Posted on 10/12/2013 6:01:55 AM PDT by Kaslin
The popular take on the current debt ceiling stand-off is that the Tea Party wing of the Republican Party has a delusional belief that it can hit the brakes on new debt creation without bringing on an economic catastrophe. While Republicans are indeed kidding themselves if they believe that their actions will not unleash deep economic turmoil, there are much deeper and more significant delusions on the other side of the aisle. Democrats, and the President in particular, believe that continually taking on more debt to pay existing debt is a more responsible course of action. Even worse, they appear to believe that debt accumulation is the equivalent of economic growth.
If Republicans were to inexplicably prevail, and the federal government were to cut spending so that its expenditures matched its tax revenues (a truly radical idea) the country's financial mess would be laid bare. The government would have to weigh the relative costs and benefits of making interest payments on Treasury debt (primarily to foreign creditors) or to trim entitlements promised to U.S. citizens. But those are choices we will have to make sooner or later anyway. In fact we should have dealt with these issues years ago. But generations of mechanistic debt ceiling increases have allowed us to perpetually kick the can down the road. What could possibly be gained by doing it again, particularly if it is done with no commitment to change course?
The Democrats' argument that America needs to pay its bills is just hollow rhetoric. Paying off one's Visa bill with a new and bigger MasterCard bill can't be considered a legitimate payment of debt. At best it is a transfer. But in the government's case, it doesn't even qualify as that. Treasury debt is primarily bought by the Fed, foreign central banks, and major financial institutions. None of that will change with a debt ceiling increase. We will just go to the same people for greater quantities. So it's like paying off your Visa card with a bigger Visa card.
According to modern economists, an elimination of deficit spending will immediately cause a dollar for dollar decrease in GDP. For example, if the government stopped sending food stamp payments to poor people, then grocery stores would lose business, employees would be laid off, and the economy would contract. But this one dimensional view fails to appreciate that the purchasing power of the food stamps had to come from somewhere. The government can't create something from nothing. Taxation transfers purchasing power from people living in the present to other people living in the present. In contrast, borrowing transfers purchasing power from people living in the future to people living in the present. The good news for politicians is that future people don't vote in current elections (and current voters don't seem to appreciate the cost to their future selves of current policy).
The Obama Administration has congratulated itself for turning around the contracting economy that it inherited from President Bush. But even if you take the obscenely low official inflation statistics at face value, we only grew at an anemic 1.075% annual pace from 2009 to 2012 (far below the between 3% and 4% that the U.S. averaged post World War II). Sadly, this growth pales in comparison to the accumulation of new debt that we are borrowing from the future.
U.S. GDP is measured at roughly $15 trillion per year. 2% growth means that each year the GDP is approximately $300 billion larger than the prior year. But in the less than five years since Obama took office, the federal government has added, on average, about $1.3 trillion per year in new debt, a pace that is four times higher than the growth. If the deficit were subtracted from GDP, America would be shown to be stuck in a severe recession that Washington can't acknowledge. But such a reality is more consistent with the dismal job prospects and stagnant incomes experienced by most Americans.
The belief that deficits add to the economy, and that debt can be dealt with in an imaginary future (that never seems to arrive) is the foundation upon which the President can chastise the Republicans as irresponsible suicide bombers. Using this logic, he can argue (with a straight face) that borrowing is the equivalent of paying. That the President can make this delusional argument is not so surprising (no lie too great for the typical politician to attempt). What is alarming is that the media and the public have swallowed it so willingly. As they call for limitless increases in borrowing, Democrats have offered no plan to reduce the current debt and they are unwilling to negotiate with Republicans on that topic. Yet somehow they have been perceived as the party of fiscal responsibility.
While the Republicans have a dismal track record of their own when it comes to budgetary management, it can't be disputed that the minor dip in that rate of increase in spending that resulted from the recent Sequester, happened only because they dug in on the issue. Without the 2011 debt ceiling drama, there is no chance that any spending would have been touched.
Democrats had warned that the $85 billion in sequestration cuts slated for fiscal year 2013 (about 2% of the Federal budget) would be sufficient to bring on economic Armageddon. But guess what? We survived. Recently, Senate Majority Leader Harry Reid continued with such rhetoric by declaring that there are no more cuts to be found anywhere in the $3.8 Trillion dollar federal budget. (Apparently he missed last week's 60 Minutes piece on the spreading epidemic of federal disability fraud.)
We have to acknowledge what even the Republicans haven't fully grasped. We are in such a deep debt hole that there is no solution that does not involve serious economic pain. Tea Party Republicans rightly believe that government spending is a drag on economic growth. As a result, they conclude that immediate spending cuts will help with the "recovery". But they are confusing real economic growth with the delusional expansion created by deficit spending (which is actually damaging the real economy). If they cut the deficit, this phony economy may likely implode and cause widespread distress.
