The fiscal cliff has consumed Washington for months, but it may end up being the long opening act for a fiscal drama with even higher stakes: the debt ceiling.Click here for an article at barbarians-at-the-gates site breitbart.com for another view, entitled Fiscal Cliff Deal Sets Table for Conservative Debt Ceiling Win. Here's a quote from that one:
So while popular attention has been fixed on the fiscal cliff’s tax hikes and spending cuts — which economists said could lead to a recession — it’s the debt ceiling debate that is keeping investors awake at night, and that could tarnish the United States’ sterling reputation among creditors.
“Of all the so-called cliffs, only the debt ceiling is a real cliff because once you go off it you will plunge to your death,” said Jaret Seiberg, a policy analyst at Guggenheim Securities. “All of the other cliffs can be fixed retroactively, but once you default on the debt there is no taking that back.”
The 2011 debt-ceiling standoff cost the United States its perfect credit standing with rating agency Standard & Poor’s, and Fitch Ratings warned earlier this month [December 2012] that it would consider a downgrade of its own if lawmakers again flirt with default.
Treasury hit the debt ceiling Monday and Geithner began employing “extraordinary measures” — like postponing payments to government pension funds and suspending a securities program popular with cities and municipalities — to ward off default for about two months.
Democrats have complained that Republicans’ decision to draw a harder line over the debt limit last year went beyond the usual Washington power play and irresponsibly called into question the once unquestionable: whether the U.S. would pay its debts.
Even if Congress steers clear of default, another round of debt-ceiling brinkmanship could do further damage to the U.S. credit rating, analysts said.
“It's hard to predict when the global investing community might lose confidence in the United States but courting that possibility doesn't make sense,” said Rob Nichols, president of the Financial Services Forum, a group that represents the CEOs of large banks and other financial services companies.
So is this fiscal cliff deal a loser for Republicans? Only if they play their cards wrong on the debt ceiling debate. But Obama has no cards on that debate. Is he going to hold America’s credit rating hostage to preserve this level of government spending?"Hold America's credit rating hostage"? Defending the validity of the world's reserve currency against attacks from fanatic ideologues within the government is breitbart.com's idea of hostage-taking?
Click here for Think Progress bringing us a nice flashback from Mitch McConnell, Republican leader of the Senate, after the debt ceiling debacle in the summer of 2011:
“I think some of our members may have thought the default issue was a hostage you might take a chance at shooting,” he said. “Most of us didn’t think that. What we did learn is this — it’s a hostage that’s worth ransoming."Click here for Standard & Poor's view of the situation, according to Singapore's channelnewsasia.com:
The brinksmanship over the ceiling last year led to Standard & Poor's cutting the US's top-level AAA credit rating for the first time in history, putting it at AA+ with a "negative" outlook.Click here for the full explanation -- it's not too long or difficult -- at standardandpoors.com.
On Friday S&P said that any deal to fix the fiscal cliff package of economy-crunching tax hikes and spending cuts would not help the country's credit rating.
In 2011, S&P said, its downgrade was rooted in "the political brinkmanship of recent months (that) highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable".
"We believe that this characterization still holds," it said Friday.
Maybe it won't be that bad? Click here for an article in The Atlantic by Megan McCardle entitled What Happens If We Don't Raise The Debt Ceiling? It's from the last time around, summer of 2011, but the principle is the same:
Here's what I think I know about what will happen:The U.S. economy is in a shaky recovery: Can it handle the pain that would result from even a less-than-worst-case scenario?
We will almost certainly pay the interest on our national debt, military payrolls, VA benefits, and Social Security. That is going to leave precious little money for anything else.
Standard & Poor will downgrade our bonds [NOTE: They did that anyway]. Fitch and Moody's, however, are not going to downgrade us unless we actually default--which, as I've said, I don't think we'll do.
Economics of Contempt argues that this will actually have less impact on markets than people are predicting, because most contracts and regulations that require institutions to buy AAA rated securities do not force those institutions to sell unless two out of three of the agencies have downgraded. As long as Fitch and Moody's hold the line, we won't see the absolute chaos that would follow a downgrade of the US short-term credit rating from all three.
Nonetheless, there will be considerable disruption in markets, less because of the direct regulatory problem, than because markets--like the rest of us--like to believe that there is some sheriff in town. The level of political instability implied by a congress that does not raise the debt ceiling is a level of political instability that makes all financial transactions riskier. The willingness of people--foreigners especially, but also Americans--to hold our debt will be permanently impaired. That will be expensive. Also, voters are going to be unhappy when their 401(k) portfolios start behaving like a manic depressive coke addict in detox.
We also don't know if Fitch and Moody's will hold the line. They're telling reporters they will--but how will they feel in a month? Who knows? If they downgraded us significantly, the resulting sell-off just from money market funds could feel a lot like a replay of 2008. Only this time, it's not clear that anyone in the government has the authority to step in and stop a run on the money markets; the issue was left conspicuously unaddressed by Dodd-Frank.
