July 26, 2011
The Bonds of August
An Historical Analogy applied to today's debt ceiling crisis, with apologies to Barbara Tuchman
Discerning readers of history (so that excludes a number of people) will recall that in Tuchman’s magisterial account of how the world went to war in August 1914, she identified several factors that accounted for why the leaders of the great powers each felt victory would be painless assured. First, they thought that the war would be quick; "Home before the leaves fall", as Kaiser Wilhelm predicted. Second, they broadly misunderstood the economic implications of the conflict, believing free trade would prevent an expansion of the conflict to continent-wide proportions. Third, military leaders failed to consider the political implications of military plans, such as the German violation of Belgian neutrality.
The result was a costly and prolonged war that no leader sought, or even contemplated, but were pushed into exactly because of their mistaken beliefs.
I think we could very much be in for a repeat of this experience. Even if there are extraordinary measures are implemented which extend the X-date beyond August 2nd, the very fact that the Republicans have no viable plan, given the veto held by the Tea Party component , for achieving some sort of compromise indicates that we are inexorably moving to some sort of crisis. Consider the following:
- Certain individuals believe the debt default would be temporary (or "technical"), lasting until the politicians come to their senses (Pawlenty, Ryan)  or can be avoided by selectively defaulting on only non-debt payments (Bachmann, Gohmert) 
- Certain individuals think the effects of the default would be short lived and minimal.
- Certain individuals think that the rest of the world (including holders of US Treasurys, like PBoC) will not react to a default, and the policy paralysis evidenced by this event. 
My analogy is not completely apt in one important sense. The delusions are almost completely held on one side. As long as these delusional individuals hold veto power in the policy process, we are doomed to some sort of event; perhaps it will take a EESA redux -- with trillions of dollars of equity value wiped out, and municipal bonds being eviscerated  -- to make them realize that this is not a game.
By the way, even if the Administration is able to extend funding capacity beyond August 2nd, the one thing those of who have studied currency crises in emerging markets know is that -- given rational expectations -- the crisis typically occurs before the exhaustion of reserves (Krugman, P. (1979) "A model of balance of payments crises", JMCB 11: 311-325.) There is some evidence of this wariness already.  Of course, as international finance economists we typically thought of first-generation currency crises as a problem restricted to emerging markets and less developed economies. Little did Jeff Frieden and I know that when we entitled the first chapter of our forthcoming book, Lost Decades, "Welcome to Argentina", how apt that title would become in describing policy making as well as policy problems. That policy paralysis due to ideology is something financial market participants have also noted.
For those who think a 4 to 1 ratio of spending cuts to tax increases is still too much tax increase, and believe all adjustment can be done by spending cuts alone, I bring their attention to the following graph of spending and revenues.
Figure 1: Federal current expenditures, line 20, BEA Table 3.2 (red) and sum of Federal tax receipts and social program contributions, lines 2 and 11, BEA Table 3.2, both divided by GDP. All raw figures in billions of $, SAAR. NBER defined recession dates shaded gray. Dashed lines at 2001Q1 and 2009Q1. Source: BEA, 2011Q1 3rd release, NBER, and author’s calculations.
So what will the impact of a default be? The IMF reminds us that, just like WW I did not remain contained to a few countries, the fallout from a US default is likely to global in nature (from Reuters):
An IMF official, briefing reporters by telephone, said that if the United States' AAA debt rating -- regarded as the gold standard for creditworthiness -- was downgraded it could be "extremely damaging" for the U.S. and world economy.
The IMF official said that, since such a downgrade would be precedent-setting, it was impossible to predict with certainty the impact, but it would certainly drive interest rates up.
While underlining the urgency of reaching a debt-reducing agreement, the IMF also cautioned that an "excessively large upfront fiscal adjustment" should be avoided because that would further dampen domestic demand and slow growth.
"With a still-wide output gap and downside risks to the outlook, especially potential spillovers from European financial markets, directors called for a cautious approach to unwinding macroeconomic support," the IMF said.
For another analogy, see Jeff Frankel's interpretation of the game now going on.
Finally, a bad omen (USAToday):
"The markets are pricing in a strong likelihood of no default and no government shutdown," says Don Luskin, chief investment officer at TrendMacro.
This is the same Don Luskin who wrote on September 18, 2008, that "we're on the brink not of recession, but of accelerating prosperity." In the next quarter, real GDP fell 6.74% (SAAR). I'll take the "Don Luskin indicator" to suggest we are hurtling toward a very serious situation.
