SS recipients will not get 100% of their checks regardless of how many bonds the SSTF has in its vaults. Two weeks ago you were claiming that somehow Treasury could magically make cash just appear out of thin air by swapping public debt bonds and SSTF bonds.
And note that because of the peculiarities of August, the total (FICA plus on-budget) govt revenues recieved in the 24 hour period from 2 Aug to 3 Aug will almost certainly be less than the SS disbursements due on the 3rd. That's the lumpy nature of cash managment problems.
Posted by: 2slugbaits at July 14, 2011 02:05 PM
tj You are also calling Pelosi a liar, because she said you have to pass the bill to find out what's in it!
I believe Pelosi was suggesting that if Republicans were too stupid or lazy to read the bill, then they could pass it and find out. In any event, the Republican claim that they did not know what was in the bill is laughable on its face. If they honestly didn't know what was in the bill, then how could they in good faith make all kinds of wild claims about what they insisted was in the bill??? You cannot simultaneously claim that you don't know what's in a bill and then confidently assert that the bill will do X, Y and Z. The funny thing is that old Tea Party voters are comfortable with cognitive dissonance, so this kind of contradiction didn't seem to bother them.
Posted by: 2slugbaits at July 14, 2011 02:58 PM
2slugs, you completely ignored the comment re: your understanding of how SSTF bonds effect debt. Saying this: "You cannot liquidate SSTF bonds into cash without adding to govt debt." is wrong, because it was already calculated as part of the debt when submitted into the TF. And then you repeat the misconception with the lumpy cash management comment at the end of your comment.
I guess Mr Goss, Chief Actuary for SSA, needs to talk to you to learn how it really works. Maybe your analogy will help him, eh?
BTW, whenever someone resorts to analogies, it is a clear sign the writer does not know the actual process.
Until the SSTF is exhausted, there are no lumpy SS check outlays. That was the purpose of the SSTF, make up the differences when there are short falls.
Posted by: CoRev at July 14, 2011 04:26 PM
CoRev Go look at daily SS revenues and receipts. They are lumpy as hell.
And you still haven't answered how the SSTF bond gets converted into cash so that the Treasury can make disbursements. That's the central issue.
Posted by: 2slugbaits at July 14, 2011 05:50 PM
2slugs, they are offered as part of the normal Treasury offerings, redeeming special treasuries for cash is a normal step. They are not new debt, but since they were already on the books as intra-governmental debt, converting them to treasuries and receiving cash, just changes the accounting status of the debt represented by them.
They have to be converted or else the SSTF just grows without end.
Posted by: CoRev at July 14, 2011 07:35 PM
P.S. 2slugs, lumpiness was no problem when FICA receipts were in surplus. Now that they are not or close to equal to outlays, the lumpiness is resolved by the SSTF, one of its primary purposes.
Posted by: CoRev at July 15, 2011 08:49 AM
CoRev Ugh! That's what Geithner has been doing for the last couple of months. That's what Geithner is saying he can no longer do after 2 August. The SSTF is not growing without end precisely because FICA receipts are less than SS disbursements right now, in part because of the FICA tax holiday. If that's the point that you've been trying to make then I don't know what to say except that your solution amounts to assuming away the problem. You've completely wasted everyone's time. The central problem is that Treasury can no longer find cash internally and it must go to the public and borrow through the creation of new debt. That was Geithner's point yesterday. This might come as a news flash, but you are not smarter than Geithner and his army of cash management experts. You don't have any secret knowledge. Just accept that. They've already exhausted every trick in the book. If there was some clever way out of this mess, don't you think Geithner's team would have thought of it by now? Or are you standing by your phone waiting for that call from the Treasury hotline pleading with CoRev to come help save the country with his plan to keep the govt running? CoRev, the nation's hero!
Oh, you also completely screwed up Goss's argument. What Goss was describing was exactly what I was outlining in my example. If in the 24 hour period between 2 Aug and 3 Aug the sum of FICA receipts plus receipts from other on-budget sources is greater than planned FICA disbursements, then Treasury can redeem SSTF bonds equal to the FICA shortfall. But that only amounts to a decision by Treasury as to which claimants will be honored and which ones will not. The Treasury still faces a default situation on 44% of its obligations. And as I pointed out,the lumpy behavior of the daily receipts and disbursements does not guarantee that total govt receipts will be enough to cover FICA disbursements. Remember, on 2 Aug the Treasury has zero cash on hand. On 3 Aug the Treasury can only pay out the amount equal to receipts over the previous 24 hours. Those receipts do not come in smoothly. Monday is the 1st of Aug and that's when they usually get big influxes. Treasury is saying that will be gone the next day. I'm not a Treasury guy, but I've worked enough "G8" and DFAS cash management issues (usually involving currency issues with the Euro and old German Mark) to know that this is exactly how things work in govt cash managment. Cash on hand balances are lumpy, not smooth...that's why we use "stuttering/compound Poisson" probability models to set target cash operating levels.
Posted by: 2slugbaits at July 16, 2011 05:35 AM
As we rush to the cliff, there is one adult party and one less so. The dems have failed to pass a budget for two consecutive years. Thankfully, due largely to Continuing Resolutions which hold spending near previous levels, discretionary spending has stabilized and may have actually retreated slightly.
Now that the adults are in control of the House we can see the progress made on passing budget appropriations bills.
To date 5 of 13 bill have passed the House with the bulk out of committee. Since the status changes nearly daily, the list of bills and their status can be found here: http://appropriations.house.gov/News/DocumentSingle.aspx?DocumentID=251676
Look at the right column for the subcommittee progress.
