Kash Returns, Discovers one of Mark Thoma’s Cohorts is an Idiot
CBS Marketwatch Devalues their Brand. Kash views the carnage:
Despite all the rhetoric and posturing we see in the media and in Washington D.C., it is safe to say categorically that the U.S. Treasury will not default on its debt after August 2nd, even if the debt ceiling is not raised. Not only will the Treasury be able to pay interest on U.S. debt obligations, but there is money for other essential programs as well. However, there will be some serious cutting that has to happen because spending clearly exceeds revenues.
Yes, quite. In fact, some specific numbers are provided in this column: federal spending would instantly have to be reduced by about $100bn per month. By the end of 2011 federal spending would be about $500 bn lower for the year than it would have been otherwise.
I’ve made this point before, but for numbers that large, anyone who wants to pretend to have some understanding about the economy has to think about macroeconomic effects. In particular, spending cuts of that size would reduce the US’s 2011 GDP by multiple percentage points. The Q3 and Q4 GDP growth rates wold probably be on the order of between -5% and -10%. Recall that during the recession of 2008-09, GDP only fell by about 4% in total. The unemployment rate would be likely to rise by several percentage points from its current level of 9.2%, to perhaps 15% or more of the US population. Recall that at its worst, the unemployment rate during the Great Recession only reached 10%.
So when you read someone blithely writing that the federal government will not default in the absence of a debt ceiling deal, and instead will merely have to trim excess spending, remember that what they’re really advocating is a new and deliberately caused Great Depression. And not just in economists like me.
Can it really be that bad? Well, yes. This is what Marketwatch allows to be given their imprimatur, as one Kurt Brouwer presents “in a Q&A format…what I believe you need to know at a basic level”:
If we do not raise the debt ceiling by August 2nd, we will not default on Treasury obligations. Nor, will we have trouble making Social Security payments. However, there would be a big drop — roughly 44% — in government spending because that percentage represents the difference between government revenues which would be about $200 billion for the full month of August and [sic] $172 billion for August if we start counting after the first week when the deadline hits. Spending is slated to be over $300 billion that month.
Kash is right; that’s about $100B a month. So how does Brouwer solve that $100B+ shortfall?
The [Bipartisan Policy Center] study projects there will be $172 billion in federal revenues in August and $307 billion in authorized expenditures. That means there’s enough money to pay for, say, interest on the debt ($29 billion), Social Security ($49.2 billion), Medicare and Medicaid ($50 billion), active duty troop pay ($2.9 billion), veterans affairs programs ($2.9 billion).
That leaves you with about $39 billion to fund (or not fund) the following:
Defense vendors ($31.7 billion) IRS refunds ($3.9 billion) Food stamps and welfare ($9.3 billion) Unemployment insurance benefits ($12.8 billion) Department of Education ($20.2 billion) Housing and Urban Development ($6.7 billion) Other spending, such as Departments of Justice, Labor, Commerce, EPA, HHS ($73.6 billion) [formatted for style]
Oh, he doesn’t.
Now, does Brouwer prioritize payments by “bang for the buck” (multiplier effect)? No. Paying interest on debt supersedes even the Social Services. If you’re looking to do as little damage as possible to your domestic economy (this is our government, not China’s), you don’t prioritize paying the interest on the debt (multiplier well 1; those people are liquidity-constrained in a way that coupon-clippers never will be).
And if you want to be a viable long-term investment, you don’t cut your current investment in long-term human capital (DoE, EPA).*
So what do you do, pay bond interest, or pay for parts and repairs on that military equipment that keeps active-duty military active? If you’re sane, you put troops on the line in priority over investors whose interest payment won’t be the source of their next meal or the protection from that next IED.
What does Brouwer say about these choices?
No doubt picking and choosing who gets paid and who doesn’t would be chaotic. And, lots of programs would not get their funding and that would lead to plenty of screaming. Nonetheless, it should be clear from this exactly how much we are spending in excess of government revenues. And, that could and should lead to a sober assessment of what government can and cannot do.
