Senate Fiscal Cliff Doomsday Countdown Thread

Except you're oversimplying it, Kimball.

It's not "just" the 14th Amendment, or the Treasury, it's the markets, it's businesses, it's people.

Even if we do as you suggest, credit downgrades-and a market crash-will follow. Stocks bounce up and down, but a collapse in bonds and US Treasuries, with a corresponding spike in interest rates, will do our economy real, sustainable harm.

That harm will not be undone after a week of political posturing that leads to a bill, even a good one. Stocks may recover quickly, as they've done in the past after each episode of brinkmanship, but the one time they didn't was the debt ceiling fight. Even after the deal, the markets continued to sell off. But I digress. If we breach the debt ceiling, and the bond markets are affected, the damage to low interest rates will not be reversed by the passing of legislation.

Business and investors will pull back, sharply, and it will be a long, long time before they start to venture back in. While we're waiting, a new recession, if not outright depression, may ensue.

I say again: do the Republicans REALLY want that on their back?

Peace,

V-03

 

But under the scenario I described, we wouldn't actually breach the debt ceiling. Instead, we would have a government that is restricted to living within its means.

Our debts would still get paid, SS and Medicare would still be funded (until the Trust Funds run out), and parts of the federal government would still be open for business. There shouldn't be a credit downgrade at that point because we would still be paying our debts. If fact, we would be doing what several credit rating agencies have insisted we need to do: cutting the budget.

To use a home budget analogy, as long as you pay your debts as agreed upon (your credit card minimum payment, mortgage, car payment, etc) each month, your credit rating will not be downgraded. It doesn't matter if you then have to cut back your food budget to beans and rice, or you can't go buy new clothes, or you can't buy various luxuries. Those restrictions on your budget might be painful, but they won't reduce your credit rating.

What would destroy the bond market is if the government either refused to pay its debts or issued bonds without Congress's approval. In the former case, it would be in violation of the 14th Amendment. In the latter, the debt could be repudiated by the government because it would not have been "authorized by law", which would make it essentially worthless.

As far as the market goes, if it has become so dependent upon federal deficit spending, then maybe it needs to self-correct. There's a reason why the rating agencies have been calling for spending cuts. Simply increasing the debt limit isn't going to address the underlying issues that have threatened our national credit rating. Unless spending gets under tight control, all increasing the debt limit will do is stall when the ultimate crash comes along, and make it worse when it actually happens.

 

I genuinely cannot believe how you've managed to convince yourself of something that anyone outside the right wing bubble knows to be absurd. DS77 was so right when he made his sharp observations back in October.

All that "live within its means" claptrap is ludicrous. The federal government is *not* a family and should not be viewed as one.

It reminds me of those who said that Romney was headed for victory, based on no real evidence in particular. Hacks like Jay Cost and Michael Barone cited this and that as reason for their predictions of a Romney win, but of course all of that met the unforgiving space of reality.

The debt ceiling is going to be raised, and there will not be any major spending cuts. Most of the people screaming for those cuts don't actually want any meaningful ones, because if there were, their own constituents would be among the hardest hit and the fastest to complain. Many of those representatives are too far gone to understand this, of course, but a reality check would be almost as fast in coming as the one we saw provided on the night of November 6, 2012.

 

KK, do you have any respectable source that not raising the debt ceiling would simply be a "self-correct" of the market that wouldn't be catastrophically damaging to the global economy by causing the U.S. to default?

 

At the same time, the nation can't afford to continue $1T deficits and hope to maintain a strong fiscal foundation.

Some debt is acceptable (even in a family setting, such as for a mortgage), but no organization can constantly spend more than it takes in, especially when you are talking about spending that is over 33% above your revenues. Eventually, people are going to stop loaning you money, and when that happens it doesn't matter what you set your own credit limit at. You have to cut the spending at some point.

 

The thing is that it wouldn't cause the US to default. Default means that you aren't paying your debts. That isn't what would happen in this case unless the President directs the Treasury not to pay them (which would be unconstitutional).