Posted by Menzie Chinn at July 26, 2011 12:01 AMdigg this | reddit
Always nice to see Barbara Tuchman mentioned. Interesting analogy. To extend it, in current times the US/EU plays both Allies and Central Powers against ourselves. In 1914 America marveled at how Europe willingly destroyed itself, opening up the world economy for the rise of the United States over the next 40 years. I fear we could be doing ourselves in again, for the benefit of the BRIC's who will similarly sit back and scratch their heads at America and the EU playing economic Russian Roulette with a fully loaded gun.
Posted by: Brian Konash at July 26, 2011 12:41 AM
Hi Menzie, as you know from your dem friends, Obama will save us all. Show script by Axelrod.
Posted by: Johannes at July 26, 2011 02:25 AM
Scary times ... seems like some on the far right feel the need for apocalypse. No compromising with the instruments of god's will.
Just read Jarred Diamond's "Collapse" and recommend to those who like placing current times into a broader perspective. If things get bad, best of luck to you all. Hoping a few weeks from now it has all worked out for the best.
Posted by: MarkOhio at July 26, 2011 02:39 AM
When you quote Luskin from September 2008 you're quoting a prediction. When you quote Luskin on what the markets are currently pricing in, you're not quoting his prediction, rather his analysis of what other people are predicting. His own prediction in the article is, respective of default: "If that occurs, we are in a world of hurt."
The Luskin indicator may be that we are hurtling toward a not very serious situation!
Posted by: Brent Buckner at July 26, 2011 05:45 AM
Personally, I think that the more apt analogy is not WWI, where leaders thought that victory would be quick, but the cold war mutual-assured-destruction detente. Default would be catasprophoic for both parties, not to mention the rest of the country.
I would not exactly call 3% on the ten year treasury and less than 60 bps on a 5 yr UST CDS a market reaction. More like ho-hum complacency and well within daily volatility/drift.
If this were a rational game, no one would be stupid enough to pull the trigger. If everyone were rational, the threat of default would be just a bluff. However, as you point out, there is a large contingent of delusional republicans who think the impact will be zero and are perfectly happy for checks not to go out.
Or, maybe the republican party has been playing up that contingent, playing the better bluff. After all, in a game of chicken, usually the one perceived to be craziest wins.
Posted by: dwb at July 26, 2011 06:05 AM
Whilst all the late Cassandra are out, the analogy with Calouste Gulbenkian, Mr. Five Percent is more in accordance with the bargaining content and the players involved.
History has never seen heroes emerging from the swing powers.
Posted by: ppcm at July 26, 2011 06:14 AM
Delete social programs from both the expense and revenue curves and you will have a far more illuminating graph.
Posted by: bmz at July 26, 2011 06:52 AM
Since Menzie has demonstrated a fondness for reflecting upon truly insightful forecasts made by fellow economists, it might be useful to revisit another profound forecast from 2005:
Might the dollar eventually follow the precedent of the pound and cede its status as leading international reserve currency? Unlike the last time this question was prominently discussed, ten years ago, there now exists a credible competitor: the euro. (Chinn & Frankel, 2005)
Those who live in glass houses (or ivory towers)...
Posted by: T-Dub at July 26, 2011 07:53 AM
Menzie, you said:
when we entitled the first chapter of our forthcoming book,
You mean, "when we titled the first chapter". It's a common grammar mistake, but one that always makes me bristle. People are entitled, books are titled.
Anyway, sorry for the OT grammar lesson.
Posted by: Gridlock at July 26, 2011 08:17 AM
Menzie's points are:
1. Certain individuals believe the debt default would be temporary (or "technical"), lasting until the politicians come to their senses (Pawlenty, Ryan)  or can be avoided by selectively defaulting on only non-debt payments (Bachmann, Gohmert) 
The article states that those who believe this think "a brief default might be an acceptable price to pay if it forces the White House to deal with runaway spending." It appears that Menzie does not believe that default would force the White House to deal with runaway spending. Apparently a default is a price the White House is willing to pay to maintain its runaway spending.
2. Certain individuals think the effects of the default would be short lived and minimal.
Since Menzie gave no reference for this comment it is difficult to reply. Who are these mysterious people?
3. Certain individuals think that the rest of the world (including holders of US Treasurys, like PBoC) will not react to a default, and the policy paralysis evidenced by this event. 
So apparently from the reference China will invade the US if we default on our debt payments to them. What else can they do? Oh, I guess they might not buy any more of our debt. But wouldn't that reduce our debt? Why do we want to borrow more from the Chinese?
