People seem to be despondent over the lack of political compromise on the federal debt limit. I do not share that concern. Incidentally, neither does the bond market.
To be clear, the United States is both financially and morally required to meet its obligations. Not doing so would expose an astounding lack of political leadership that would undermine the credibility of the country. But the disaster scenario -- default on US debt -- is still unlikely. First, because a compromise that involves deficit reduction along with a debt ceiling increase is still the most likely outcome, as it is the most sensible, even for our politicians with their polarizing agendas.
And second, because the US government collects much more in taxes than the amount necessary to service the debt. So even in the unlikely event that the debt limit is not increased, the coupons on US treasuries will still be paid and Treasury will prioritize other government expenditures, even if it has to shut down non essential government services.
More importantly, the debt levels are not the main concern. The real threat to the country's long term financial health is the ongoing deficit. US revenues were about $2.2 trillion last year. Expenditures were $3.5 trillion. Interest payments were only about 6% of that. Entitlements -- Medicare, Social Security and unemployment insurance -- accounted for roughly 58% of total expenditures. And defense was another 20% (it seems strange that any country would dare to have 150 military bases around the world and be involved in three wars while running a deficit of over $1 trillion a year, but, that is a whole other topic).
Such perennial deficits are obviously untenable. It is the one issue we simply must deal with, and it is certainly not impossible. If we limit government spending to the level it was in 2007, not exactly the age of austerity, we will have a balanced budget within three years. If we than keep it at that level for ten years, we will also substantially reduce our debt levels. This will return the country to very solid financial footing.
If the mere talk of the debt ceiling will force a serious national conversation about priorities that would finally put the country's fiscal house in order, I would argue such outcome is a net positive. In any event, for an owner of a Treasury debt instrument, it would be better to miss out on a few months' worth of payments and emerge with a fiscally responsible country that is a better lending risk, rather than keep collecting payments in a deteriorating currency, and from a country hobbling down the path to fiscal ruin.
For that reason I also don't subscribe to the notion that default would cause interest rates to spike. There are enough savvy investors out there that understand the long term benefits that emanate from forced fiscal discipline, and they would snap up treasuries on any weakness, knowing they are effectively guaranteed to collect the principal plus all back pay.
This point is made more relevant if you recall that traditional default (suspending payments on debt) is not the only form of avoiding payment. Inflation is also effectively default. It is more stealth and vile, but gets a similar end result.
In fact the U.S. has continuously engaged in devaluing the currency to the detriment of its debt holders. Right now, Treasury is making the payments on time, but those payments are made in a constantly weakening currency. And consequently, the price of anything denominated in dollars is going higher.
It isn't demand from emerging economies that is driving the prices of wheat, cotton, oil or Swiss Francs higher. It is the decline in the value of the dollar. In fact, over the past four years, neither wheat nor oil prices are up if measured in Yen (they are each up about 50% vs. the US Dollar), and have actually gone down vs. gold.
In light of that, I don't see the point of increasing the debt ceiling if it simply perpetuates our incorrigible spending habits. If this faux crisis forces political will to confront our structural fiscal issues and finally behave rationally, then I would consider it very good news.
Lawmakers Struggle to Find Detour Around Debt Impasse
Rubio: Dems "deliberately" put off debt debate
Constituents bending ears of lawmakers as debt ceiling debate raises worries ...
Debt crisis may help Obama woo independent voters
Durbin: Accept responsibility, raise debt limit
And second, because the US government collects much more in taxes than the amount necessary to service the debt. So even in the unlikely event that the debt limit is not increased, the coupons on US treasuries will still be paid and Treasury will prioritize other government expenditures, even if it has to shut down non essential government services.
If we limit government spending to the level it was in 2007, not exactly the age of austerity, we will have a balanced budget within three years. If we than keep it at that level for ten years, we will also substantially reduce our debt levels. This will return the country to very solid financial footing.
I prefer the second, and the cut Government spending.
Sacrifice actually involves EVERYONE sacrificing, not just the old, the poor and the children.
We need to raise the debt ceiling so we can print more money to offset our spending.
