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THE DANGER IS FROM THE SPENDING CUTS, NOT THE DOWNGRADE
Pragmatic Capitalism ^ | 7-29-2011 | Warren Mosler

Posted on 07/29/2011 4:49:50 AM PDT by blam

THE DANGER IS FROM THE SPENDING CUTS, NOT THE DOWNGRADE

29 July 2011
By Warren Mosler

The headlines are all about the risks of default or a too small deficit reduction package causing a downgrade of US debt. And while markets react to those issues, they all miss the point.

The consequences of a downgrade to US govt debt are minor at best. Note that when Japan was downgraded below Botswana, with a debt/GDP ratio nearly triple that of the US, interest rates remained the lowest in the world.

The real risk comes from the spending cuts.

No debt ceiling extension is the worst case scenario. Government spending will fall by some $150 billion/month as expenses can’t exceed revenues. Fed Chairman Bernanke mentioned that might reduce GDP by a full 6%. And that’s just the first order effect, as a falling economy means falling tax revenues, which means further reductions in Treasury spending in a pro cyclical nightmare.

And if they do extend the debt ceiling it will be with prescribed spending cuts. This too adds drag to the economy. The more the cuts are meaningful and immediate, the more the drag on the economy increases. Because the markets don’t yet understand this, the feedback they are giving is misleading policymakers, and encouraging them to make deeper, more meaningful cuts.


TOPICS: News/Current Events
KEYWORDS: badnewsblam; budget; debt; economy
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To: blam
The more the cuts are meaningful and immediate, the more the drag on the economy increases.

This assertion does not make sense. It is true that people feeding off the government trough will have to find other work. But the trail off may not be immediate and precipitous. And people doing nothing to contribute to the economy cannot be much of a drag.

No doubt that it will be a painful exercise, but perhaps not as painful as a total economic collapse caused by continued spending far beyond our means. Russia's economy was chaotic for years after the collapse of Communism. Just look at where we are headed without some painful corrections.

21 posted on 07/29/2011 5:19:18 AM PDT by olezip
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To: blam
The premise of this article is a lie. There are no spending cuts being proposed - at least not in the sense that most of us understand. The "cuts" under discussion are reductions in planned spending in future years, based upon the current inflated baseline, which we cannot afford to maintain. The suggestion that actual budget reductions are under consideration is false, and the idea that government spending is the engine of economic growth is a Keynesian fantasy disprovable by simple reference to historical fact.
22 posted on 07/29/2011 5:22:39 AM PDT by andy58-in-nh (America does not need to be organized: it needs to be liberated.)
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To: rbg81
The Government sends out 80 million checks per month to citizens. At this point, we are borrowing 42 cents of every dollar we spend. If we cut that overnight, its akin to cutting about 11% of GDP (not to mention the ripple effect). Would have a huge impact on the economy. But....the longer we wait the worse the final shock will be.

I really think that's the truth in a nutshell. It will be very painful, and to an unknown degree, but it is right thing to do. For the sake of the next generation, time to stop kicking the can. I am convinced without doubt, that politicians will never do it otherwise. Good luck everyone.
23 posted on 07/29/2011 5:23:29 AM PDT by ZX12R (FUBO GTFO 2012 !)
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To: rbg81
The Gross Domestic Product does not truthfully include government employee salaries because that money has to come from something productive somewhere. Money doesn't come from government. It comes from private sector PRODUCTIVE activity.

Government employees laid off will not be able to SPEND their salaries but they were spending OTHER PEOPLE'S MONEY, anyway.

How productive people spend their own money is healthier for a society than how government employees spend money confiscated from productive people.

That is what history teaches us.

24 posted on 07/29/2011 5:23:57 AM PDT by NoControllingLegalAuthority (What this country needs is an enema.)
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To: blam; All

“Government spending will fall by some $150 billion/month as expenses can’t exceed revenues.”

Well then, Mr. Mosler, that means the Government is spending $150 billion dollars a month TOO MUCH.

Bring the monthly budget down to match what comes in.

It’s so easy, a caveman can do it. (apologies to cavemen everywhere)


25 posted on 07/29/2011 5:25:30 AM PDT by TheRobb7 (Folding@home.....Google it, then join the healing.)
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To: rbg81

Nonsense.


26 posted on 07/29/2011 5:25:54 AM PDT by Tennessean4Bush (An optimist believes we live in the best of all possible worlds. A pessimist fears this is true.)
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To: All

Another “Breaking Windows Helps The Economy” zealot reporting in.

Why not spend a quadrillion dollars and pull the entire world out of this global economic quagmire?


27 posted on 07/29/2011 5:27:06 AM PDT by The Theophilus (Obama's Key to win 2012: Ban Haloperidol)
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To: blam
Government spending will fall by some $150 billion/month as expenses can’t exceed revenues. Fed Chairman Bernanke mentioned that might reduce GDP by a full 6%.

That makes perfect sense as government spending is figured as part of the GDP. In other words, the huge increase in spending under King Barry is masking the fact that we are actually still in recession.

28 posted on 07/29/2011 5:30:46 AM PDT by Fresh Wind ('People have got to know whether or not their President is a crook.' Richard M. Nixon)
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To: blam
The danger from the spending cuts is unemployment for unproductive workers in this bloated Federal bureaucracy.
29 posted on 07/29/2011 5:32:50 AM PDT by DarthVader (That which supports Barack Hussein Obama must be sterilized and there are NO exceptions!)
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To: blam
"There's no peaceful way back from here."