Posted by: Ricardo at July 26, 2011 08:22 AM
Certain individuals believe the Reid "plan," with its phony cuts like assuming a baseline of perpetual global war and then cutting a trillion off that baseline, would not lead to a downgrade.
Posted by: W.C. Varones at July 26, 2011 09:21 AM
"My analogy is not completely apt in one important sense. The delusions are almost completely held on one side."
Posted by: mp at July 26, 2011 09:42 AM
Argentina borrowed money to fund an engorged public sector until it could no longer repay . The Tea Party wishes to stop borrowing money before we get to that point within the framework of limited government.
As I have said many times before, in the post-communist world, I believe the median voter boundary is between the social conservatives on the right and the fiscal conservatives on the left. Yet Obama's rhetoric remains egalitarian, thus he is, to all appearances, eliminating himself from the equation.
Per your analysis, Menzie, Obama could say, "Historically, federal government spending has been 20% of GDP. We are committed to that level in the future as well. However, we differ with our predecessors in that we strongly hold that our taxes revenues must meet these expenses over the economic cycle." That's fiscally conservative rhetoric (even though it contains a tax increase!).
But he hasn't said that. But look at the chart: it's exactly what Clinton did!
Posted by: Steven Kopits at July 26, 2011 10:42 AM
I still think sanity will prevail (but I also thought we would not invade Iraq). If we do default, you should retitle this entry "The Bums of August". Since some of your readers seem confused, you can tell who they are because they have (R)'s after their names.
Posted by: Mark Kuperberg at July 26, 2011 12:25 PM
Maybe I'm splitting hairs but all this talk lumping "default" with the August 2nd (or 1st or 3rd) deadline seems to be a bit misleading, it stinks of partisan motivation, and I'm dissapointed to see it mixed in with such quality analysis
Default means you cant pay those who lent to you and you are giving up on paying them. First, if the debt ceiling is not raised on the deadline, there will still be funding to pay interest and principal on the current debt. You better believe that's the first thing that gets paid. All the other obligations that congress laid out on their never ending spending spree is the part in trouble, and while it's a bad thing that they cant pay for things that they've already approved spending for, that's not interest on the debt and that's not default. Yet. That said, raise the debt ceiling but address the long term budget issue. That is what financial markets are really interested in, not this short term political bickering, unless the bickering leads to insolvency.
BTW, if this Luskin guy is so bad at predictions and/or managing wealth, which he presumably manages from some of those predictions, how is he still around with the same company? So he got one wrong, and spectacularly wrong for sure, but that prediction doesnt predict the outcomes of future assessments any more than what Noriel Roubini might say.
Posted by: Devin at July 26, 2011 12:26 PM
What a fine mess the über-Keynesians have gotten us into.
They've got our economy so addicted to 10% GDP deficits that withdrawal is unthinkable.
Posted by: W.C. Varones at July 26, 2011 01:23 PM
Re:Default and its various flavors.
A couple of people have written that the U.S. can default on some things (e.g. payments to federal contractors) and not others (principal and interest on the debt.
couple of points:
1. "default" is not a legally precise term and does not only apply to "debt". Credit analysts are often equally concerned with defaults on contracts (which generate receivables) as well as debt. A receivable that a Federal contractor has against the U.S. govt for services rendered is a debt the same as a T-bill.
2. S&P has noted that if the U.S. defaults on "any" of its payment obligations it will be considered a default and will downgrade the US to a D.
3. any prioritization of payments, eg payment of principal and interest first breaks the law. social security checks go out aug 3rd, and coupon payments are due august 15th. nonpayment of social security august 3rd to conserve cash breaks the law. nonpayment to federal contractors may violate those contracts.
4. anyone who thinks you can pay some bills and not others should try that and see what happens to their credit report. yes, late payments to utilities, medical bills, leases, and so on are all reported, not just credit card, auto and mortgage debt.
5. which gets me back to: credit analysts are often equally concerned with rating receivables generated by contracts as well as actual debt (in reality, the difference between a receivable and a short term t-bill is nil). Hence S&P has said the U.S. will be downgraded to D for nonpayment of any outstanding obligations, not just principal and interest.
Posted by: dwb at July 26, 2011 01:52 PM
While I think the Guns of August comparison is a good one, arguing that it's only the Republicans who are the source of all problems is, well, delusional.
What is to stop a majority of Democrats in the House from joining with a majority of Republicans to pass a "reasonable" bill?