Ayup. Government can, if they ignore Brouwer’s advice, keep Brad DeLong calling this “The Little Depression,” keep people employed, and set up future growth with trained workforces and people who are not starved into unhealthiness.
Or it can do what Brouwer wants, and pay bond market investors who don’t need the cash while soldiers die and people starve.
Mark Thoma should be ashamed to share pageviews with this guy.
*As Beverly’s post notes, Texas notes that “beginning 25 years ago, the state began significantly increasing its education funding and therefore the quality of its workforce.” Conservatives used to see the value of human capital development in creating an environment for jobs, and I still hold to that one.**
**Rick Perry has, of course, reversed this, so anyone looking to start a business in the mid-2030s might do well to avoid the Lone Star State. Unless, of course, everyone else follows suit.
So we are blaming Mark Thoma because……? Do we need tabloid headlines?
Anyone else tired of economists arguing about the deck chairs while the ship sinks?
MarketWatch and MoneyWatch are not the same (notice the different letters). I write for MoneyWatch.
I don’t see the point of dragging Mark Thoma’s name into this. He posts on CBS Marketwatch and so does Kurt Brouwer? So what?
Shut down the machine in Defense Finance and Accounting Services (DFAS) that cuts the checks for Lockheed, Boeing, General Dynamics and Northrop.
Only a few over paid retired military who got their jobs because of friends will be slightly”harmed”.
As well as the PAC bagmen’s beneficiaries.
oops, cannot have Ryan’s other $350 bottle of wine paid by Ryan.
Even easier than messing with DFAS, shutter the F-35 and other weapons programs that are ongoing through the neglect of demanding perfoprmance of contracts.
But Mark, they are approximately the same, so its only a small degree of error in the analysis of the difference. It is, therefore, not outside the realm of likelihood that you may share the same general opinions as this fellow Brouwer. Makes perfectly good sense to me, I think. Besides which Kash is pointing out that the “value of the brand” is being diluted, leading to the assumption that if you identify yourself with that brand, M_____Watch, then there is some degree of devaluation to your contributions.
I hope that this clarifies the issue for you.
I wrote up a simalar assessment the other day, based on the May Treasury statement, For those who are interested: What If There’s No Debt Ceiling Increase?
Ken,
You pay the bondholders first because you have to continue borrowing.
Besides, interest payments are only <10% of the Budget. So we should be able to make do just fine. Unless, of course, Obama wants to make it ugly, which he probably wants to do.
pay bond market investors who don’t need the cash while soldiers die and people starve.
That’s pretty good. Expect Obama to request permission to use this in one of his future speeches.
sammy,
This depression was not even discussed during the 2008 presidential cycle even though it started in spring 2008.
How about the treasury send the bond holders MBS held in TAPR at face value instead of the coupon interest??
That is good for about 7 months.
When they are done send the special treasuries backing the OPM retirement fund, etc…………………………………..
You know all the assets the treasaury holds for which no one ever sent cash money.
The new president in 2013 can address the issue a few months after inaugural day.
Sammy, is there any difference in the amounts when a treasury is rolled over. Aren’t they first discounted when bought? The full amount of the treasury should be what is shown as part of the debt. It seems to me that rolling over a treasury for another would be a 100% wash.
Co Rev,
That’s a good question. T-Bills are issued at a discount, put have a par value (but there is negligible difference). T-bonds can be issued at either be at a discount or a premium, but they also have a par value. I am going to assume that the par value is what counts against the debt ceiling. So the answer is “yes, it’s a 100% wash.”
As I thought. Thanks!
Here’s good theater on SS, SSTF, Treasury and Obama’s claim that he can not guarantee
ss checks on the 3rd. Watch the video. http://hotair.com/archives/2011/07/13/video-social-security-chief-actuary-confirms-a-decision-to-withhold-checks-would-come-from-the-treasury/
Sammy, since rolling over the debt does not effect the debt ceiling, how could we default on debt?
Co Rev,
Suspend interest payments.
CoRev/Sammy,
Easy button.
Nationalize K St and all their assets.
What a sovereign with most of the world’s nukes gets to do.
