Debt Ceiling Consequences
If the debt ceiling is not raised at some point the US government will be unable to meet all of its obligations.
I assume that they will make their interest payments and bond redemptions on schedule and the shortfall will be in paying social secutiry, medicare, military and other obligations. This will naturally impact aggregrate demand and generate a significant negative impact on the economy. Given the severe weakness in the economy this shock most likely would tilt the economy into a recession.
This is rather straight forward analysis, but the more severe situation would be the consequences of the government failing to redeem T bonds and/or T bills or failing to make an interest payment of these debt obligations.
Large business and financial institutions do not leave large sums sitting around not earning interest. For the most part firms invest idle balances in T bills. This reached the point long ago where banks introduced sweep accounts where they will go through a firms deposits late in the day and sweep their balance out and invest them in T bills overnight. This is where the risk free instrument comes to play a major role in the financial system and the economy. In many ways the risk free investment of T bills are like the oil in an engine. It provides the buffer or lubrication in the financial system that allow the various moving parts of the economy to move freely and not rub against each other. If the risk free instrument of the T bill is removed from the system there is nothing around of sufficient size to provide the lubrication that the system requires. Thus, if firms no longer have T bills or risk free instruments to invest in there is a danger that the financial system will seize up like an engine without oil. It becomes a question of confidence and we could quickly have a repeat of something like what happened in 2008 after Lehman Brothers were Dealing with High Levels of Debt then went bankrupt and lenders pulled in their horns and refused to lend to otherwise good credits. This is why those claiming that the US defaulting on its debts would not have severe and wide-ranging consequences are completely wrong. It is why some of the largest financial institutions are already starting to take measures to protect themselves against this possibility.
Spencer,
I tend to agree with you on most issues, but I’m not sure I agree here. Frankly, I don’t think anyone really knows what will happen if the debt ceiling is not reached. No small part of the problem is that it isn’t clear what the policy response by the administration, the Fed, Congress and the Courts would be. Consider the following scenario: the Treasury secretary says “the Constitutional doesn’t allow a default, we’re going to borrow just as before”, the Supreme Court says “OK!” I can’t speak to the likelihood of that happeneing, but I imagine if we return to the “debt limit is a fiction” regime we’ve lived under during the four presidencies that raised debt/GDP since WW2 (Ford, Reagan, Bush 1 and Bush 2), and the markets believe it, maybe nothing happens at all. On the other hand, maybe those saying that all hell breaks loose are right, and I can construct scenarios for that too.
Beyond that, what you are saying is that large financial institutions have come to rely on the Treasuries. Back in 2000 many people (I wasn’t writing at the time, but it was certainly my opinion as well) said the financial industry’s need for Treasuries was not a good reason not to pay down the debt. Of course, we didn’t pay down the debt, but now we’re in another situation in which the same excuse comes from the financial industry: we need Treasuries. But the financial industry’s need for Treasuries is not a good reason to pick among options A or B when there is so much more at stake.
Slowly reducing the debt outstanding as was the case in 2000 where businesses have time to adjust is a very differnet scenario then one where the system receives a major shock that would occur if the US delaults.
Slowly reducing the debt outstanding as was the case in 2000 where businesses have time to adjust is a very differnet scenario then one where the system receives a major shock that would occur if the US delaults.
Well, it looks like we have a passable plan in the House. So more conjecture on hypotheticals may not be necessary.
The Dems have already folded. It’s just a question of how much more they are going to give up. There may be a shutdown for a day or two but the Tea Party is going to be too terrified to hold out for long. The Dems will probably capitulate before then though.
Obama is doing a Jim Marshall on this. Recovering the Republican fumble and running it the wrong way into the end zone. He just has to hope they don’t spike the ball in his face and do an end zone dance. Right now, it’s all about preventing the dance.
Spencer,
You say, “shortfall will be in paying social secutiry, medicare, military and other obligations.”
Why are you assuming this……That is straight up Fear Mongering!
If we are taking in around $200 Billion in revenues a month…we could pay
1.) Debt——————-$29 Billion
2.) SS———————$49 Billion
3.) MediCare & MedicAid-$50 Billion
4.) Military Salaries——-$2.9 Billion
5.) Veterans Affairs——–$2.8 Billion
That leaves $66 Billion a month to haggle over. Don’t you think it’s time to decrease the size of government and find watse, fraud, and efficiency at the Federal Government Level and put this issue to bed……In other words….What a Crappy Post on your part!
RA,
If Obama scores a touchdown for us……….We are doing the Icky Shuffle, The Funky Chicken and gonna top it off with The Lambaeu Leap!
