Debt ceiling

[Chad]

Because the longest shutdown was 14 days and everyone who wants a shutdown, basically wants an indefinite one. That's a big difference.

Plus, we weren't in the worst economy since the Great Depression during those shutdowns.

[JohnnyH]

everyone who wants a shutdown, basically wants an indefinite one.

Can I get some sources on this?

Plus, we weren't in the worst economy since the Great Depression during those shutdowns.

What?!... Haven't you been reading news and govt press releases? Recession's over!

[Felix]

That's interesting, thanks!

The difference is this: The government is the biggest spender in the economy and the only one that net spends.

My question remains: Why is there a need for a shutdown in the first place?

[workathome]

My question remains: Why is there a need for a shutdown in the first place?

Because all government spending that goes beyond tax revenue is eventually funded through currency devaluation.

[JohnnyH]

My question remains: Why is there a need for a shutdown in the first place?

Well, this is probably the main reason: "51% Favor Government Shutdown Until Congress Cuts Health Care Funding"
http://www.rasmussenreports.com/public_ ... re_funding

That and [most of] the R majority [pretends to] cares about what is viewed by their constituents as wasteful and unsustainable spending... The relevant part of the R party (the only part growing) for reasons workathome just said.

[Chad]

everyone who wants a shutdown, basically wants an indefinite one.

Can I get some sources on this?

I should have included "seems." I'm reading between the lines in all the articles and from what has been posted on here. They all want massive spending cuts, but the only way they could get them is if it's an indefinite shutdown.

Plus, we weren't in the worst economy since the Great Depression during those shutdowns.

What?!... Haven't you been reading news and govt press releases? Recession's over!

Yes, they are trying to work the common psyche a little. We have obviously seen some improvement, but the recession isn't truly over. We still have some way to go.

[Spartan_Warrior]

Completely insane and retarded political theater. I kinda hope the shutdown happens, though. As one of those dirty villified government workers, I could use a nice vacation with back pay!

Then we get back to my original question: What is the scenario in which the US government cannot pay the interest on dollar-denominated treasury bills? Save for the willful refusal to do so by imposing an arbitrary debt limit, I do not see a reason for the US government not being able to pay any bill denominated in US dollars. As far as I see it, it has zero reason for default. What did I miss?

Would be very interested to hear some answers to this.

P.S. Chad, thanks for the stonekettle link. I enjoyed that. Especially one of the comments:

Has anyone considered this is all just a grand drama put on by the Corporations' puppets to divide and distract us from the complete usurpation of power by corporate interests, and by extension the wealthy? This is just a Barnum and Bailey three ring circus to get you to forget that the Congress has eliminated your inalienable rights, that the Corporations are running the government, that 95% of all productivity gains over the past 40 years in the US have gone to the top 5%, that 400 families have amassed the equivalent wealth of the bottom 180 Million US citizens - I could go on.

Congress has engineered thèse faux issues, and, masterfully manipulated by the Corporate news organs (FOX, NBC, CBS etc), the American people have eaten it up and bought into their narrative.

Think about it.

[Felix]

My question remains: Why is there a need for a shutdown in the first place?

Because all government spending that goes beyond tax revenue is eventually funded through currency devaluation.

The value of the dollar is dependent on many other factors as well. There is little correlation between government debt and the value of the dollar.



I would agree that new government spending can lead to a devaluation of the currency, probably when there is full employment and the economy is booming already. Then tax increases and spending cuts are in order to fight inflation, not government default on debt.

But this misreads my question. Let me rephrase it:

Is there a way for the US government to default on its debt except voluntarily?

[Felix]

@JohnnyH: Fair enough, if you want it that way ...

But is there an economic reason why the US has to default on its debt?

[jacob]

I am not aware of any scenario where the US government can not pay interest on existing bills unless they choose not to. Also none where existing bill holders can refuse payment in dollars. So no problem there. That's the advantage of controlling your own currency.

The scenario to consider is: What if nobody is willing to lend the government money anymore? What would that look like? How would the government get money then? Taxing? Printing?

Worse, what if on top of not being willing to accept future promises (bonds) none are willing to accept present promises (cash). How would the government then get services and stuff? Confiscation? Conscription?

As it is, by being able to print money governments (and those who are closer to that money stream) get a free ride on those who can't. This, however, only works insofar that this parasitic relationship is symbiotic. Politics is the fine act of trying to make this relationship value added.

All this lives on a continuum. Most arguments seem to be about different perceptions of where we are and different opinions of where we should be.

[JohnnyH]

The value of the dollar is dependent on many other factors as well. There is little correlation between government debt and the value of the dollar.

Uh... look at any chart of purchasing power/federal debt from 1970 on, the trend is clear and correlation strong... USD index is just a basket of other currencies, and with the currency wars 'n all.

[Spartan_Warrior]

The scenario to consider is: What if nobody is willing to lend the government money anymore?

If this is indeed the doomsday that "Conservakazis" allegedly want to avert, I can't help but find it even more laughable given the result of this debt ceiling debacle last time was a downgrade to the US credit rating.

[JohnnyH]

I think Jacob said it... IMO, until the power to coin is restored to Congress none of the conservative measures have much chance of defending the dollar's potential decline.

If this is indeed the doomsday that "Conservakazis" allegedly want to avert, I can't help but find it even more laughable given the result of this debt ceiling debacle last time was a downgrade to the US credit rating.