What would happen is more akin to the government shutdowns in the 1990s. In that case, money couldn't be spent because it hadn't been appropriated. In this case, the money has been appropriated, but it isn't in the Treasury (which means that it also cannot be spent). As a result, it would only be a partial shutdown, which would be enough to allow critical services to continue up to the point that operations cost more than the ongoing revenues.

For example, I work as a federal contractor supporting the FAA. When the FAA's appropriations bill came down to the wire a few years ago, we were instructed that as of midnight, we were not to do any further work. Our call center was to shut down at midnight (when the old bill ended), and even if a server went down, I wasn't supposed to do anything to fix it until I was notified by by boss that the appropriations were approved and the contracts office would pay us for the work. The difference here is that rather than everything shutting down, only those things that exceed the revenues would have to shut down.

There's some money to pay our debts and keep the government running on a minimal level. There just isn't enough to do everything.

 

I said source. Because everything I have read says that isn't legal to prioritize and that even shutting off the rest of the payments would devastate the economy by wiping out demand. The Bipartisan Policy Center has even said, regarding the payment of debt first "Anyone who says they know for sure whether this is legal is not telling the truth" let alone that it would even be possible to program through FedWire.

 

Well I already sold a chunk of my portfolio to get ready for this entirely man made disaster 2.0.

I actually agree with Republicans (at least they're rhetoric) about how we have address the unsustainable path we're on, etc. but they go about it so stupidly.
I can't believe the party of big money is so blind to the interests of their own benefactors.

 

My source is to look at the actual appropriation laws themselves, as well as my experience as a federal contractor in how they hand;e such finance issues..

Each and every one of them starts with the same phrase I quoted above. Each successive appropriation is made "out of any money in the Treasury not otherwise appropriated". If there's no money in the Treasury, then the money isn't appropriated. If you don't believe me, read the laws themselves.

I've seen a lot of people claim that it would be illegal to pick and choose, but I haven't seen anyone cite what specific law makes it illegal. If you know, I would appreciate a pointer to it.

 

I'm pretty sure that getting out of the way of the private sector is how the financial crisis started.

 

Well, I showed that Blad Plumer from the Washington Post said the details are marky at best, and the Bipartisan Policy Center said that it's unclear as well. Roll Call has reported that Geithner claims he "could not prioritize payments." Even if it were to be legal - I'm not arguing that it isn't, but that there is no definite answer - Geithner has said it's much harder than simply prioritizing. The Treasury cannot fail to pay an obligation without Congress acting. And call me delusional, but I'm assuming that Congress isn't going to be able to settle that fiasco easily. Geithner has repeatedly argued that even if we were to pay the interest on the debt while reneging on other obligations, it would be catastrophic for the U.S. economy.

You mentioned that credit rating agencies have told us to cut our spending. Which they have. You seem to forget that they downgraded our credit rating primarily because of our political instability, which is largely caused by the House GOP caucus. They have also stated that your theory of prioritization "would signal sever financial distress and potentially imminent debt default" as well as many investors openly stating they'd be less inclined to buy up U.S. debt, which is currently one of the safest financial assets.

Here is what James Baker cautioned on not raising the debt ceiling under Reagan: "I should stress that defaulting on already outstanding, validly incurred obligations has far graver effects than halting operations of the Government when spending authority is allowed to lapse, such as when there is a delay in action on appropriations. A failure to pay what is already due will cause certain and serious harm to our credit, financial markets and our citizens; it is not remotely similar to a lapse in authority to incur new obligations."

I would like to note we're arguing over prioritization, whereas many in the House GOP caucus have openly stated that they are not opposed to defaulting.

 

In an ideal world, the federal government should develop a 25 year spending/revenue/deficit reduction strategic plan based on countercyclical stimulus and spending reduction. Raise taxes and reduce spending into periods of growth above 2-3% annually, with full on government austerity measures. Increase spending and lower taxes into recessionary trends to stimulate employment, consumer spending and investment.