[The author discusses what Geithner may have up his sleeve.] If he does not have these tricks up his sleeve, many things people like--a lot!--will probably stop.
Whatever happens will not last long. The constituencies which make up the tea party do not necessarily understand how much of their life is underwritten by the government. But they will. When the market starts convulsing, and checks stop coming, and states have to do emergency property tax hikes to make up for lost federal revenue, angry constituents are going to mob their congressmen. About five minutes after the first doctor tells a senior citizen that he can't treat any more Medicare patients until he gets paid, the tea party caucus is going to crawl back to Capitol Hill and beg to pass whatever will make it stop.
In the aftermath, we will, over the long term, pay more to borrow money. At least some of that is going to be paid for with higher taxes.
Everyone else is probably going to pay more to borrow money, too. The US is a net borrower, and this sort of instability means paying more to attract capital. And a whole lot of debt, including fixed-rate debt, is priced off of treasuries.
Consumer confidence, already shaky, will take a blow. It's hard to say how much this matters, but it certainly matters some; like markets, consumers want to think that there's someone in charge.
This also raises the regulatory risk that the GOP says they care about. A mildly bad rule that's stable is better for business than a good rule that changes every two years.
The political situation in DC will get even worse. The last two decades have been marked by one party doing something kind of raw to the other party, who then goes even further because after all, look what they did . . . If the Tea Party, and the GOP, precipitate a crisis, then the GOP, and the Tea Party, will pay for it eventually.
So the world is not actually going to end, and I am not buying canned goods and ammunition for my portfolio.
However.
Convulsions in the market, lives disrupted by, say, an inability to actually close on the house you need to sell in order to move cross country and start your new job, higher interest rates, an even more poisonous partisanship . . . these are bad things.
Click here for an article from The Washington Post entitled What's the debt ceiling, and why is everyone in Washington talking about it? It uses some 2011 numbers, but again, the principle is the same now as it was then. Here it answers the question: What happens if we don’t raise the debt ceiling but continue to pay interest on our bonds?
This is an option known as “prioritization.” The Bipartisan Policy Center released a report attempting to think through how this would work in practice, as it has never been attempted before. The raw numbers are chilling: In August, the federal government would have to cut expenditures by about $134 billion, or 10 percent of the month’s GDP. If it chose, for instance, to fund Medicare, Medicaid, Social Security, supplies for the troops and interest on our bonds, it would have to stop funding every other part of the federal government. The drop in demand, when coupled with the turmoil in the markets and the general financial uncertainty, would undoubtedly throw the economy back into a recession. Also keep in mind that we have to roll over $500 billion in debt that month, and if there was uncertainty about how we were going to pay our bills, it is not clear we could find buyers for our debt at anything less than an exorbitant rate. In this way, “prioritization” could actually increase the deficit.As if that's not bad enough, here's the Post's answer to the question, What happens if we stop paying the interest on our debt?
This is too scary to consider for any serious length of time. Treasury securities sit at the base of the global financial system. They are considered so safe that the interest rate on Treasuries is called the “riskless rate of return,” as the market assumes there is no chance of default under any circumstances. Almost all other types of debt — mortgages, credit card, auto loans, business loans, hospital bonds, etc. — are yoked to Treasuries. Almost all major financial players hold substantial portfolios of Treasuries or Treasury-related debt in order to buffer themselves against financial shocks. Consider that the 2007 financial crisis was caused by the market realizing it had to reassess the risk of bonds based on subprime mortgages. If the market has to reassess the risk of Treasuries, the resulting financial crisis will be beyond anything we’ve ever seen in this country.Click here for a view opposite to mine, also from 2011. It's an article on The Hill blog entitled The real debt-ceiling 'Catastrophe.' Here is what I take to be the important quote from that article:
Along come White House chief economist Austan Goolsbee and Treasury Secretary Geithner crying “catastrophe” in an effort to pressure Congress to raise the nation’s debt ceiling. But the real debt ceiling catastrophe lies not in the predictable fear-mongering of a profligate Administration trying to get its way, but in the fact that the United States is already in the position of having to raise a $14.3 trillion debt limit that is almost as large as America’s GDP. And the other related debt ceiling crisis is making sure that the Republican Party can fulfill its election mandate of bringing the federal spending binge to an end without a suicidal 1990s-style government shutdown that could guarantee a fiscally ruinous Obama re-election in 2012.Or, as I would put it: "The debt is far too high! And the tea partiers were elected in 2010 to block everything and make Obama a one-term president!"
Now, the U.S. debt is far too high. I don't dispute that. That's what happens when you elect a "0" like "W" as president. Click here for an article from the nonpartisan Pew Research Center entitled The Great Debt Shift: Drivers of Federal Debt.