The truth is that your comparison is more apt than you imagine. Both the Republicans and the Democrats are similarly delusional.
Posted by: Don at July 26, 2011 02:48 PM
"BTW, if this Luskin guy is so bad at predictions and/or managing wealth, which he presumably manages from some of those predictions, how is he still around with the same company? So he got one wrong, and spectacularly wrong for sure, but that prediction doesnt predict the outcomes of future assessments any more than what Noriel Roubini might say."
Well, efficient markets bail out the incompetent and competent money managers with (almost) equal opportunity, Mark.
As for the specter of default, yes, the bond market is watching the math more than the politics. And the math is favorable. Unless the bond market starts to believe that the politics will screw up the math, in which case we all better look out.
What likely happens is if a debt ceiling increase is delayed and D-day is reached, that sends bonds up in price rather than down...as the government is forced to reduce spending on currently produced goods and services, and that serves as a(nother) contractionary force right now.
Posted by: Chris at July 26, 2011 03:08 PM
Devin Default means you cant pay those who lent to you and you are giving up on paying them. First, if the debt ceiling is not raised on the deadline, there will still be funding to pay interest and principal on the current debt.
Yes, we all know that. But we also know that this is what's called a distinction without a difference. Do you think it wouldn't matter to your credit rating if you paid your Visa bill but didn't pay your plumber and grocer and utility bill?
You better believe that's the first thing that gets paid.
Ummmm...no. Treasury's disbursement system is set-up on a first come first served basis. Disbursements are issued as bills are presented. Bondholders do not stand in the front of the line.
if this Luskin guy is so bad at predictions and/or managing wealth, which he presumably manages from some of those predictions, how is he still around with the same company?
Is he going to fire himself??? He's the boss (Chief Investment Officer). And he got a lot of things spectacularly wrong. He is a perennial contender for the "dumbest man alive" contest.
Posted by: 2slugbaits at July 26, 2011 03:30 PM
Sad to see so much tea party nonsense infesting the comments section of your blog. My condolences.
My take on the current right wing insanity is that it is a long run consequence of the bubble world created by right wing television (FOX) as a consequence of the end of the Fairness Doctrine. This bubble world has allowed fantasies to flourish, and we will (soon) all be the poorer for that.
Posted by: lark at July 26, 2011 05:44 PM
A lot of finance textbooks will need to be updated if even short term US government bonds can no longer be used to proxy a "risk free" rate.
Posted by: Jacob Mohs at July 26, 2011 06:43 PM
Jay Carney: God love 'em...
Posted by: Babinich at July 26, 2011 07:10 PM
"Well, efficient markets bail out the incompetent and competent money managers with (almost) equal opportunity, Mark."
Not in the long run. The random walk of equities would suggest that most money managers can't beat the market. Some do for a while, but they charge more or demand more capital. I don't know Luskin's record, perhaps he's done worse than S&P, can someone show me where that info is? BTW Who's Mark?
"Yes, we all know that. But we also know that this is what's called a distinction without a difference. Do you think it wouldn't matter to your credit rating if you paid your Visa bill but didn't pay your plumber and grocer and utility bill?"
This question is unfair. The treasury can delay payments to cash financed obligations and even to other debt financed obligations, i.e. Secretary Geithner can continue to declare a debt suspension period where they dont put cash into say the Civil Service retirement fund. This is not a good practice obviously, and markets or the public won't tolerate it indefinitely. But eventually, despite the republicans, taxes will be raised. There's your credit rating. As an individual, I dont have the ability to tax my way out of these situations, and if you believe in Ricardian Equivalence at some level, it helps explain why I'm paying for less groceries. I need to save!
Moreover, your question points to the debate over what G should be financing. You mention paying the plumber or grocer. I would say it's more of a question of should I be putting in six shower heads on one pipe, or perhaps I should be shopping at Walmart instead of Whole Foods.
"Ummmm...no. Treasury's disbursement system is set-up on a first come first served basis. Disbursements are issued as bills are presented. Bondholders do not stand in the front of the line."
Can you show me where the Administration wouldnt be able to make decisions on who to pay? I'm curious about this topic. Aside from that, do you really think that if push came to shove the Administration would pay social security recipients before creditors and risk another financial meltdown?
Posted by: Devin at July 26, 2011 07:24 PM
I personally am not sure I see any side as delusional here.
The Tea Party feels that i) they were misled with the last round of budget cuts, ii) that they were elected on no new taxes, iii) that additional taxes will merely feed the beast, and iv) that better a technical default now than an insolvency-driven default later. And they see Obama and the Democrats as weak.
