kinder, gentler debt ceiling discussion

[Riggerjack]

Felix, are you under the impression that a budget was passed? There were continuing resolutions, which allow a sidestep of the budgetary process, and leaves all spending in question. This is a key point.

That's clearly enough obligation to you. should someone come to you wanting a new $400 hammer, surely you would make it, right? and because you made it, that person is obligated to buy it, you say? if they don't buy t, they would be in default, and subject to your righteous ire! fine.

In the real world, when spending exceeds funding, spending gets cut. either by rational self control, i.e. not ordering things you cannot pay for, or by creditor control, businesses and employees failing to extend you credit.

I've been employed by companies going under. There's no good feelings when you go to work, and suppliers have cut you off and you don't know if you will be paid for your work and time. I don't wish that on anyone. yet, at the same time, continuing this charade is just extending this to more people and companies. when in a hole, stop digging.

anyone doing business with a shaky customer prices that risk in. making the full federal debt shakier by adding to it, raises the risk, and eventually, the price. (comments about greece and printing money deleted. see? I'm trying to show restraint, too.)

i guess it really comes down to obligation. if i order goods from you, run out of money, then cancel the order, i don't feel obliged to pay for the cancelled order. if there was a cancellation fee, i'd feel obligated by that. if i'd taken delivery, and there was a restocking fee, i'd feel obligated by that. if i hired you to pressure wash my driveway, you got started, and i cancelled halfway thru, i'd be liable for half the fee, and maybe some transportation costs. That's the way the world works.

I see no reason why it would be better to let them finish the driveway and declare that since i can't pay in full, i won't pay at all. or until some undetermined time in the future, when the political winds are right. it would be immoral for me to do it, i don't understand why feds doing it would make it right.

You seem to hold the view that

It is partial default. Financial promises made by the government are broken.

Every purchase made, or employee hire, or debt the feds acquire is done under contract. those contracts have cancellation terms. engaging those cancellation clauses doesn't put anyone in default. mind you, there would be work involved in this process, and there seems to be nobody in office who has the slightest interest in doing it, or seeing it done.

that is a political issue, not economic, moral, or administrative.

[Felix]

The thing is that the US is not in a hole or a shaky customer. It is the only participant in the US economy who by design need never default. This is the way the real world works, since 1971.

If the government now willy nilly based on artificial hysteria over the deficit created for partisan politics and without an economic reason decides to run a balanced budget out of the blue, it does default on existing legally binding arrangements.

To quote the treasury via the pdf I linked above (emphasis mine):

If Congress fails to increase the debt limit, the government would have to stop, limit, or delay payments on a broad range of legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and many other commitments. Defaulting on those legal obligations would cause severe hardship for American families. Additionally, it would call into question the full faith and credit of the United States government - a pillar of the global financial system.

By contrast, a government shutdown caused by a temporary failure to enact appropriations bills, while unwise and highly disruptive, would not have the same long term negative impact on the creditworthiness of the United States. Federal government shutdowns have occurred a number of times over the last 30 years, whereas a default on the legal obligations of the United States government is unprecedented in American history.

These are legal obligations. This is default. That's where the difference is to simply passing a lower budget - or a government shutdown for that matter. It is a legal issue, I would say.

Also, raising the debt ceiling does not cause higher legal obligations, but merely allows the US to meet those it already has.

This is not "my view" but the official statement of the US treasury.

So I stand by my statement that if you want a lower budget you pass one and don't just play Greece for no reason whatsoever.

[Riggerjack]

since Social security, as of right now, is still running a surplus, choosing to continue to take money from that fund to pay other bills is business as usual. choosing not to fund social security checks, would be a political administrative move. Anyone claiming we would stop making social security payments if the debt ceiling is not raised, is simply engaging in scare tactics or ignorant of how the taxes are collected and paid. now, it is possible, that our administration could Choose not to make SS payments, but that has nothing to do with ability to pay.

it's this fear mongering that i started this thread to counter.

Now, a (D) senate approved, (D) political appointee is touting the party line, that this brinksmanship is irresponsible and just a disaster in the making, doesn't impress me. it seem like the sort of thing he'd say in a badly written play... dudley dooright goes to washington or something to that effect.

This is not "my view" but the official statement of the US treasury.

3 merit badges for political loyalty don't make a professional bureaucrat any more trustworthy.

By contrast, a government shutdown caused by a temporary failure to enact appropriations bills, while unwise and highly disruptive, would not have the same long term negative impact on the creditworthiness of the United States.

again, the money is coming in. the interest can be paid. If, they Choose not to pay it, that's a decision of the current administration. Creditworthiness is based on paying your bills on time. if this administration chooses to force creditors to cut us off, well choices have consequences.