The problem is that the developed world has entered into a long-term period of anemic growth in which it is essentially trapped between recession and marginal growth. Japan is a country in serious relative economic decline. Spain, Greece, Portugal, etc, are going to be stuck in a long-term downward spiral that will continue to drag down the core EU economies, which in any case remain beleaguered by high energy prices. World oil production is flat over the last seven years, with immense demand growth pressure from Asia, leading to sustained high world oil prices. No one is sure how sustainable the North American natural gas boom is, one of the few bright spots in the U.S. economic picture.

Rapid economic growth may not return to Japan, western Europe and North America in our lifetimes. Long-term stagnation will make it extremely difficult to finesse a long-term countercyclical system of spending increases and reductions aimed at providing economic stimulus when it's needed and deficit/debt reduction when it's not. Beyond that our government is not well-suited to implementing long-range strategic economic planning.

All that's left then is shock therapy a la Kimball. Britain's austerity program has left its economy essentially growth free for more than two years. No real end in sight there.

If we're going for shock therapy in the U.S., the place to start is the military. Let's cut military employment by 50% and defense contract spending by 50% and get that trauma to the labor market over with as Kimball suggests we should do. We also cut the war in terror/homeland security budget in half. Maybe we take some of that money in the first ten years saved from military spending and put it into infrastructure and alternative energy deployment. We raise the minimum retirement age to 70.

A sustained commitment to a small, focused national defense will give us some breathing room while we make the rest of the government work more efficiently. We have about one generation to solve our revenue/spending problem before debt maintenance alone completely overwhelms all government spending, other things being equal, which of course they hardly ever are. The problem is urgent, but not critical to solve this year or next or the next. To urge economic austerity in the face of multi-year economic stagnation is foolish, unless you can see the end result. Drastic cuts in military spending and an end to "early retirement" have the advantage of a tangible endpoint where the systemic shock will work its way through the domestic economy.

 

Except that you're incorrectly assuming that the market operates solely on fundamentals.

While that would be nice (it would make it a lot harder to lose money in stocks and bonds, for example), your post completely ignores what truly drives the markets:

Psychology.

The psychological blow of America breaching the debt ceiling, or, as you suggest, suddenly cutting spending by 40% literally overnight, would absolutely destroy markets. The fact that interest payments on bonds could still be made, or that Social Security and Medicare still have solvent trust funds, is irrelevant.

Let me say that again: it is irrelevant.

If we're going to discuss the law, I would like to point out that the debt ceiling needs to be raised to cover spending for which Congress has already voted; refusing to do so is no different from telling the bank that you will only pay the mortgage if they agree to write down the principal (to use one analogy).

As far as the ratings agencies go, they are acting on psychology, and not fundamentals. Over the long term, America needs to ratchet down spending; nothing any of the three agencies has said even remotely would suggest that this needs to be done overnight. Indeed, doing it too quickly will explode the debt by shrinking the economy and increasing the debt-to-GDP ratio. The biggest threat right now is not the debt itself, but the gridlock. Gridlock is what led to the S and P downgrade last year, and we all saw how the market reacted.

A default, or the perception of "hostage-taking" where the debt ceiling is concerned, will so spook investors, both institutional and individual, that no-one will want to put money into America for years, perhaps decades. This won't be a two-week event that leads to a "grand-bargain", after which money will suddenly come flooding back into the United States. If we breach the debt ceiling, or make sudden, sharp severe cuts, there will be a capital flight from America, and it won't reverse for a long, long time.

Worst case: a panic, with a run on the banks resulting in a currency crisis as the FDIC is forced to print up to $12 trillion dollars to cover insured accounts. That would lead to hyperinflation, and be very, very ugly.