The traditional Republicans are trying to find that middle road, with a combination of tax increases and spending cuts. To all appearances, Boehner is trying to avoid a default, but he is not at a pole--he's in the middle, between the Tea Party and the Democrats.
I think the traditional Democrats correctly see this as a frontal assault on the ideological pillars of the New Deal. It aligns with the attacks on unions and public employees of recent times. But given the weakness in the economy, there is little appetite for new taxes in the general population. Economic realities are arguing for re-trenchment, not expansion, of government services. So this is a very serious fight for the Democrats, but they have comparatively little ammunition.
The President, I think, does not openly say what he thinks. In his heart, I think he believes the role of government is to re-distribute income from the wealthy to the poor. And yet, while the President's emotions may be socialist, he's not prepared to defend the ideology in public--and this makes him indecisive. To win, he would have to say, "I believe protection of the poor is the key purpose of government, and I believe a majority of voters share my view. Consequently, I will permit a shutdown and default, because the Republicans will only learn this lesson through electoral decimation." Is that the mood of the country today? I don't sense it.
Consequently, in a battle of ideological wills, the President will lose, because the Tea Party is and has been committed to coherent set of principles and because the price of crisis is, by construction, less to the Tea Party than to the Democrats. Win or lose, for the Tea Party, this is a battle which must be fought, and better now than later. And the President, if he does not know that now, surely will soon.
Posted by: Steven Kopits at July 26, 2011 08:06 PM
As long as we're taking a trip down memory lane, let's harken back to the time last year when Menzie mocked me for mentioning structural deficits of 10% of GDP, and credulously linked a CBO estimate showing a deficit of just 3% in FY2013.
W.C. Varones: Do you really understand the concept of "structural deficits"? I sincerely doubt it. Where exactly are you getting your structural deficit estimates of 10% going forward? Definitely not from the CBO (see here), and not even under their alternate fiscal scenario.
Posted by: Menzie Chinn at September 27, 2010 08:08 PM
Well, Menzie, it's another year later, three years into the alleged recovery, and we're still running deficits of 10% of GDP. So how's that 3% deficit looking for you in FY2013?
Posted by: W.C. Varones at July 26, 2011 09:16 PM
Devin Can you show me where the Administration wouldnt be able to make decisions on who to pay?
On several occassions Geithner has said that Treasury will not be able to prioritize who gets paid first. The Administration claims (incorrectly in my view) that they do not have the legal authority to prioritize claims against Treasury; but it's essentially academic because at this late date there is no practical way that Treasury computers could be reprogrammed to prioritize customers. Treasury keeps paying bills as they arrive until the cash is gone for that day. Then receipts get posted overnight and they pay what they can the next day. The good news is that due to the lumpy and stochastic nature of receipts and disbursements, there is a report that Treasury may be able to squeeze out a positive cash onhand balance until 10 August.
You mention paying the plumber or grocer. I would say it's more of a question of should I be putting in six shower heads on one pipe, or perhaps I should be shopping at Walmart instead of Whole Foods.
Your statement is in the future subjunctive..."...perhaps I should be shopping..." The problem is that the need to raise the debt ceiling is a consequence of past spending decisions and current year appropriation bills passed by this and previous Congresses. You already bought the showerhead and wrote it with a hot check hoping that you would be able to borrow some money from your brother-in-law and get the money into your checking account before the plumber cashed the check. The government already has the obligation to pay; it just doesn't have enough in its account to clear the check.
Posted by: 2slugbaits at July 27, 2011 02:36 AM
Steven Kopits You may well be right about the asymmetry of motivation here. The Tea Party types don't care about the consequences and many don't care about being re-elected in 2012. I think that's quite true in too many cases. But that is almost the textbook definition of delusional. Someone who takes reckless actions without regard for the consequences is almost by definition delusional. Especially so when that person's view about economics is based on know-nothing homespun intuitions. These people are committed, but ultimately ignorant. They could be defeated if Boehner had enough of a spine to risk his Speakership by bucking the "Crazy 75" that are hurtling the country into Tuchman land.
Posted by: 2slugbaits at July 27, 2011 02:43 AM
I think you are right that neither side is delusional. But both sides seem to see electoral success as more important than the country's success.