Count On It!
What do you mean if….. He’s already in the end zone.
Here is a recap of the negotiations:
http://www.youtube.com/watch?v=CocwA5LXKlc
HehE!
Darren, nice analysis. It’s a shame you did not take into account that many of these receipts and payments are very lumpy, especially the debt payments. This is like the story of the six foot economist drowning fording a river where the average depth is three foot.
Darren, you dropped $10B some where, but there is one other thing to solve Spencer’s problem, they also have $83B in cash.
Spencer, you’re correct. It will take Treasury/Geithner/Obama/Lew to manage a moderate cash flkow problem.
Here’s a reality check if we do not raise the debt ceiling. Our Federal Government will retrench to perform just its core functions! Those agencies remaining will be performing only their core functions for which they were created. Several agencies may very well be closed, and that’s actually not a bad thing.
There are many case studies in the Poly Sci/Pub Admin schools showing cutting back and closing dead functions is nearly impossible in DC. This debt ceiling episode may be the best catalyst for fundamental transformation of DC. Wait, that’s not, I am sure, what that other guy meant with that promise.
As usual, CoRev is apparently off in his own fantasy universe with his own set of so called facts.
And even if the cash flow management problem proves intractable and we end up with another 20M unemployed the discipline among the few workers still hanging on will provide another uptick in corporate profits! So what the hey. Win win! Well played Koch brothers!
AS, better take a look at the economic projections. Not good and nothing to do with the current DC debates.
CoRev, always full of hope.
The more likely scenario is that it causes a recession that will be blamed on the Tea party and almost everyone of the really extreme republicans will be defeated in 2012. Remember, the typical new republican is much more conservative than the voters in their district.
Excuse me? What I saw this PM was several TP House leaders saying they would vote for the revised Boehner bill. Have you seen something else?
Spencer, there’s some conjecture that we may have slipped negative already or nearly so. You’re closer to some of the numbers than I so you may have a different view.
BTW, other than a snarky response do you have a different analysis of how the Fed Govt will respond without a rise in the debt ceiling? Which, I doubt seriously will happen.
White House threatens veto of Boehner debt bill
President Barack Obama’s advisers would recommend that he veto a bill authored by House Speaker John Boehner to cut government spending and raise the debt ceiling in two stages, the White House said Tuesday. The House is expected to vote on the Republican bill on Wednesday. Senate Democrats have offered a competing proposal to cut spending and lift the debt ceiling.
Spencer
Your analysis seems to assume a “unified budget” approach. That is, according to the SSA web site, a fiction at present and for about the past 20 years. Why the assumption that FICA contributions will not flow directly to SS beneficiaries? Granted that it goes to Treasury for processing, but it is legislatively reserved for benefits payments. Also, if debt and interest is likely to be favored then why not assume that the Trust Fund Treasuries will get their share and redemption is therefore available to make up any short fall of FICA in paying benefits. The SS system has a dedicated stream of “payroll taxes” that are identified as such for good reason. Why the assumption that someone will attempt to use FICA and Trust Fund assets to pay other general debt or expenses? That would seem to be illegal without specific new legislation which would seem to be toxic for all sides of the aisle.
a 38pp debt limit analysis (PDF) from the bipartisan policy center, which i believe is the rivlin-domenici group; estimates what would happen to government programs in august should the debt ceiling not be raised…
they estimate receipts of $172.4B from the 3rd to the 31st, with which the government could cover interest, social security, medicare, medicaid, unemployment benefits, & pay defense vendors, and not much else out of the $306.7 billion legislated spending for the period…
“Remember, the typical new republican is much more conservative than the voters in their district.”
Thats the precise reason there was a landslide election for them in 2010….
pencer, try this report: http://hotair.com/archives/2011/07/27/reports-house-gop-lining-up-behind-boehners-plan/
Reports: House GOP lining up behind Boehner’s plan
“[T]he opposition bloc led by [Jim] Jordan appears to be crumbling, as leadership’s message seems to be sinking in. Sources tells NRO that a number of members who were confirmed no votes against the Boehner plan announced during the meeting that they would be voting yes. One of those members, Rep. Blake Farenthold (R., Texas) told reporters that while he would like to “snap my fingers and change the world like ‘I Dream of Genie’ of Samantha on ‘Bewitched,’” Republicans “need to take what we can get.”…
Even Rep. Mike Pence (R., Ind.), a prominent conservative with a history of voting against leadership, said he was undecided, but seemed to indicate that he could ultimately support the plan, calling it “an important first step toward fiscal discipline and reform.”…
Members will be presented with an updated draft of the plan later this afternoon, with a vote tentatively scheduled for Thursday. GOP aides won’t predict whether or not they have the votes to pass the plan, but acknowledge things are moving in the right direction. Rep. Paul Ryan (R., Wis.), however, said he thought the plan would pass. Tea-party favorite Allen West (R., Fla.), who supports the plan, said he might be willing to bet his retirement check on it.”