Just like in 1861, a couple of states are going to make a break for it. That's my hope and prediction. The sheeple don't realize they are in fact wearing the ruby slipers. "There's no place like our own sovereign state"

30 posted on 07/29/2011 5:33:46 AM PDT by central_va ( I won't be reconstructed and I do not give a damn.)
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To: blam
Fact: Projections show that in 20 years, every dime made in this Country will be confiscated to pay the interest of the debt.

Fact: Projections are notoriously off to the extreme low side

Fact: 2 Trillion has been spent in the last 2 and 1/2 years, and Jobs continue to be lost at the rate of 398,000 per week (can you imagine that is being hailed as an improvement).

Quote: “Government can not solve the problem, Government IS the problem.”

31 posted on 07/29/2011 5:33:59 AM PDT by swamprebel ((jmho))
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To: blam

Warren Mosler is a liberal economist who is running for Sen Dodd’s seat in Connecticut!


32 posted on 07/29/2011 5:37:16 AM PDT by Erik Latranyi
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To: blam

Is “Pragmatic Capitalism” anything like “compassionate coservatism?”


33 posted on 07/29/2011 5:46:52 AM PDT by HIDEK6
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To: blam
The more the cuts are meaningful and immediate, the more the drag on the economy increases

Thats the way it goes, numbnutz. Should we end up like Greece, Portugal, Spain, France? Stagnation forever and 20 % unemployment? No thanks, Mr Pragmatist.

Time to live within our means. Destroying the value of our currency and individual savings is no way to go through life, son.

34 posted on 07/29/2011 5:53:03 AM PDT by Nonstatist
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To: MeneMeneTekelUpharsin
We better stop spending what we don’t have. The public is beginning to wake up. Retail spending is dropping like a rock (like I’ve never seen).

We are seeing stores and restaurants close up at rates we can't believe! It's like a line of dominoes from day to day, corner malls have one or two stores left, and then the next weekend they're gone!

This is a full blown financial catastrophe. No doubt EXACTLY what obama wanted.

35 posted on 07/29/2011 5:54:09 AM PDT by Caipirabob ( Communists... Socialists... Democrats...Traitors... Who can tell the difference?)
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To: Gaffer
"Fed Chairman Bernanke mentioned that might reduce GDP by a full 6%."

We are now wise to the deconstruction of and dynamic definitions of words that the Progressives employ when lying about things such as unemployment, inflation, and budget "cuts". Thus we can expect Bernanke to lie about the GDP to serve his master's interest in destroying the West. If these people lie about most things, why would we ever expect them to the tell the Truth?

Essentially this is a throw-away statement by Bernanke since we don't know if the job of paper shuffling, lawsuits and regulation enforcement is calculated in his definition of "GDP".

Plus, creating legions of jobs for tax and compliance lawyers, HR employees, and industrial engineers to combat the explosion in growth of government interference and crippling of every industry is actually, to them, a good thing - yet might be what Bernanke is including in his definition of "GDP".

Using his logic, we can grow the "GDP", particularly the carpentry, animal shelter, funeral and psychological counseling industries by stepping up SWAT team raids.

Government does not produce revenue! They steal it from people and corporations that earn it!

There in lies the problem. One massive sector in government is the regulation and tax side that actually costs orders of magnitude more than the cost of underwriting the agency - for example the EPA. The budget of the EPA is miniscule compared to the financial havoc that it has caused. The EPA is a major reason why China makes all of our stuff. When a company relocates to anywhere on the planet to escape the nightmare of the Fe'ral Government and their legions of life destroying agencies we can count on more and more formerly productive people joining the ranks of the Takers who have now grown accustomed to leeching off your wallet while producing nothing.

That is why I am utterly convinced that the Ruling class are out to destroy the West in general and he US in particular. No where is there talk about getting rid of Obamacare before its system of roots makes it impossible later to pull. No one among the Ruling Class gives even a moment's though to eliminating or even mildly constraining the EPA, OSHA, FDA, FTC et al. While the Ruling class makes no hesitation to shut down the oil industry slapping a draconian moratorium on drilling, there is never a word breathed to even question the insane dictates of the EPA.

I'm sadly coming to the conclusion that as awful as the French Revolution was, that is preferable to what we are about to become.

36 posted on 07/29/2011 5:55:47 AM PDT by The Theophilus (Obama's Key to win 2012: Ban Haloperidol)
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To: The Theophilus

” “Fed Chairman Bernanke mentioned that might reduce GDP by a full 6%.”
We are now wise to the deconstruction of and dynamic definitions of words that the Progressives employ “

Precisely...

Accurate and *honest* reporting of economic data, without changing anything else, would reduce GDP by *at least* 6%....


37 posted on 07/29/2011 6:05:34 AM PDT by Uncle Ike (Rope is cheap, and there are lots of trees...)
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To: andy58-in-nh

>>the idea that government spending is the engine of economic growth is a Keynesian fantasy disprovable by simple reference to historical fact.

While true, the sad reality is that a considerable portion of the populace has been brainwashed otherwise.

I fear it will get really ugly before it is over.


38 posted on 07/29/2011 6:30:36 AM PDT by FreedomPoster (Islam delenda est)
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To: blam

If Walter Mosler is a capitalist, it is of the crony capitalist type.

True free market capitalists understand the danger of government control of massive parts of the economy. This is the very heart of the fascist economic model. Far too few understand this.

The only way to build a true wealth-building economy is to get it out of the hands of government.


39 posted on 07/29/2011 6:35:17 AM PDT by FreedomPoster (Islam delenda est)
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To: blam

Bingo! Besides that we aren’t going to default on our debt, we have enough cash flow to pay our immediate obligations.


40 posted on 07/29/2011 6:37:50 AM PDT by Free Vulcan (Obama's hoping that I'll have nothing but chump change left when he's done with me.)
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