Peace,

V-03

 

The main concern, however, is that if you immediately slash spending down to the level of current tax revenue, as you suggested, it would amount to roughly 1.3 trillion dollars in cuts, which based on the generally accepted estimates for the average GDP multiplier of all government purchases, would in turn knock about 2 trillion dollars off of GDP. The proposed cuts you've mentioned would negatively impact GDP by 13%. Given that GDP only grew at a 2% rate in the 3rd quarter of 2012, we would likely see a net reduction in GDP of around 11%. Okun's Law has shown that in industrialized economies, the unemployment rate will will fall 1% for every 3% GDP growth is below potential GDP (approximately 2.5%). A simple estimate based on Okun's Law would suggest that unemployment would rise by 4.4% in the first year.

To make matters, worse, the Federal government would also be losing tax revenue as the economy shrank, so the net effect of the deficit reduction would be far less than it would initially appear to be.

Now I'm in favor of restoring fiscal sanity as much as anyone, but I'm not convinced that this method of reckless cuts would amount to any good in the short or long run. Think of the social unrest that would emerge as the unemployment rate jumped dramatically in just a few quarters? We're talking about millions of people, struggling through as it is, who would be thrown out of work with no alternatives for several months or even several years at the system adjusts itself.

With all due respect, I just can't see this approach as fiscally and economically sound, let alone morally sound.

 

Does anyone have any thoughts/comments on what I posted on the last page, ideas for possible Tax/Entitlement Reform and Spending Cuts?

Here it is again, slightly updated...

Tax Reform
* eliminate tax breaks for companies that ship jobs overseas

* eliminate subsidies to oil companies

* eliminate agricultural subsidies that give an unfair advantage to unhealthy foods

* limit the mortgage interest deduction to one residency

* provide option for a pre-filled-out tax form, to make tax-collecting more efficient and simpler to understand

* create a 1% financial transaction tax

* create a 1% carbon tax on corporations




Entitlement Reform

* allow Medicare to negotiate for cheaper drug prices

* allow imported prescription drugs

* prevent drug companies from blocking generic drugs

* medical malpractice reform

* lift the cap for Social Security, so the rich pay more into the system, extending Social Security's life by several decades



Spending Cuts

* stop funding the federal "war on drugs"

* speed up the troop withdrawal from Afghanistan

* close military bases in Europe (there's this thing called NATO...)

* find ways the Department of Defense can be trimmed (particularly by reviewing the recipients of additional funding since 9/11, as well as reviewing any relics from the Cold War)
-looking at the rough figures, it seems like "Military Construction" could definitely be cut
-and with the changing nature of warfare, the Army and Marines could likely see significant cuts
-there should also be more oversight over which "special projects" of the Navy and Air Force should be funded
-we should also move in coordination with Russia/China to further cut our number of nuclear weapons
-the GAO has been unable to conduct a financial audit of the DoD for years due to DoD's financial mismanagement, so a mechanism should be established that ensures automatic spending cuts for the entire DoD each year the GAO is unable to conduct a reliable financial audit

* 5-10% across-the-board cut for all other discretionary spending programs, not related to defense/security/research

* offset any macro recessionary effects of the permanent spending cuts with one-time investments in infrastructure, such as the NIB and other infrastructure proposals in the AJA (for transportation, schools, and foreclosed homes/businesses)
-the cost of these temporary investments should be roughly equal to the total amount of permanent spending cuts and revenue-raisers, but definitely not allowed to exceed it
- the funds for these one-time investments will be front-heavy, and spread out over 2-5 years, gradually diminishing to 0 at the very end, so the macro
economy will not face any shocks that could throw it back into recession

*establish a mechanism so that in 10 years, if there isn't a budget surplus, then all discretionary programs (including defense/security) will face an across-the-board 2% cut each fiscal year until a budget surplus is produced



Then, with these changes, fund the government for another fiscal year, and raise the debt ceiling by the same amount that these measures will create savings.​

 

There are increasing signals that many House Republicans are going to back down. The leadership knows what a disaster a shutdown and/or default would be for the GOP, and it looks like some of its members do as well. A lot don't, of course, and would rather see the government shut down or default than accede to the President. I don't think they're going to get their way.