Well I would certainly bet on Obama caving–he always has and that is why he is in the current mess. I do not know what the Dems in the Senate will do. I am guessing that they will extract something from Obama in return for presenting him a bill–like he resigns. Wishful thinking on my part, but Obama is making Jimmy Carter look like he should be on Mount Rushmore and we got 12 years of GOP misrule as a result of the peanut farmer. If they do screw it up, I hope that the teabaggers in Congress follow through on their threat and impeach Obama–Biden is a bit of a schmuck, but at least he is a Democrat and seems to identify with working people.
Jack
thanks. i was going to try to point that out, but it doesn’t look like anyone is listening. SS can continue to pay for itself mostly out of tax receipts for the next couple of years, but certainly by cashing its bonds for the next twenty years.
cashing its bonds will not increase the debt so is not affected by the debt ceiling.
unless of course the liars say… oh but we can’t cash these bonds because we don’t have the money and can’t borrow any more.
but liars is all we have anymore.
meanwhile, of course the payroll tax could be raised a tenth of a percent and the bonds could sit there gathering interest for a few more years.
Jack, if the debt ceiling is not raised and Obama chooses not to ignore it, he will have to break other laws. He will choose which ones. Then he gets to defend against lawsuits from injured parties for his decision not to pay debts (violating the constitution) and impounding funds (against the law, probably against the constitution). Of course, he could ignore the debt ceiling, breaking that law–a much better option for several reasons imho. Or he can sign a bill passed by the House and Senate, if any; odd’s of Boehmer’s bill passing in the Senate may be lower than odds of Reid’s bill passing in the House (without TP votes), but maybe both will fail, or maybe a third bill will magically will appear. Nobody knows what these idiots will end up doing.
Spencer
It is now four hours since I raised the question concerning application of FICA revenues and Trust Fund assets for any purpose other than Social Security benefits payments. I want to read your opinion since you suggested in your post that SS benefits are at risk. The only risk described by any reliable report is the Trustee’s projection that the program may be a little shy in 25 years. Of course even that supposition needs to be considered in light of what we know about economists’ ability to foresee the future. To wit: Why Economists (On Average) are Terrible Forecasters.
Jack,
There is no law or requirement that FICA revenues be applied only to Social Security benefits payments. When it comes to the debt, FICA revenues are just another cash in flow, benefit payments are just another cash out go. Once the ceiling is hit choices have to be made as to which bills to pay.
Sammy,
I wasn’t addressing my question to you, but since you deemed it necessary to put in your opinion I now have a subsidiary question for you. Who as I to believe has the most likely correct answer to the first question regarding the use of FICA taxes and Trust Fund assets. Sammy or the Social Security Administration? This link provides an easy to read and understand explanation in an historical context:
http://www.ssa.gov/history/BudgetTreatment.html
Jack,
I get it. Your questions are not really questions, but are passive-aggressive statements. Please spare us the drama and just make your statement: “The FICA revenues must be applied to Social Security benefits” and, while you’re at it, please supply us a different supporting link, because your “Research Notes & Special Studies by the Historian’s Office” link doesn’t cut it. The exact language of the requirement would be ideal. If it exists you should have no trouble finding it.
Oh,BTW the last sentence of your link states: These changes in federal budgeting rules govern how the Social Security program is accounted for in the federal budget, not how it is financed.
In the debt ceiling debate, it does not matter at all how things are “accounted for,” it only matters “how they are financed.”
spencer, it doesnt look like they can even priorize interest payments:
Treasury to Weigh Which Bills to Pay – The Treasury Department1 is preparing to answer a question that it has dodged and rebuffed for months: If there’s not enough money for everyone, who is left empty-handed? Officials said Wednesday that the department would address the issue later this week unless it became clear that Congress would vote by Aug. 2 to let the government borrow more money. The outlines of the answer, however, already are clear. Officials have said repeatedly that Treasury does not have the legal authority to pay bills based on political, moral or economic considerations. It cannot, for instance, set aside invoices from weapons companies to preserve money for children’s programs. The implication is that the government will need to pay bills in the order that they come due. President Obama has warned as a result that the government “cannot guarantee” payments of Social Security2 benefits or other popular programs. Officials also have disputed the assertion of some Republicans that the government could prioritize interest payments.