Not to lend credit to any of stonekettle's emotional arguments, but I think it's obvious that is exactly what R want to avoid by [attempting] cutting spending sooner rather than later to avoid irrecoverably damaging the US and dollar's credit.

[Felix]

I am not aware of any scenario where the US government can not pay interest on existing bills unless they choose not to. Also none where existing bill holders can refuse payment in dollars. So no problem there. That's the advantage of controlling your own currency.

Yes, that's what I'm thinking, too.

The scenario to consider is: What if nobody is willing to lend the government money anymore? What would that look like? How would the government get money then? Taxing? Printing?

The Fed creates money and buys bonds with that. As far as I can see it, they can do this forever. (What happens to the value of the dollar is another issue, but there is no way to default).

The government can only tax back the money already spent into the economy through the process above (plus money created through bank lending).

In the current system, it seems to work this way: Money is created through the process above. This ends up in private accounts through government spending. Then banks can add more money to this through credit expansion (no net dollars, though, all that money has to be paid back eventually). Also, these funds (government money creation plus bank money creation) would then give the private sector the funds to buy treasury bills to begin with.

The government cannot get revenue through taxes. It works the other way around. It spends first (fiat money), then takes it out through taxation.

Worse, what if on top of not being willing to accept future promises (bonds) none are willing to accept present promises (cash). How would the government then get services and stuff? Confiscation? Conscription?

Money is basically a tax credit. It is legal tender by law (read: force). So as long as there is a tax man with a gun who wants dollars from you to pay your taxes, you need these dollars. Money is basically a way for the government to get stuff and services without resorting to confiscation etc. The state demands taxes in its currency and then starts spending that currency for whatever it wants to the people who are now short of that currency.

A corollary of this is that the government needs to spend enough money to cover savings + taxes. It can't take back the money before it has put it out there. Where else should it come from? Any other way to create money is counterfeiting.

[jacob]

@S_W -

Not lending is the extreme case on the continuum. Having to pay 10%, 20% or 30% interest are less extreme but more likely... and I think that's what the worry is. What if people are only willing to lend at 20%?

In particular, such higher rates makes it tricky to decide where to invest and whether to spend money this year or next year. If you know that the future interest rate is 12%+/-%6, what do you do with all the projects you have with an IRR between 6% and 18%. You err on the side of safety---or go ahead an risk creating a money losing proposition. It's much harder to deal with than if the future interest rate is 1.2%+/-0.6%.

The housing boom and bust is a decent analogy. You can think of "raising the debt ceiling" as equivalent to "lowering lending standards". Having the effective interest rate go from normal to super easy to super hard wrecked havoc on the housing market.

@Felix - You need to account for all the money ALREADY out there in your model. The government can tax for quite a while before running out of that.

[Chad]

If this is indeed the doomsday that "Conservakazis" allegedly want to avert, I can't help but find it even more laughable given the result of this debt ceiling debacle last time was a downgrade to the US credit rating.

Not to lend credit to any of stonekettle's emotional arguments, but I think it's obvious that is exactly what R want to avoid by [attempting] cutting spending sooner rather than later to avoid irrecoverably damaging the US and dollar's credit.

Republicans have had ample opportunities in my life time to cut debt and haven't done it (not that the Democrats are much better). I just don't believe it. They, as all current politicians do, are just looking for a "win", as opposed to doing what's right.

[Chad]

The housing boom and bust is a decent analogy. You can think of "raising the debt ceiling" as equivalent to "lowering lending standards". Having the effective interest rate go from normal to super easy to super hard wrecked havoc on the housing market.

Economic extremes are generally rather bad for the economy, which is what a drawn out government stoppage/not raising the debt ceiling would entail.

[Felix]

The value of the dollar is dependent on many other factors as well. There is little correlation between government debt and the value of the dollar.

Uh... look at any chart of purchasing power/federal debt from 1970 on, the trend is clear and correlation strong... USD index is just a basket of other currencies, and with the currency wars 'n all.

It works overall in the US, but strangely it stays flat throughout the entire decade of the 70s and only starts rising in the 80s.



It doesn't work in Japan, which has held its CPI stable since 1992:
(FRED only has data from 2005-2010 for Japan debt as % of GDP )

[JohnnyH]

Republicans have had ample opportunities in my life time to cut debt and haven't done it (not that the Democrats are much better). I just don't believe it. They, as all current politicians do, are just looking for a "win", as opposed to doing what's right.

Pretty much... Some of them would happily cut entitlements deeply. But most of them would freak out and regurgitate a bunch of nationalist, mostly fictitious nonsense about terrorists if the "defense" budget was threatened.

[Felix]

@Felix - You need to account for all the money ALREADY out there in your model. The government can tax for quite a while before running out of that.

Well, that's 16 trillion in private savings.

(... which are distributed very unevenly!)

But the negative effects on the economy would get worse month by month.

Hypothetically, if the current system stays in effect and the US removes dollars from the economy step by step, creditworthiness would plummet as there would be a long recession: bank-created money and asset prices would go down very fast as debtors default and demand for products and services falls. Taxes would fall correspondingly and rates would need to be increased.

With all government money taxed away, banks have no capital to lend anything and borrowers have neither income nor credit nor intention to borrow.

It would be pretty hard to be financially independent in that scenario.

It would be a "the government is after your savings" world.