I think you might be a little delusional about the President's socialist leanings. Sure, he thinks ensuring a safety net for the poor is important. But he does not see this as the only role of government. In this particular debate, he seems the most reasonable to me. Going on a month ago, he proposed $4T in cuts (including significant reductions in New Deal programs) and $1T in revenue increases by allowing Bush tax cuts to expire on wealthier Americans. That proposal is on par with the Ryan budget plan in boldness, and far more significant than either the Reid or Boehner plan currently on the table. He isn't the decision maker on the debt ceiling, so maybe that is why he appears indecisive to you. Where he has decision making authority, he seems quite capable of decisiveness. Maybe when Congress fails to do its duty on the debt ceiling, we will see some of that decisiveness.
Posted by: MarkOhio at July 27, 2011 03:54 AM
As students of economics are taught, causes and causations matter and in that order.What is the substance of these universal outcries,if causes are not thoroughly included.
"So the two qualities that requires trust, it is justice that holds the first place, because even without the skill it is worth considering, while the skill without justice is unable to inspire confidence. The more a man has skill and cunning, the more it seems suspect and excites the jealousy, if not a reputation for honesty. Thus the union of justice and skill that we have in the strength of a man unlimited confidence, justice without the skill has a great effect, the skill without justice is worthless"
Posted by: ppcm at July 27, 2011 03:54 AM
W.C. Varones: Well, if I consult the CBO document that is hyperlinked to in this post, then you will see the cyclically adjusted budget balance for FY 2013 is -2.6 percentage points; it is -6.7 ppts in FY 2011. Corresponding budget to GDP figures are -4.1 ppts and -8.8 ppts respectively. These are current law projections, so I well expect FY2013 to be different in actuality, but FY2011 is almost over, so I am feeling pretty good about my prediction.
Note: Had the President's proposal to allow the tax rate to rise for households with AGI over $250K been implemented, then the FY2012 budget deficit (actual, structural) would have been smaller.
Posted by: Menzie Chinn at July 27, 2011 05:55 AM
Menzie, sticking to the democratic talking points, says: "Note: Had the President's proposal to allow the tax rate to rise for households with AGI over $250K been implemented, then the FY2012 budget deficit (actual, structural) would have been smaller."
No question! If, somehow, Obama was able to raise all revenues (that's not just restoring the Obama/Bush tax cuts) a whole 3% the the deficit (~$1.2-1.7T) would be cut by a whopping ~$65B/Yr. And if Obama hadn't added the 2% FICA holiday, deficits would have been smaller.
News flash! One did not happen and the other did. C'mon now let's talk about the real world and not some fevered wishful dream.
Posted by: CoRev at July 27, 2011 06:38 AM
Delusional or dedicated and motivated?
Dedicated: devoted: wholeheartedly devoted or committed to a goal, cause, or job
Motivated: provided with a motive or given incentive for action; "a highly motivated child can learn almost anything"; "a group of politically motivated men"
Yup! They even used politics in the definition.
Delusional: 1. an act or instance of deluding.
2. the state of being deluded.
3. a false belief or opinion: delusions of grandeur.
I dunno how you read the definitions, but one set appears closer to TP reality than the other.
Posted by: CoRev at July 27, 2011 06:46 AM
Thanks for the description of the Treasury's payment mechanics, although Geithner is in a political position, thus playing the doom and gloom card and as a practical matter I can't believe him; their constant references to default on a specific date are disingenuous. I realize that the payment system is too large to stop or start on a dime, but despite the millions of payments it automatically makes, It seems like there must be some way to make an executive decision by stopping some and doing what is necessary if congress continues to act like children.
"Your statement is in the future subjunctive..."
That part was just a silly moralizing question of what should Gov't be outlaying in the first place. I was attempting to extend your analogy with the simple notion that perhaps they are doing too much. Apologies if it seemed like I was referring to the acute problem of what congress has already laid out for on/around Aug. 2nd.
Posted by: Devin at July 27, 2011 02:16 PM
Devin It's a couple years old, but you might find this interesting. It's a Treasury slide show from 2008 that describes Treasury's daily cash management practices. Note slide #17. Poster CoRev assures us that Treasury cash balances are not "lumpy." I'll let you decide for yourself.
Go to this site:
And under Informational Material, select Overview of US Treasury Debt Management
You can also check Geithner's veracity by checking the Treasury's daily closing cash balances. Geithner is not lying.
Posted by: 2slugbaits at July 27, 2011 02:52 PM
Bruce Bartlett, formerly with the Reagan and Bush 43 Administrations, was just on Hardball, on MSNBC. He has reached the same conclusion that I have, i.e., that nothing will be approved by the House (except for possibly a spending cut only bill).