[Riggerjack]

Not, as i said before, that anyone in congress has the intent to go to a forced balanced budget.

this whole argument is starting to feel like the ramblings of trekkies getting irate about a romulan/klingon war. arguing semantics about a fictional event in a sci-fi universe.

I think we all know that Rs will fold, both sides will declare victory, then proceed to spend like drunken sailors. the "recovery" will continue as planned, with continually increasing governmental spending as the private economy continues to flatline.

[Felix]

If there is a debt ceiling (as opposed to a lower budget) you also remove any wiggle room in cash flow management (the thing that breaks most small businesses), meaning that the taxes have to come in before you can pay out anything, meaning delays on possible payments, especially high payments like billions in interest, freezing other payments in between.

As of the last statement from September 26th, there are 25 Million dollars left in wiggle room between deficit and debt ceiling.
https://www.fms.treas.gov/fmsweb/viewDT ... 092600.txt

They had a payment of 111 Billion dollars that day, and a net withdrawal of 27 Billion dollars.

With such fluctuations, you are bound to delay on tons of payments and ruin your financial credibility.

Try and run a business with such massive in-outflow fluctuations with an operating account without a functional credit line. It makes a lot of sense that this undermines the US financial credibility.

A debt ceiling as such does not lower the budget, it simply keeps the treasury from being able to make the payments required by it.

To actually lower the budget, you would have to, well, actually lower the budget.

[Riggerjack]

I agree. I also know that mall shopping bimbos are still better with budgeting and restraint than Congress. Of course it would be nice if they passed a balanced budget. But then, Santa and the Easter Bunny are just as likely to meet in times square.

It would be nice if there were any sense of fiscal responsibility, lacking that, I'll settle for an obstructionist contention and deadlocked Congress. That is the closest to progress that they get.

For what it's worth, I agree that the payment schedule would be tight, with more pain and delay than necessary. So, clearly our administration either believes this will not happen, to a degree that they refuse to prepare in any way, or they are sure they can blame the opposition, and damage to America is worth it to damage the opposition. Or maybe there's a third reason, I'm unaware of...

[Felix]

Congress practicing "restraint" simply means a deflation for the economy due to insufficient government spending, with a de-facto balanced budget thanks to the debt ceiling combined with a lower GDP implying a higher Debt-to-GDP ratio - hardly a sign of economically sound decision-making.

I still think that this is pointless harakiri. What good does it do to anyone?

From what it looks like, they will actually jump into default. I will rest my face comfortably in my palm.

[jacob]

@Felix - How does the fact that private banks can leverage credit by a factor 10 on checking accounts and (as far as I know) face no legal/practical limit on levering savings accounts and CDs influence your government debt =private wealth? I could imagine the combined firepower of reserve banking easily exceeding the gov.

[Felix]

If the economy is in an uptrend, you are perfectly right. The private debt amount is much higher than government debt in general. The problem with this is that the private sector usually acts pro-cyclically. So while it could theoretically overpower government action, when the economy goes down, companies sell less, people earn less, people become less creditworthy and banks lend less (I think they are actually not allowed to lend to uncreditworthy individuals through banking regulations, also it makes little business sense). Existing debt is cancelled either by default or paying it back. People try to save and won't borrow more in this environment. All these further drain demand.

In a private credit uptrend, I have no problem with government running a balanced budget or even a surplus, especially when the private credit bubble drives up prices (which it could do, in the case of credit for consumption and not production). The problem the private sector has is that this debt needs to be serviced by income and can only rise so much before it contracts (debt bubble).

Of course there are individual examples contrary to this trend, I am talking about the aggregate here.

So in a nutshell, theoretically yes, practically no.

[jacob]

@Felix - I think you just took the Keynesian position here of the government serving to smooth the credit cycle?! There are counter arguments from the Austrian camp that government smoothing action exacerbates the credit cycle or causes it in the first place. No need to repeat those arguments. We all know them

But was that really the direction/argument you wanted/just proposed?

[Chad]

(I think they are actually not allowed to lend to uncreditworthy individuals through banking regulations, also it makes little business sense).

It may make little business sense, but that doesn't mean it won't happen. Short-term extraction of cash can out weight long-term business sense. Assuming all actors are rational creates the 2008 scenario.

[jacob]

http://www.bloomberg.com/news/2013-09-2 ... aders.html
http://en.wikipedia.org/wiki/Peterson_I ... _Economics

More fuel for the fire.

