StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



The Impending Debt Limit/Default Crisis Has Been Long in Coming

23 Apr 2011
Posted by Bruce Bartlett
As the almost inevitable debt default is perhaps only weeks away, Wall Street types are finally becomeing nervous. They should have known that supporting a bunch of not-too-bright, ignorant Tea Party members to Congress was not going to work out well. I tried to warn them. Following is an article I published last year warning people just how crazy these people are and some references to the debt limit/default issue. BB
 
Debt Default: It Can Happen Here
The Fiscal Times, June 11, 2010
 
The recent financial crisis in Greece has led to a lot of discussion about whether the United States might one day have a public debt so large that default becomes a real possibility. While the sort of problem Greece is experiencing is impossible here, we have another problem that, to my knowledge, no other nation on Earth has: a legal limit on government debt that Congress must raise periodically. This peculiarity of our fiscal system could indeed lead to a default on the debt, with repercussions that advocates of default — yes, they exist — have absolutely no clue about.
The main reason the U.S. cannot suffer the sort of debt problems of Greece and other eurozone countries is that all our debt is denominated in dollars, of which we essentially have an unlimited supply. Because its monetary policy is controlled by the European Central Bank, Greece can’t just print euros the way we can print dollars. And the Federal Reserve will always ensure the success of a Treasury bond auction. De facto monetization of the debt could be inflationary, but default resulting from a lack of demand for Treasury bonds is not really possible.
This does not mean that default is impossible, however, because there is always a danger that Congress will not raise the debt ceiling in a timely manner, meaning that the Treasury may not have sufficient cash to make interest payments or redeem maturing securities. If that happens, there would be a technical default.
As of right now, outstanding debt subject to limit is a little over $13 trillion and the debt limit is $14.3 trillion. At the rate the Treasury is borrowing, it can continue for about 10 months before the debt limit must be raised again. It has been difficult enough, politically, to raise the debt limit when Democrats control both houses of Congress. But next year there is almost certain to be a very substantial increase in the number of Republicans in both the House and Senate, with Republican control of the House being well within the realm of possibility.
The party opposite the White House always demagogues increases in the debt limit to score cheap political points. Economist Donald Marron calls the vote on raising the debt limit a tax on the party in power. Barack Obama knows this very well. As a U.S. senator he voted against a debt limit increase in 2006, saying that the necessity of raising the limit was “a sign of leadership failure.”
                               
To be sure, the debt limit has always been raised in time to prevent a default, although Treasury sometimes had to push the limits of the law to move money around to pay the government’s bills. However, I believe the game has changed because Republicans have become extremely bold in using the filibuster to make it extraordinarily difficult to pass any major legislation without at least 60 votes in the Senate.
Furthermore, a growing number of conservatives have suggested that default on the debt wouldn’t be such a bad thing. It is often said that default would lead to an instantaneous balanced budget because no one would lend to the U.S. government ever again. Therefore, spending would have to be cut to the level of current revenues.
Writing in Forbes last month, the Cato Institute’s John Tamny was enthusiastic about the prospects of default. Said Tamny, “It’s time we learn to love the idea of a U.S. default . . . For Americans to worry about a debt default is like the parent of a heroin addict fearing that his dealers will cease feeding the addiction.”
While acknowledging there might be some pain from default, he dismissed it as trivial compared to the enormous blessing of a massive reduction in federal spending.
Tamny is not an isolated crackpot; reputable conservative economists have been writing sympathetically about the idea of default for decades. These include Nobel Prize-winning economist James M. Buchanan, whose 1987 essay, “The Ethics of Debt Default,” defended the morality of default on the grounds that deficits weren’t financing public capital but current consumption, with the bills being passed on to future generations.
Other prominent conservatives who have been favorable, even enthusiastic, about debt default include Murray RothbardDan PillaJeffrey Rogers Hummel, and Christopher Whalen. In 1995, then House speaker Newt Gingrich publicly warned the Public Securities Association that he was prepared to default on the debt unless Bill Clinton acceded to Republican demands for budget cuts. “I don’t care what the price is,” Gingrich said.
 
Consequently, it is becoming increasingly common for the idea of default to be discussed as a realistic possibility even by responsible analysts. Last year, The Economist’s Greg Ip wrote an article in the Washington Post saying that financial markets were placing the risk of default at 6 percent over the next 10 years. “Default is unlikely,” he said. “But it is no longer unthinkable.”
 