So in your view, Alan, social security checks, payments to our armed forces, and anything which does not go to the financial services industry are "non essential government services"?
Real people depend on those services to eat. Real people depend on those services to survive.
No, we should cut off all debt service to the fake people (corporations) and pay only the real people. The ones our country was formed to protect. The ones who have "Life, liberty, and the pursuit of happiness" at stake.
Again, It's called prioritizing. Like real people have to do. But common sense doesn't run in our Government.
I put this in such simple terms because you obviously do not understand them. The wife is talking to death letting you get the loan, and her bitchy friends aren't going to let her sign the papers. Yes, we have money to pay back the lenders, but WE WILL STARVE in the house. No food. No security and alarm system. And a permanent mark against our credit rating that will triple our debt. TRIPLE OUR DEBT!
Tea party runs out the clock. Republican bills with terms Democrats can't accept get brought to the floor, and Tea party doesn't vote for them either. Senate has a bill, passed and ready to sign, but no one in the House (being bitchy and all that) will sign it.
Stupidity is the most likely outcome. We already have abundant proof of that.
That is likely true. I believe you. What you didn't mention, however, is if we return to the responsible taxation levels of the Clinton administration, the same thing would happen. Other than the defciit crisis, and burgeoning debt, and of course further enriching the rich, the tax cuts for the rich have had no effect on the economy, and certainly no positive effect on employment, as anybody without an ulterior motive would expect, because the idea that low taxes drive employment is something nobody actually believes. What everyone does know is that spending more than you take in results in deficit, but there are two sides to that equation. And there are many divisions to the spending side. A case can be made that properly run social programs are beneficial to an economy, but substituting wars for an economy will not work for long, and is inhuman and destructive in any case. You can read about this in the history of any empire, right toward the end.
Free money creation to bail out America’s elite financial speculators, but not for Social Security or Medicare . ven more remarkable is the attempt to convince the population that new money and debt creation to bail out Wall Street – and vest a new century of financial billionaires at public subsidy – cannot be mobilized just as readily to save labor and industry in the “real” economy. The Republicans and Obama administration appointees held over from the Bush and Clinton administration have joined to conjure up scare stories that Social Security and Medicare debts cannot be paid, although the government can quickly and with little debate take responsibility for paying trillions of dollars of bipartisan Finance-Care for the rich and their heirs.
http://michael-hudson.com/2011/06/how-a-13-trillion-cover-story-was-written/
The first being that a country that overspends by over a trillion dollars PER YEAR maintains an overseas military presence that would make Alexander the Great and Julius Caesar blush (and by the way, it's over 2000 military installations, not 150).
It's enough to make one wonder why all the discussions about cuts are focused solely on the solvent, off-budget, and separately funded programs that actually put money back into the economy.
Another interesting point is that the "default" will never happen. Which is quite true. There is more than enough taken in each month to pay for the essentials (debt service, Social Security, Medicaid, Medicare, veterans benefits, military pay, and the fifteen or sixteen wars we're currently engaged in).
The last Treasuries sale was a superb, and yields continue to stay low. Not exactly signs of panic from the bond markets (ignore S&P and Moody's - the same people who brought you AAA-rated sub-prime crap sandwiches).
Overall, it's nice to see another recitation of the fact that this latest version of shock-kabuki theatre is a sham. Yet people continue to buy tickets for the performance.
What would be really helpful is if everyone realises that it only stops when you quit supporting it.
That 43 cents of every dollar goes to...
The 13 carrier groups we maintain throughout the world's oceans, along with the 2000+ military installations we maintain through the world's landmasses.
The cost overruns incurred through our wonderful and awesomely patriotic military contractors.
Not to mention all the other discretionary spending (whether it's through the tax code or outright outlays) we incur that isn't quite essential.
So, yes, in fact we could cover the list of essentials I cited without busting the ceiling - perhaps apart from the wars. Although their monthly cost is probably low enough to just make it.
So stop this Insanity........................before it gives America a DEPRESSION !
Limit Federal Spending to 18 % of GDP ! Viola ! USA grows again !