It seems to me that the only way for the Democrats to avoid default is to capitulate to the Tea Party and let the chips fall where they may.
Posted by: Jeffrey J. Brown at July 27, 2011 04:44 PM
2slugs, I've left you alone for days, now, but why do you have to lie? Our discussion was about FICA revenues and SS outlays. Not the general fund (GF) processes.
Your argument was that SS checks not covered by available FICA revenues, must be covered by GF revenues. Which denies the SS Trust Fund and its use
SSA Actuary, Mr Goss, made it clear, all SS checks are funded from the SSTF. That certainly takes the lumps out of revenue for those outlays. To do that means Treasury redeems, in advance, those SSTF bonds needed for a period's outlays.
2slugs, also persists in saying Treasury's FIFO payment system precludes any prioritization of payments. Even if it was too costly to modify the payment system, while I doubt it is that inflexible, 2slugs ignores and perhaps deliberately fails to tell you about the approval process. That's where most of the management controls are placed on the payment process.
Why he relies on the final step in the payment process as the best one to perform the management function is beyond me. There are many other places where managing and prioritizing payments is traditionally done.
Approvals and forwarding goes on within the various services, departments and agencies. It is in these steps where the prioritization process is usually implemented.
The President can issue an order to stop approvals or forwarding of approved payments at any stage in the process he wishes. That is a more flexible and controllable way to prioritize payments.
An Executive Order is needed for stoppages/prioritizations of that nature. It could be implemented by, budget line item, service, department or agency, accounting code, dates, type of payment and can be implemented at any number of steps in the payment process. Even the final step, Treasury's FIFO payments system is possible for implementation, but not usually recommended.
Posted by: CoRev at July 27, 2011 05:35 PM
CoRev As I said, you badly misunderstood Mr Goss's testimony. The SSTF can redeem SSTF bonds in excess of FICA revenues (that was never in dispute), but in order to liquidate those bonds the Treasury must either sell more public debt on the market or redirect general fund revenues. The first option is precluded due to the debt ceiling.
As to the Treasury's flexibility to prioritize customers, please to try get my argument straight. I believe the President has the authority to prioritize debt; it's the WH and Secretary Geithner who are claiming they don't. And just to be clear, I didn't say it was absolutely impossible for Treasury to reprogram things, I said that as a practical matter it was impossible. There are several reasons. For example, Treasury would want to do something like that in strict confidence so as not to spook the losers, but that would be a very hard secret to keep. And how would Treasury reserve funds for potential high priority claimants that may not immediately come forward, and for how long would Treasury reserve those funds? As a practical matter it really isn't feasible to reprogram and test those complicated decision rules in such a short timeframe. We're not talking about some Excel spreadsheet with a macro. Treasury doesn't even do their own programming, so it would require the letting of a contract through WHS...good luck with that.
Posted by: 2slugbaits at July 27, 2011 06:47 PM
2slugs, for a Govt insider you truly are inexperienced in some of the basic functions of cash flow. You just assigned a Treasury function to SSA with this: "The SSTF can redeem SSTF bonds in excess of FICA revenues (that was never in dispute),..." No, Treasury redeems the bonds not SSA. BTW, how can a TF redeem its own bonds? Doesn't that take some human intervention?
You then go on and compound your ignorance with this statement: "but in order to liquidate those bonds the Treasury must either sell more public debt on the market or redirect general fund revenues. The first option is precluded due to the debt ceiling." But if that were true we woould not still be borrowing above that ole $14.3T debt ceiling, passed in May, 2011. Since we already discussed that situation, I know you are aware of how and why they are allowed to continue to borrow above that ole ceiling. And since we have already discussed that the Trust Funds are no different in their accounting against that ole ceiling, then you are either disingenuous or especially ignorant and hard headed.
I won't address the remainder of your comment as it does not fit reality.
Be very careful of what 2slugs says here. Too often he is wrong, and since there are few here knowledgeable of inside government functions, he gets away with it.
Posted by: CoRev at July 27, 2011 08:38 PM
The numbers of monthly checks issued by Treasury has been a little soft, ranging from 70 to 80 million. Regardless, Social Security makes up 60.114 million of those monthly checks. Since these checks are funded through the $2.6 trillion Social Security Trust Fund (SSTF), there is neither lumpiness nor revenue shortfalls for them.