In January 2001, the Congressional Budget Office (CBO) projected under a current law baseline that the federal government would erase its debt in 2006. By 2011, the U.S. government would be 2.3 trillion in the black.The Bush administration decided that rather than paying down the deficit with projected government surpluses, a better alternative would be huge tax cuts -- especially for the rich -- to put the surplus money in the hands of the "job creators" instead of the federal treasury. The resulting shortfall in projected tax revenues, supply-siders claimed, would be more than offset by the explosive economic growth that would result from the tax cuts. Then Bush launched two needless wars that dragged on for a decade, costing trillions. In the last 70 years, every other major war the U.S. had waged -- WWII, Korea, Vietnam, Gulf I, for example -- had been paid for by increased taxes. No president before Bush had cut taxes in wartime (although one after him has).
Click here for an article in that pinko lefty hippie rag, Forbes, entitled Republican Deficit Hypocrisy. Here's a quote:
The human capacity for self-delusion never ceases to amaze me, so it shouldn't surprise me that so many Republicans seem to genuinely believe that they are the party of fiscal responsibility. Perhaps at one time they were, but those days are long gone.Tack on a huge unfunded prescription drug plan (a gift to Bush's wealthy buddies in Big Pharma), and the projected surplus is completely exhausted. So when a huge subprime housing bubble blows up in 2008, bankrupting American icons like Merrill Lynch, there is no cushion above the balanced-budget baseline to absorb the shock; the drop is from an economic position much, much worse than it would have been in the projected Clinton scenario.
This fact became blindingly obvious to me six years ago this month when a Republican president and a Republican Congress enacted the Medicare drug benefit, which former U.S. Comptroller General David Walker has called "the most fiscally irresponsible piece of legislation since the 1960s."
So that's why the national debt is so high. When Obama was inaugurated, the economy was in freefall, losing 750,00 jobs a month. Obama's deficits have not been because of profligate new spending, but because of huge expenditures made necessary by the financial crash and the impossibility of easing the debt situation with increased taxes.
Let's talk about U.S. tax rates. Click here for an article in the September/October edition of the highly respected magazine Foreign Affairs entitled America the Undertaxed. It has a pretty incredible graph, showing total tax revenues as a percentage of GDP in the industrialized world in 2009. (I tried to copy it in but failed; click on the link and have a look!)
It shows a bar graph for 32 countries. The lowest of the 32 is Mexico, at 17.4%. Second-lowest is Chile at 18.4%. Third place, at 24.1%, is -- ta-da! The U.S.! (We're Number 3! We're Number 3!)
So there are 2 countries in the developed world where tax revenues are lower, as a percentage of GDP, than the U.S. -- and there are 29 where the tax rate is higher.
And not just a little bit higher: 8 other countries have a percentage in the 20s, with Greece at 30.0%; 15 countries have a percentage in the 30s (including the 18th lowest, Canada at 32.0%), with Hungary at 39.9%; and 8 are in the 40s, with Denmark topping the list at 48.1%. Those 8 are third-world basket cases Denmark, Sweden, Italy, Belgium, Norway, Austria, Finland, and France.
But it is important to look at pre-recession data, which better reflect long-term trends. In 2006, before the financial crisis struck, OECD tax statistics showed that total taxes in the United States -- at all levels of government: federal, state, and local -- were 27.9 percent of GDP, three-quarters the percentages in Germany and the United Kingdom and about half of those in Denmark and Sweden. Among the rich democracies in 2006, only South Korea had lower taxes.The article goes into six pages of wonky explanations as to why -- and it isn't mostly because of personal income tax levels, which are actually just a tad higher than the average of the rest of the developed world.
G.W. Bush did immeasurable harm to the U.S., and in ways other than economic -- moral leadership from the guys in the white hats running Guantanamo and Abu Ghraib, for instance -- but sticking to economics, let's not forget to push some blame onto Mr. Andrea Mitchell (otherwise known as Alan Greenspan, the 18-year head of the Federal Reserve), a devoted follower of Ayn Rand, long thought to be a financial wizard until exposed in 2008 for the chucklehead he is. Click here for an article in the U.K. newspaper The Guardian entitled Greenspan - I Was Wrong About The Economy. Sort Of.
Testifying before congress in October of 2008, Greenspan said
...he had been "partially wrong" in his hands-off approach towards the banking industry and that the credit crunch had left him in a state of shocked disbelief. "I have found a flaw," said Greenspan, referring to his economic philosophy. "I don't know how significant or permanent it is. But I have been very distressed by that fact."
"I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms," said Greenspan.
In prepared remarks before the House of Representatives, Greenspan, 82, who retired in 2006, called the financial crisis a "once-in-a-century credit tsunami" and said it had "turned out to be much broader than anything I could have imagined".Yeah, Al, your house of cards "was working exceptionally well" right up until it collapsed.
He suggested his trust in the responsibility of banks had been misplaced: "Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity (myself especially) are in a state of shocked disbelief."
The congressional committee's Democratic chairman, Henry Waxman, pressed him: "You found that your view of the world, your ideology, was not right, it was not working?" Greenspan agreed: "That's precisely the reason I was shocked because I'd been going for 40 years or so with considerable evidence that it was working exceptionally well."
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