A list of the bills is below.
Agriculture, Rural Development, Food and Drug Administration, and Related Agencies
Commerce, Justice, Science, and Related Agencies
Energy and Water Development, and Related Agencies
Financial Services and General Government
Interior, Environment, and Related Agencies
Labor, Health and Human Services, Education, and Related Agencies
Military Construction,Veterans Affairs and Related Agencies
State, Foreign Operations, and Related Programs
Transportation, Housing and Urban Development, and Related Agencies
The Senate has only passed out of committees one or two of the appropriations. That is progress though.
Posted by: CoRev at July 16, 2011 07:16 AM
CoRev Go look at the Treasury's daily closing balance sheets. Treasury's cash balances have fallen sharply over the last 2 weeks as Treasury runs out of options. As of COB 14 July Treasury was down to $42.8B in cash on hand
And you can check out the daily receipts and disbursements for yourself if don't think they are lumpy. And as I said, August is a bad month for Treasury receipts and disbursements. See the charts for yourself:
FICA receipts will fall short of required disbursements. That means SSTF will have to make up the difference by trying to cash in one of those SSTF bonds. Except that they can only cash it in if Treasury has cash on hand the morning of 3 August, which they may not.
Posted by: 2slugbaits at July 16, 2011 08:03 AM
CoRev Now that they are not or close to equal to outlays, the lumpiness is resolved by the SSTF, one of its primary purposes.
Why do I bother? This statement shows that you don't have a clue. We are not talking about the lumpiness of SSTF bonds...whatever that means. We are talking about the lumpiness of both monthly and daily Treasury closing cash on hand balances due to the lumpy nature of cash receipts and disbursements.
Posted by: 2slugbaits at July 16, 2011 08:06 AM
2slugs, bwahaha, I misread Goss, and saying this what caused the hilarity: "What Goss was describing was exactly what I was outlining in my example. If in the 24 hour period between 2 Aug and 3 Aug the sum of FICA receipts plus receipts from other on-budget sources is greater than planned FICA disbursements, then Treasury can redeem SSTF bonds equal to the FICA shortfall. But that only amounts to a decision by Treasury as to which claimants will be honored and which ones will not."
Logic is not your strength, is it? An ORA, and he can't even see the logical fallacy in the above highlighted statement.
Here's a hint, as I don't think you actually understand the absurdity, if treasury can redeem SSTF bonds to make up the difference in SS check outlays, then there is no need to prioritize SS check claimants.
You just rephrased an argument and are now arguing that new argument. You have just done the typical bait and switch tactic you are so prone.
Other than an opportunity for another personal attack, what was the point of your comment. It appears to cover nothing already provided.
I'm done with you. Your arguments are becoming weaker and more pointless.
Posted by: CoRev at July 16, 2011 08:28 AM
CoRev No one ever said that Treasury couldn't redeem SSTF bonds to make up for the shortfall IF and ONLY IF two conditions were met. First, Treasury has enough receipts from on-budget sources to cover the shortfall. Second, the Treasury decides to deny other claimants in favor of SS recipients. That's always been the case. But initially you were arguing something quite different. You were arguing that SS benefits could be redeemed irrespective of the amount of on-budget receipts that came in. You were arguing that the SSTF could just show up at the Treasury window and be guaranteed that the Treasury would redeem the bonds. Go recheck your arguments from a couple of weeks ago. Remember? You said that Bernanke was wrong about lumpy receipt and disbursement patterns creating a problem for Treasury and that SS benefits could be in jeapardy? Remember that? Remember when you said that Congress had a role to play in setting disbursement priorities and then tried to pretend that you were only saying that Congress had a role in the debt ceiling crisis? Remember that? This is why people shouldn't be allowed to vote after a certain age...sooner or later dementia sets in and memory fades. We see what happens. We end up with Tea Party clowns that Tea Party supporters regard as "adults."
Posted by: 2slugbaits at July 16, 2011 03:57 PM
Folks, compare 2slugs' comment above re: how Treasury operates relative to paying SS checks with:
SS Chief Actuary, Goss: "All SS checks are paid out of the SSTF." That means monthly they are paid 100% by redeeming SSTF Bonds. No matter what the balance of any of the revenue streams.
And this from the House Appropriations Committee subpanel: "The panel, in a study, noted that roughly $50 billion of Social Security payments are due in August ....
The analysis also said that, if Treasury used $50 billion in cash on benefits for August, the department could also get rid of that same amount of debt in the Social Security Trust Fund and borrow that sum without breaching the debt limit."
My points, for weeks now, are that Treasury redeems SSTF bonds to pay the SS checks, and that it does not add to the overall debt, nor bust the ceiling. That is especially true since FICA receipts are now less than outlays.
2slugs is of the opinion that it happens under specific conditions: "First, Treasury has enough receipts from on-budget sources to cover the shortfall. Second, the Treasury decides to deny other claimants in favor of SS recipients."
2slugs, is absolutely correct, if on-budget receipts are in surplus and FICA receipts are in deficit to SS outlays, Then Treasury can/would make up the SS difference out of that surplus if large enough. And, he want you believe as he does, that if SS FICA revenues are in deficit to SS outlays, and on-budget revenues are in deficit (the norm) then Treasury decides which set of claimants should be paid instead of SS checks which are already 100% funded due to the SSTF.
Remember 2slugs makes this statement above: "No one ever said that Treasury couldn't redeem SSTF bonds to make up for the shortfall..." Goss says they actually redeem 100% every month.
Your arguments are becoming weaker and more pointless.
Posted by: CoRev at July 17, 2011 05:11 AM