[Felix]

Well, there's a certain perspective to this (MMT is a bit different from classical Keynesianism):

Look at where the assets on private accounts come from. They have two sources. First, there is the government deficit corresponding to private sector assets. This is the net asset source of the private sector. Second, you have the banking sector leveraging these assets upward by creating credit and debt in equal amounts.

So when you have no government debt, you do not have money in the economy.

This is the state theory of money:
http://p2pfoundation.net/State_Theory_of_Money

It makes the government central to the entire modern economy in contrast to views considering markets primary (including regarding money creation) and the government merely as an interference.

Overall the government needs to spend enough money into the economy to satisfy savings and tax payments. Bank lending then builds on that but it cannot create net assets. The aggregate in the private sector (assets+debts) remains unchanged as it can only be affected by either government spending or trade balance shifts. (the three-sector-balance-model in MMT)

Lowering the interest rate helps little in an economic downturn, the same goes for bank reserves (QE). Fractional reserve banking money creation is dependent on bank capital and credit worthiness.

If I understand the Austrian argument correctly, it says that the government causes artificially low interest rates and thus incentivizes unsound investments by screwing up the "price of money"-signal which then are purged in the necessary downcycle.

The MMT view (and I think this would be different from the original Keynesian perspective) is that this does not match the actual operations of a fiat money system. MMT holds that the "natural rate of interest" of government debt is zero.

http://moslereconomics.com/wp-content/g ... s-zero.PDF

So all the government can do to "interfere with the free market" is support interest rates, push them upward from the natural zero rate.

Another difference between MMT and Keynesianism is the notion in MMT that government surpluses are not necessary and that the government can theoretically net spend till the end of time. Keynes usually considered savings in good times necessary to have the funds for deficit spending in bad times.

In MMT you also (ironically, given the criticism it usually gets) have a strong focus on the real economy. This borrows from the ideas of functional finance by Abba Lerner.

Basically, you try to maximize real wealth output and let the paper money chips fall where they may. You try to keep full employment and high productivity and do whatever is needed for that using the options the government has. I think an MMT adherent would only lower the budget deficit when there is actually high inflation and otherwise spend away freely to maximize long-term investment in things like research, education, infrastructure, ecological maintenance and support private savings and thus private investment.

Phew, that was long.

So my position (which is heavily MMT-based) is similar to a Keynesian view, but has many important differences.

[Felix]

(I think they are actually not allowed to lend to uncreditworthy individuals through banking regulations, also it makes little business sense).

It may make little business sense, but that doesn't mean it won't happen. Short-term extraction of cash can out weight long-term business sense. Assuming all actors are rational creates the 2008 scenario.

Good point. My caveats would be: Did this not happen in violation of banking regulations? Was this not an up market?

I would guess you have a clearer picture of this, having worked in bank auditing.

[Chad]

(I think they are actually not allowed to lend to uncreditworthy individuals through banking regulations, also it makes little business sense).

It may make little business sense, but that doesn't mean it won't happen. Short-term extraction of cash can out weight long-term business sense. Assuming all actors are rational creates the 2008 scenario.

Good point. My caveats would be: Did this not happen in violation of banking regulations? Was this not an up market?

I would guess you have a clearer picture of this, having worked in bank auditing.

I'm not arguing against your theory, just giving a "heads up" over one part.

They hadn't broken any significant bank regulations in 2008 (though, they definitely would have broken regulations relating to Glass-Steagall if it hadn't been rescinded).

Definitely in an up market.

[Felix]

Interesting. I was assuming that there was a lot of fraud involved in the housing boom.

[Felix]

This whole debt ceiling drama certainly causes quite some market volatility:
http://www.zerohedge.com/news/2013-09-3 ... epublicans

[Chad]

Interesting. I was assuming that there was a lot of fraud involved in the housing boom.

There was a lot of fraud by the companies that originated the loans, but most of those weren't banks. The mortgage companies would then sell the loan to the banks. Who would then repackage it and sell them as mortgage backed securities, which were very thinly regulated. If at all.

The banks committed more fraud after the crash when dealing with bankrupt homeowners than they did before the crash.

[Felix]

What kind of poll is this?
http://www.alternet.org/69-percent-poll ... t-shutdown

[vivacious]

A good one?

People are overwhelmingly opposed to government shutdown. And they overwhelmingly blame the GOP for the issue and rightfully so.

The supposed party of business is sure making a scene.

I didn't follow this whole thread but the time is not now to reduce spending.

I don't get why people worry about government debt. It's not really a problem in America. And if they were so worried about it, why didn't they follow Clinton's balanced budget and debt payback plan? Even with the recession there would be very little debt right now if we followed that plan.