My purpose today is not to make the case against default or explain all of its ramifications — that would require a separate column. Rather, my purpose is simply to alert readers to the consequences of increased Republican membership in the next Congress, a Democratic administration, the need for 60 votes in the Senate on major bills, and a debt limit that will run out early next year. I believe we could be in for the biggest debt crisis we have seen since Alexander Hamilton was Treasury secretary.
One way of forestalling such a crisis would be for Congress to require that bills breaching the budget resolution’s revenue floor or spending caps — those designated as “emergency” legislation — would have to include an increase in the debt limit equal to the increase in the deficit. This won’t eliminate the need to raise the debt limit eventually, but it would at least put members of Congress on record as accepting the consequences of deficit spending, rather than trying to have it both ways — voting for deficits but then scoring political points by voting against an increase in the debt limit.
Focus on U.S. Debt Default
The Fiscal Times, January 6, 2011
 
Many conservatives are openly calling for the U.S. Treasury to default on the national debt. They have been doing so for years in obscure publications. But now with Republican control of the House and the power of the right-wing populist Tea Party movement within the GOP, and the need to raise the debt ceiling within the next few months, the possibility of default is no longer theoretical, but a real possibility. If the debt limit is not raised, the Treasury may lack the cash to pay interest on the debt, thus leading to a default. Following are some commentaries and reports on the issue of a U.S. debt default.
Edmund L. Andrews, “Some Experts Are Bracing for Default on U.S. Debt,” The Fiscal Times (October 18, 2010): link.
 
Bruce Bartlett, “Debt Default: It Can Happen Here,” The Fiscal Times (June 11, 2010): link.
 
Geoffrey Brennan and Giuseppe Eupsepi, “The Dubious Ethics of Debt Default,” Public Finance Review (November 2002): link.
 
Carlo Cottarelli et al., “Default in Today’s Advanced Economies: Unnecessary, Undesirable, and Unlikely,” International Monetary Fund (September 1, 2010): link.
 
Kathleen Day, “With Debt Burgeoning, Could the U.S. Default?” Washington Post (June 14, 1992): link.
 
Michael Hogan, “Niall Ferguson: America Needs to Cancel Its Debt,” Vanity Fair (January 20, 2009): link.
 
Jeffrey Rogers Hummel, “Should the National Debt Be Repudiated?” Caliber (August-September 1981): link.
 
Jeffrey Rogers Hummel, “U.S. Government Default: Good, Bad, or Just Plain Ugly?” Liberty & Power blog (August 20, 2008): link.
 
Arnaud Marès, “Ask Not Whether Governments Will Default, but How,” Morgan Stanley (August 26, 2010): link.
 
David Min, “The Big Freeze: The Conservative Pledge to Freeze the Debt Ceiling Is a Looming Disaster,” Center for American Progress (October 2010): link.
 
Gary North, “The Looming Federal Default: Sooner or Later?” LewRockwell.com (August 6, 2008): link.
 
Gary North, “The Case for America’s Future,” LewRockwell.com (October 14, 2010): link.
 
Dan Pilla, “Should We Cancel the National Debt?” The Freeman (November 1995): link.
 
Murray Rothbard, “Repudiating the National Debt,” Chronicles (June 1992): link.
 
David E. Sanger, “Gingrich Threatens U.S. Default If Clinton Won’t Bend on Budget,” New York Times (September 22, 1995): link.
 
John Tamny, “Learn to Love a U.S. Debt Default,” Forbes (May 24, 2010): link.
 
Focus on the Debt Limit
The Fiscal Times, January 5, 2011
 
Many Republicans have lately insisted that they will not vote to raise the debt limit for any reason. On January 2, Council of Economic Advisers chairman Austan Goolsbee warned them that failure to raise the debt limit would do extreme harm to governmental finances. There is surprisingly little academic research on the debt limit or the consequences of failure to raise it in time to prevent a debt default. Following is a list of online resources that illuminate this issue.
D. Andrew Austin and Mindy R. Levit, “The Debt Limit: History and Recent Increases,” Congressional Research Service, Report for Congress RL31967 (September 8, 2010): link.
 
Josh Barro, “Debt Limit Impasse Could Drag on For Months,” Real Clear Markets (November 10, 2010): link.
 
Bruce Bartlett, Testimony before the Senate Finance Committee on Administration’s Request to Increase the Federal Debt Limit (February 14, 2002): link.
 
Ellen Bradford and Russell Constantine, “The Debt Ceiling and Executive Latitude,” Briefing Paper No. 11, Federal Budget Policy Seminar, Harvard Law School (January 2009): link

Alan Greenspan, Testimony before the Senate Committee on Banking, Housing, and Urban Affairs (February 11, 2003): link.
 