The Big Picture ran a wonderful clip with Grouho Marx singing a great little ditty, the punch line of each verse: “I am against it”.
My hope is the tea party gets their way and all of our CD’s go back to 14%.
I am short everything but cash, since 2007.
I would be good with that!!!
Why didn’t the Dems do away with the debt ceiling a few years back when they ran both houses?
mcwop,
Entertainment.
I need circuses.
Debt ceiling highlights the inanity of house’s appropriation committees with the executive filling various troughs is overloading the treasury with obligations the ways and means committee won’t tax (except payroll taxes for SS and medicare) to pay for.
I was wondering why no one has run it through the courts, seems if the 14 th Amendment thing is arguable………………
The debt ceiling may be contrary to the US constitution.
Let Obama use the 14 th Amendment and see how the supremes think.
Always need a story until 8 Sep when the NFL is back!!!!
Give me circuses!
If we’ve gone for circuses let’s make them deluxe Cirque du Soleil type affairs. Michelle Bachmann 2012!!!!!
AS, let’s hope. But, of course it doesn’t really matter as long as its not Obama 2012.
more consequences:
Insurance cost against US default hits record – The cost of buying insurance against a default by the US rose to a record on Wednesday, in a sign of growing unease that gridlock in Washington over raising the federal debt ceiling may result in the Treasury failing to pay interest to bondholders. The market for buying and selling insurance on the creditworthiness of the US is thinly traded, denominated in euros and dominated by European and UK banks in London. But trading in so-called credit default swaps has picked up as the threat of a default has grown. In a CDS, a buyer of protection is compensated by the seller should there be a default or missed payment, known as a “credit event”. “The US CDS market is much less liquid than other sovereign markets as up until recently no one thought the chance of a US credit event was very high,” . “The market is getting nervous over the risk of a default.” Premiums for one-year US sovereign CDS rose sharply this week and traded at about 90 basis points in London on Wednesday, overtaking the previous high set in March 2009. In a sign of greater concern of a near-term default, US one-year CDS was trading higher than premiums for the more liquid five-year sector, at about 65bp, for the first time. Brazil less risky than the US – Should Americans be giving up their passports and moving to Brazil to avoid bankruptcy? That depends on whether you believe in the wisdom reflected in the one-year credit default swap market. Guido Mantega, Brazil’s finance minister, does. He says that the risks associated with Latin America’s largest economy are now lower for the first time than those of the US as measured by the CDS market. “This is the first time the risk of Brazil is lower than the risk of the US,” said the indomitable minister, who is known to be fond of knocking Brazil’s big brother to the north.
ISTR tha the administration has stated that it has no authority to pick and choose who gets paid. Certainly any whiff of that will mean that the non-payees will sue for their money. So the idea that the debt ceiling represents some sort of magic, painless or even painful but fully blameable on the president way of cutting spending is silly. Despite the “there is no other plan” statements from Timmy, it sounds like the idea is simply to pay the bills in the order that they come in.
ISTR tha the administration has stated that it has no authority to pick and choose who gets paid. Certainly any whiff of that will mean that the non-payees will sue for their money. So the idea that the debt ceiling represents some sort of magic, painless or even painful but fully blameable on the president way of cutting spending is silly. Despite the “there is no other plan” statements from Timmy, it sounds like the idea is simply to pay the bills in the order that they come in.
ISTR tha the administration has stated that it has no authority to pick and choose who gets paid. Certainly any whiff of that will mean that the non-payees will sue for their money. So the idea that the debt ceiling represents some sort of magic, painless or even painful but fully blameable on the president way of cutting spending is silly. Despite the “there is no other plan” statements from Timmy, it sounds like the idea is simply to pay the bills in the order that they come in.
rjs,
If Boehner’s plan goes through it will get reconcoled with Reids plan (they are very similar) get passed and dropped on Obama’s desk. He will then sign it to ‘save the country from default.’ There is no way he vetoes it and then takes the blame for whatever occurs in August.
The politics do not work for a vetoe at all. Every Rep could sit there and say they passed bipartisan legislation that would have prevented XXX (bad stuff that happens in August) if Obama had joined the rest of our US leadership.
Plus Obama has a long history of caving when called.
Islam will change
buff,
I prefer we go 14th amendment and let the supremes and the impeachment clause work.