Since the SSTF is calculated as part of the overall debt as shown below from table S-14 from here: http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/tables.pdf
Total, gross Federal debt......... 13,529
Debt held by Government accounts... 4,510
Debt held by the public 7.......... 9,019
The debt ceiling falls upon the Total, gross Federal debt, but when SSTF bonds are redeemed they do not affect that total, but move from the Debt held by Government accounts to the Debt held by the public sub categories. The debt ceiling is not affected.
To conclude this wonky discussion, the president lied when he said he can not guarantee the SS checks. The only reason he could not is political. It is not financial and not operational, since 85% of the monthly checks are already pre-funded from the SSTF.
There is much misinformation and misunderstanding being printed about how the debt ceiling affects the operations and payments of the federal government. Don't succumb to the fear mongering.
Posted by: CoRev at July 28, 2011 04:38 AM
"Be very careful of what 2slugs says here. Too often he is wrong, and since there are few here knowledgeable of inside government functions, he gets away with it." Ha!
I'll grant him this - he never lets the truth get in his way. His motto is "If you can't dazzle 'em with brilliance, baffle 'em with bs."
Posted by: Rich Berger at July 28, 2011 09:45 AM
CoRev You're right, I should have said Treasury redeems the SSTF bonds. Careless typing.
I gave you a pithy and downright homely example of how Treasury has been managing to swap things around since May. Again, we all know that. This discussion was never about whether or not the Treasury could find clever ways around the debt ceiling over the short run. I don't know what discussion you thought we were having, but I always assumed it was about what happens after 2 Aug (or perhaps 10 Aug). Assuming (and it's a huge assumption) that the Treasury decides to prioritize SS retirees ahead of bondholders and everyone else, Obama still could not guarantee that all SS retirees will get their checks. He cannot make that guarantee because he does not know with certainty how much revenue will come in overnight after 2 Aug and before SS checks go out on the 3rd. The Treasury can only redeem SSTF bonds if there is enough total revenue (FICA receipts from overnight plus general revenue receipts from overnight) to cover SS obligations on the 3rd. I'm not sure, but it sounds like you are under the misunderstanding that Treasury reserves FICA receipts each month for SS disbursements. If so, this is wrong. They are all lumped together. To take you example, there will not be 85% of the needed SS monies held off to the side so that Treasury only has to make up 15%. It might appear that way over a monthly time horizon, but that's not the case when you look at daily operations.
I agree that there is a lot of misinformation about the debt ceiling and Treasury operations...and it's all coming from the likes of Michele Bachmann and the Tea Party clowns.
Posted by: 2slugbaits at July 28, 2011 02:21 PM
2slugs persists in his fundamental mistakes and misunderstanding of the SSTF payment process. Saying this: "The SSTF (actually Treasury) can (does) redeem SSTF bonds in excess (no, redeems the amount needed for the entire SS outlay) of FICA revenues (that was never in dispute), but in order to liquidate those bonds the Treasury must either sell more public debt (on the market or redirect general fund revenues. The first option is precluded due to the debt ceiling. (no, since the debt ceiling is on Total, gross Federal debt pegged at $13,529T)"
I have just corrected 2slugs' explanation of the process. There are two egregious errors: 1) How the SSTF is used to pay SS outlays. 2) He has seriously misstated where and how the debt ceiling is applied.
I do not understand how he could make the second egregious error, as it is has been well publicized. One of his problems is poor use of actual terms. Is "public debt" actually "Debt held by the public"? Why ask? Because it is often used to indicate Total, gross Federal debt.
I won't repeat my explanations of how Treasury actually operates relative to the SSTF and how Debt held by Government accounts effects the debt ceiling. I've done it too many times.
At least in 2slugs' comment a miracle happened. he admitted a mistake: "You're right, I should have said Treasury redeems the SSTF bonds. Careless typing." Really? Is that all? Too often you have rephrased one of my points and then argued you new, rephrased points. It appears to have confused you re: what subject we were discussing
Posted by: CoRev at July 28, 2011 02:56 PM
In their threat to downgrade US debt, Moody's called for the debt ceiling to be abolished. Somehow not a single politician or major commentator has noticed this or mentioned this, only trying to figure out which parts of the social contract can be dismantled so that the teabaggers can put off for some months another round of this teeth gnashing and downgrade-inducing nonsense. It should be abolished.
If the ceiling is not raised, Obama should bite the bullet and either declare it unconstitutional and ignore it as Bill Clinton has recommended, or do the weird minting a trillion dollar platinum coin routine called for by beowulf and others, totally ridiculous as that is. But either of those is better than tanking the world economy over something that no other country in world history has ever had.
Posted by: Barkley Rosser at July 29, 2011 10:52 AM