Anita S. Krishnakumar, “In Defense of the Debt Limit Statute,” Harvard Journal on Legislation (Winter 2005): link.
 
Donald Marron, “The Debt Limit Is a Tax on the Majority,” blog post (January 28, 2010): link.
 
Brian Roseboro, Remarks to the Bond Market Association’s Inflation-Linked Securities Conference (June 26, 2003): link.
 
U.S. General Accounting Office, “A New Approach to the Public Debt Legislation Should Be Considered,” Report No. FGMSD-79-58 (September 7, 1979): link.
 
U.S. General Accounting Office, “Debt Ceiling Limitations and Treasury Actions,” Report No. GAO/AIMD-96-38R (January 26, 1996): link.
 
U.S. General Accounting Office, “Information on Debt Ceiling Limitations and Increases,” Report No. GAO/AIMD-96-49R (February 23, 1996): link.
 
U.S. General Accounting Office, “Debt Ceiling: Analysis of Actions During the 1995-1996 Crisis,” Report No. GAO/AIMD-96-130 (August 1996): link.
 
U.S. General Accounting Office, “Debt Ceiling: Analysis of Actions During the 2002 Debt Issuance Suspension Periods,” Report No. GAO-03-134 (December 2002): link.
 
U.S. General Accounting Office, “Debt Ceiling: Analysis of Actions Taken during the 2003 Debt Issuance Suspension Period,” Report No. GAO-04-526 (May 2004): link.
 

1) Would a default be

1) Would a default be unconstitutional? The 14th Amendment provides "The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned." Defaulting would appear to violate this provision.

2) If the debt limit isn't raised, the Treasury could presumably continue to make payment on treasuries, including rolling maturities. It would just have to stop other payments - a real government shut-down. Stop sending out social security checks and see how quickly the Republicans fold.

The market would likely view this as bad as a default, wouldn't it?


1979 Santa Claus Repubicans

In 1979 I warned of the Kemp/Barlett crazies who sponsored tax cuts without spending cut -- Santa Claus economics for Republicans.

The point not to be cazy is when you push the toboggan off the cliff.

The massive spend & spend & borrow Dems & supply sidere have wrecked the county.

Take responsibility for the consequences of Kemp/Bartlett ideology, Bruce.


Apparently,

you didn't read my couple of books. 


norube: Milton Friedman is

norube: Milton Friedman is reported to have said that to spend is to tax.


That's right

under a balanced budget constraint. But what if one of our major political parties thinks deficits don't matter and have veto power over raising taxes? Then Friedman is wrong. 


It's really hard to take all

It's really hard to take all this seriously. Last summer it was the fake Fox news drama over the ground zero mosque. Then we had the drama of the 2010 elections demagoguing health care, then the lame duck fight of DADT and the extension of the Bush tax cuts, and then the government shutdown drama. Now we need another media-hyped crisis to focus on for the next few months. We'll have more stories about nervous bond traders and senior citizens / sick children who will no doubt die unless we raise the debt limit. We'll have stories about how our soldiers will go without pay while they risk their lives terrorizing muslims - oops - I mean while they risk their lives keeping us safe from mean people. The politicans and their enablers in the media are addicted to drama so they have to create another fake controversy. I'll bet they hate it when some nut-job shoots up a mall or there is a natural disaster / revolution in some country. They worry we might forget about the need for tax cuts and cuts to Medicare if we see a government responding to a crisis and helping people in need. We might see the elites running our country as thugs when the young and unemployed rise up in oppressed Arab countries. No, we can't have that.

The politicans and their media friends need to focus us on their needs. Why do you all do this? Please, get a life.


The solution is simple. Raise

The solution is simple. Raise the debt limit thus time but make it certain that it's the last time by instituting a spending cap of 18 % of GDP. As a measure of flexibility institute mechanisms like in Sweden that allow for unfunded deficit spending in crises but with also has automatic deficit reduction features after the crisis. (as in Sweden it would be outside the political system, cuts and spending increases are automatic)

But when Big Government Democrats, Big Governent Reoublicans and Big Government Centrist warns about financial Armageddon if the debt ceiling isn't raised they actually warning against the risk of putting Big Goverment in a straight jacket. Big Government left, right or center all want to use the state purse to foster goals they find moral and stopnbehavior they find immoral. The problem is that what the left, right and center find moral is not the same in fact in most cases what one fin moral the other find immoral.


Not so sure...