So even though a reduction in government borrowing and spending does help the economy, it won't feel very helpful tomorrow. The more we borrow and spend today, the more we will suffer tomorrow when the bills come due. Ironically, cutting government spending now helps the economy by allowing the economic adjustment to happen sooner rather than later. But this type of long-term thinking is very difficult for politicians to consider.
Unfortunately our debts don't leave us much in the way of choices. We can choose to pay now or try to pay later. But the longer we wait the steeper the bill.
“We are in such a deep debt hole that there is no solution that does not involve serious economic pain. “
Pretty much. It’s a rare politician that will bring accept the pain on their watch rather than kick the can down the road further. That’s the interesting thing that failing to raise the debt ceiling would accomplish very quickly: instant balanced budget. Which is the reason why the chances of it NOT being raised are very low: our kakistocrats are not at all interested in that happening on THEIR watch.
The problem with that strategy is that sooner or later, you’re going to have to pay the piper. We can pay the piper soon and suffer some pain, or continue on and in the end destroy our currency. Sadly, I expect it to be the latter.
What the tea party needs to do, is to bring back American jobs.
American jobs.
Milton Friedman said that the true cost of government is what it spends, not the taxes it takes in.
In other words, you can pay now, or you can pay later.
Since the biggest item in government is transfer payments, which we are borrowing to pay for, let’s follow the money. Eventually, unsound fiscal policies will hurt all investments—falling dollar, higher borrowing rates, soggy markets, inflation. So, in a roundabout way, deficit spending is a tax on accumulated savings which takes a while to become apparent.
As to the decrease in GDP—it’s always a fun party when you’re eating the seed corn (savings).
Current Unfunded Liabilities $126 Trillion
Current liability per taxpayer - $1,010,000
Current assets - $105 Trillion
Yup - we is broke
Defunding Obamacare is a move in the right direction. The partial government shutdown is actually a move in the right direction as well and it reduces funding for Obamacare at least for the time being. Caving on defunding Obamacare is the fools errand which seems to be where the gop-e wants to go.
-——that there is no solution that does not involve serious economic pain-——
Yellen is.
Inflation will be. It will be administered in a painless, in fact, stuporific manner that will feel good.
Incomes will rise at an ever increasing rate that will make the rise in prices palatable. There will be universal healthcare the cost of which will be lost in the inflation. It will not be a penalty or burden.
The pain will be felt by the debt holders. The value of their debt assets will decline in real $$. The debt in new $$ will become manageable and disappear as a problem. They have been paid for the loss in advance. Their gains to date are an alowance for the financials asset devaluation that is coming
That’s the plan. Everybody (that matters) knows it except the wacko conservatives trying to wreck the train.
The poster describes the plan that can quite plainly be seen but does not agree with it.
“The poster describes the plan that can quite plainly be seen but does not agree with it.”
Nor do I. Because the “Yellen alternative” ignores the possibility/probability of the US Dollar losing it’s reserve currency status.
Pretty much...
No, economic pain isn't the problem, we're talking political pain. We had a far greater debt problem at the end of WWII and everyone sang doom'n'gloom. What happened was America proceeded to prosper even while it paid off the debt, rebuilt Europe/Asia, and took on the cold war. Doubting America's strength is for idiots.
Just the same the political pain was enormous because Washington had to abandon both its tax'n'spending and its war on business. It's what we need to do now but the last time we did that kind of political shift it took dropping a few nukes somewhere.
What will happen ( they are already talking about it) is they will try to raise the age for social security and the formula for computing it to ‘chained CPI’.
The Republicans will go ‘on record’ voting for it, the RATS will defeat it, and Republicans get slaughtered in 2114!
A dumber plan couldn't have been dreamed up if they tried!
Yet missing your scenario is the relative youth of S.S., no Medicare/Medicaid/OCare, no unions, Dept. of Ed, Dept of En, etc.
BIG gov’t wasn’t as much of a leviathan as it is today. The People were still able to overcome what gov’t threw at them.
We’re talking fantasy football if we’re expecting the kakistocrats to inflict any pain upon themselves. The destruction of the dollar is coming. I suggest planning for it.
“We are in such a deep debt hole that there is no solution that does not involve serious economic pain. “
There is the understatement of the century. How about there is no solution that does not involve economic collapse.
Bfl
It is a fact of life that ownership by debt means having to give something up when the credit stops. I recommend the federal government give up a number of federal agencies that are being paid for with borrowed money, like the EPA, transferring its seven essential workers to something like waste disposal on a military base. The Department of Education is redundant by fifty, multiplied by the number of independent school districts in this country. Get rid of it. As the government shut down demonstrates, we don’t need all the oppressive, meddling government we have.
I see the feds raiding 401k’s in the not too distant future.
There are other options other than economic collapse. Unfortunately the other options aren’t the likely ones. The kakistocrats will continue to make no choice and hence the worst case scenario becomes the last one remaining.
The kakistocrats won’t seize 401k’s overtly. They’ll simply force account holders to invest in “safe” government bonds. And tax what remains.
Boil the frogs slowly.
Love the picture. Thanks for the ping.
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