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.
Get another credit card?
Of course you do realize, don't you that the majority of the people that vote for Democrats and RINOs cannot understand the very subtle, yet drastic effects that this government has on the economy - especially the outcomes of their oversight, regardless of whether their underwriting is large - or small.
Feelings (and resultant government meddling therefrom) won't place a gallon of gas in your car or a gallon of milk in your refrigerator at a reasonable price. But, if the leeching masses can get their gas or milk with money the government stole from someone else, why should they care?
They will only care when the government has finally beaten this free enterprise mule to the ground, unable to pull the plow any longer.....it will be a conflagration the likes this country has never seen.
It’s going to get as ugly as you can possibly imagine, and thanks to the policies of the last two Administrations; it can no longer be avoided. Prepare yourself.
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