Call me an optimist, but when it comes down to it, the politicians in office (even those on the far right) are not going to allow the Tea Party morons to topple the world financial system, destroy the US government, and jeopardize their own wealth and power. The debt limit will be raised.

Old Whig - What is magical about the 18% of GDP number, apart from the fact that for some limited period in American history spending roughly hovered around that level? Also, why is a spending cap even necessary when those who would enact it are empowered to cap spending at that level (or any other) through their power to control the budget?


The historical US average

The historical US average since the constitutional amendment allowing a federal tax was instituted has for more than a 100 years been 18 %. Over the long run you can't spend more than you raise.


Republicans in Congress know

Republicans in Congress know they must create or fake a crisis to provide cover for gutting Medicare/Medicaid/Social Security/Education/Food assistance/HCR and at the same time open their coffers to profit-skimming. The debt limit is self-imposed, but the public doesn't understand this generally. Republicans want the public to perceive that the U.S. is broke, despondent, belly-up. It's really quite simple, Bruce. They are willing to permanently screw the United States of America in order to force their narrow and unpopular ideological agenda on the public. Boehner may be thinking he can dance right up to the edge, as was reported recently, but even doing that could have consequences. It seems that the WH knows it is nominally a bluff but Boehner could soon have no choice, as the GOP base whips itself up against the debt limit increase this could become a self-fulfilling prophecy.

I understand the temptation to see this as a structural problem with our legislative/budgeting process, but I think that misses the point. Any previous Congress could have done this same thing, just as any Senate before 2007 on could have been ruled by a 60 vote requirement. It is the unpatriotic and dishonest way our system of governance has been abused by the Republicans & the conservative movement that is at issue. There is no system of government that is foolproof against this sort of thing. I think, though, that you do understand the situation we're in, because you pointed to the "consequences of increase Republican membership in the next Congress, a Democratic administration, the need for 60 votes in the Senate on major bills, and a debt limit that will run out early next year." If you do write a separate column, consider the possibility that Republicans of conscience like yourself should vote to ensure a Democratic House, White House & Senate supermajority in 2012. If you think about it, there really is no other option. The only other one is a Republican president, but that runs right back into the problem you illustrated already, that the GOP is completely beholden to an ideological movement that has gone off the rails and detached itself from reality. Any candidate has to appease those who actually want the US to default.


This is why I don't watch FOX

"the GOP is completely beholden to an ideological movement that has gone off the rails and detached itself from reality"

This. Wisconsin is a microcosm for what Republican strict adherence to ideology will do to divide the nation.

What isn't being reported by the MSM is the fact that nearly 5,000 state employees raced to take early retirement just before Walker's "budget repair" bill passed the assembly and senate.

I know one critical employee who took retirement. He's not the only critical employee who has now been hired back as a consultant. He's now double-dipping (pension plus contract with state of Wisconsin). This is costing the Wisconsin taxpayers big time. Walker, blinded by strict ideology-based decision making, couldn't see big unintended consequences. Oh, there's also the recalls (5 Republican senators recalled so far).

The TEA party people can't think their way out of a paper bag. Same thing with the debt ceiling issue. They can't begin to imagine the negative consequences, because most of them can't think past their next meal.


I just love the contrast

I just love the contrast illustrating the issue on this very web-page: Bruce Bartlett's blistering blog on debt limit supported by advertising from Michelle Bachman's battle for boobs and buffoons to sign a petition to maintain the debt limit. It does illustrate the real problem nicely -- it's not the words, ideas, or results that matter, it's the battle for emotions that matters to Bachman and her ilk; and markets work, so accepting Bachman's advertising dollars -- and spreading her toxic message -- is okay.

Why does her marketing staff think it wise to advertise here?

Why does Capital Gains think this good advertising money?

Is this disconnect part of the problem? With so much battling propaganda funding our media; no wonder we become a nation of fools.


I see that same silly ad.

I see that same silly ad. It's all about stirring the pot, raising money, and getting page views. Even our friends here are taunting us with this nonsense. Say it ain't so!


It can't be stopped now

"Any candidate has to appease those who actually want the US to default."

The Walker fallout in Wisconsin alone will take 20 years to decay.

I just finished a novel where the villain is the symbol of the real estate/banking
disaster (good intentions gone bad, no regard for negative consequences of actions),
and the proposed solution to the problems facing the beleaguered Wall Streeter is
a metaphor for what the Republicans propose today (system destruction to rebuild).

It was called TAKEDOWN.


Wall Street types are finally

Wall Street types are finally becoming nervous.

Ha. Ha. Ha.

look at the VIX




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