Welcome to the Tea Party.
CoRev,
I’ll bite.
Yeah, what could be better than Obama but a migraine with a mission from god and the nuclear football at hand.
When the CDS underwriters go bankrupt the US gumint will bail htem out………..
JimA said: “the administration has stated that it has no authority to pick and choose who gets paid.” But they do it nearly every budget year. Before the actual cash flows within the Deparments/Agencies/Services, and again at the end of the year when cash becomes tight. Beside Timmy is no9t the actual arbiter, the president via OMB does the early prioritizations. Whcih I assure you have already been done, unless they are actually shirking their duty for politics. (Not out of the question!)
BTW, Treasury/Timmy is the last step in the process where cashflow/payment management occurs much earlier in the process throughout the Deparments/Agencies/Services.
“If the risk free instrument of the T bill is removed from the system there is nothing around of sufficient size to provide the lubrication that the system requires.”
I’m being a little facetious but I believe cash is a risk free investment of sufficient size that only pays a smidge less than T-BIlls.
I of course have no idea what will happen if the debt ceiling is hit.
CoRev,
You are talking to buff, right?
I am not an extrortionist.
The “We need to cut waste now!” argument is silly, misguided, and mathematically incoherent. Sure, we’d technically have the money to cover making transfer payments and servicing interest on the debt. But anyone claiming that you can come anywhere CLOSE to bridging the gap by cutting “waste, fraud, and abuse” in government can’t do first grade math. Non-defense discretionary spending (I.e. EVERYTHING the government does besides make transfer payments and fund the military) is around 20% of the economy. If you think laying off EVERYONE who works in Washington is the solution to the budget problem, especially when we already have a big problem with unemployment, you’re, well, nuts.
MikeMacD,
What GDP?
The US is supporting a trillion dollar a year invisible hand in the 34th best health system in the world.
And a half trillion a year military industrial congress trough.
What better to lioquidate US t bills for?
In addition, the GSEs began their enchmark programs when Treasury was paying down debt in order to (opportunitically) supplant Treasuries in the risk-free role. It seems unlikely that GSEs are in a position to fill that role now.
we’re sitting on a small wad of E-bonds but we don’t hear them mentioned.——obtw, i think we should check our collective sense of humor. the t-potty bunch is giving us no end of great humor.
sammy – “There is no law or requirement that FICA revenues be applied only to Social Security benefits payments. When it comes to the debt, FICA revenues are just another cash in flow, benefit payments are just another cash out go. Once the ceiling is hit choices have to be made as to which bills to pay.”
sammy,
I disagree with you. This issue was discussed and answered with specific SSA statements under a question you raised to coberly and jack five days ago on the Open thread July 21, 2011 (see page 4). Note my response to PJR.
You appear to be overlooking the fact that Social Security Administration designated inbound revenues are converted to special issue Treasury securities on a daily basis. Your principal argument falls apart at that point as the issue then falls to the matter of special issue Treasury securities redemption by the Treasury. More info on the Open Thread.
But a very dark kind of humor it is. There may be some number of these reactionary Tea Party types that genuinely believes the small government hype that the group peddles to the media. The media, good lap dogs that they are, don’t make any effort to vet what they are fed for a trace of consistency between what is said and what is practiced. Extremists like nothing better than to hear themselves speak and the more extreme the message the more likely will be the attention paid to the speaker.
But now we are seeing a dysfunctional Congress wherein moderates are cast as being in the extreme if only because the extreme is far off from the moderate point of view. Group dynamics require compromise, but the extremists claim that their “principles” are more important than the need for the government to continue to carry out its required functions. Keep in mind that when we talk of government there are two groups of such participants. On the one hand we have the elected representatives, the President and the Congress, who are supposed to set the guidelines for government activities. Then there is the government, the people who carry out the day to day functions. There is too much derisive talk about this functional part of our government. They are people who have a job to do and their jobs are no less important than those in private industry. The Tea Party extremists seem not to understand this structural distinction. At least not until someone suddenly understands that the “government has to have its hands on their Medicare,” in order for there to be Medicare.
Only the darkest humor if any humor at all.
So maybe one of the consequences of the debt ceiling standoff will be Boehner losing his gavel. Who’da thunk it?
Might have made an interesting wager if West actually deserved one.
Makes me wonder whether the Speaker has tried crying in front of the long list of GOP members who have been summoned to have his office tonight.
Is the United States now moving to a three party system of government? That would likely have some significant consequences as a result of dividing the power basis.
What’s the third party?
Democrats, Republicaqns and Tea Party.