Obama was a nice guy to them for most of his first term. It's looking like he's going to be an SOB to them in his second term, and like most bullies, House Republicans don't like it when someone stands up to them.

 

Didn't only 49 Republicans voted for the rest of the Hurricane Sandy aid?
Let's hope Boehner forms these coalitions of the Democrats, and just enough Republicans, more often and sooner in the 113th Congress.

With Murkowski and Collins saying the debt ceiling should just be raised, yeah, it should just be raised. And everyone knows that shutting down the government actually makes the budget deficit worse, as well as messing up years of long-term research projects, so I do expect them to eventually give on this too. Hopefully on both at least a few days before the deadlines.

But I do agree with them that Tax Reform and Entitlement Reform (especially with Medicare) absolutely do need to be done, and we do need to cut spending in intelligent ways too. And striking a bargain with the Republicans on this could be the only way Obama can still pass his Infrastructure proposals from the AJA. Let's hope the GOP are wrong in thinking that they need to hold everyone hostage in order to get these things fixed.

 

The fiscal cliff is rapidly nearing as Republicans and Democrats slug it out on Capitol Hill. Democrats say no slashes to entitlement spending, and the GOP is declining to budge on raising taxes. However, a glance at tax rates around the globe shows that Americans have it relatively well, as tax troubles go.

 

Most Americans say "no" to cuts in entitlement spending, particularly when it affects them directly. People like to say "yes" in the abstract and then change their mind when the cuts become more concrete.

 

This is a monster that is growing exponentially, I wonder at what point it will crash the American economy 20T, 30T ? At some point this house of cards comes down as this can't be paid off, they can't even balance and eliminate a deficit.
And it will bring much of the world with it.

http://www.nationaldebtclocks.org/debtclock/unitedstates

 

That's simply not true.

 

Senselessly apocalyptic post is senselessly apocalyptic.

 

So you guys think the American economy can sustain a 20-30 trillion debt load with the interest that goes with it ?
Take off those rose color glasses people, this is a can that keeps getting kicked down the road, but at some point it dead ends, and that is realistic not apocalyptic.
But we still might have another couple decades to go, so at least you might be right in that aspect. That is the only good news.

But this is a fact and it has been predicted by economists that know more about economic world dynamics than any of us, not if, but when.
It's like the big earthquake that is predicted to hit the west coast, it's just when, as the fault lines are stressed and pressured, our whole economic system is in the same category.
One banker once told me, if people really knew how precarious the situation is they would be losing sleep over it all.
Another friend of mine is a VP at a bank, he said of the current financial situation, it is the greatest Ponzi Scheme in the history in the world, but as long as "it" keeps working he has a job and gets paid.
And really his type of job is the last to go, when his job goes, the economy is gone.

I am glad you guys are positive, that's good, but your need a dash of realism to go with that.

Made me think of this 2030 scenario political commercial

 

BlueJedi33, the debt on its own will not collapse the economy. As long as there are countries and numerous entities willing to hold that debt and the economies of those countries and entities are moving along, the debt itself will not cause an economic collapse.

And what is the magic number? We're this far in debt and no collapse. So, what's to say another 10T added will cause it?

Not even the doomsayers can point with any sort of valid proof that another trillion, 10, 20 or 30 trillion will cause it.

They only say "the end is near". Sounds like wild speculation.

I agree with you that debt itself can be problematic but to suggest it's going to cause an economic collapse is not evident. The same people saying so were saying that back when it was a fraction of its current amount.

In fact, debt to growth is usually the way to reduce the risk debt can pose, not austerity. Historically, we grow our way out of the risk of debt to "income" ratio, not cutting programs.

Surpluses are the exception. Growth is how you reduce risk posed by debt, not cutting.

 

The paper that claimed there was a "magic number" (90% of GDP, I believe) and is widely used to justify austerity was not peer-reviewed and a PhD. candidate found an Excel error that, when fixed, contradicted the paper's conclusions.

The authors were Harvard professors, btw.