Roll Red Chinese and Japanese T Bills for treasury held MBS (aka Wall St saved while main st suffered). Get out Schacht’s book on creative finance, let freddie and fannie exchange their “notes” with the creditors’ T Bills.
Debt ceiling good thing. Lower it.
Shutter the part of DFAS paying the MICC (troughers) contractors………………………….
F-35 testing is late, terminate for default. There are a lot of non performing contract duties that need terminated in defense acqusition. Reduces future cost “bow wave” of fixing the defects in the trash DoD accepts.
Military controllers can do the air traffic thingy shutter the FAA. I don’t submit myself to TSA anyway!
Paul Ryan gets to buy his own $350 bottle Pee No Greee GEO.
Sammy, that’s why I asked the question. How can that happen if the maturing treasuries are just rolled over. Stop issuing any premium-based offerings. No interest need be paid.
It makes me wonder about the “interest on debt” budget line item. Is that just a calculation without any real world meaning?
CoRev,
It is possible with “budgets” that the budget and the ultimate expenditure may vary.
Budgets commit the “cash” to be spent. Contracts or bonds become claims against the commitments, when presented and accepted they become obligations. Which are expended when the check is cut against the “string” rooted in the commitment.
There is room for “wiggle” in the chain of commitment through expenditure.
String analogy on purpose because when you cannot push the string you get insovent.
Insolvency, a Republican goal!
Co Rev,
How can that happen if the maturing treasuries are just rolled over. Stop issuing any premium-based offerings. No interest need be paid.
For T bonds, an actual coupon gets paid every 6 months (check gets sent to bondholder).
T securities sold at a discount actually make the situation worse: the government gets, say $950 for $1000 face value bonds.
The only way to play a game is to issue securities at a premium, say $1,100 for every $1000 face value, by offering a higher coupon. This advantage starts eroding at the first interest payment.
This the summary from an article written by Karl Rove (that guy you hate): “Washington is dysfunctional. And to paraphrase the president’s senior adviser, David Plouffe, Mr. Obama owns the dysfunction. The president has not only governed as a liberal—he’s governed as an incompetent liberal, thereby reminding voters that electing a Republican Congress and president next year is the only way to change direction.” (My bold)
From this article: Obama Owns the Debt-Ceiling Fiasco
It doesn’t help that he’s declared high-speed rail and even unspent stimulus funds as untouchable.
http://online.wsj.com/article/SB10001424052702304911104576443863077227784.html?mod=rss_opinion_main
CoRev, failure to pay that interest wouldn’t violate the 14th Amendment? BTW, the amendment appears to require all debts to be paid–whether incurred by use of someone’s money or someone’s labor. (This point seems to be lost in discussions of how to avoid government spending that exceeds the debt limit. That’s why I see only one sure way to avoid a violation of the amendment: violate the debt ceiling law as the lesser of two evils.)
Your post overreacts to the original post as far as I can tell. You have a different distributional prioroty, fine. Different priorities do not render someone else an “idiot”.
You’re certainly entitled to your view. I think you’ve missed some key points but that doesn’t make you an idiot.
One key point you’ve missed is that, when you have a $15T debt, a 1% bump in rates is $150B you’ve got to fund – 1.5T over 10 years or more or less 100% of all savings being negotiated – and notpaying your bondholders on time is a good bet to trigger at least a 1% hike in borrowing costs. Sure some debt will be outstading for a while at lower rates but the overall duration of Treasuries is less than three years, so it’s going to rise pretty quickly.
A second key point you’ve missed is that repos of Treasuries are the source of liquidity for many large institutions and if you disrupt their liquidity you could trigger another financial meltdown.
So your preferred path appears to me to be likely to exacerbate the contractionary effects of a spending shutdown. That doesn’t mean you’re an idiot, but you could be terribly wrong.
Didn’t Rove play the chubby nazi in Raiders……………..?
All he needs are the black stetson, and leather trench coat.
Perhaps posts would be better if the posts 1) stuck to one issue, 2) avoided tabloid headlines and 3) got the facts straight.
PJR, I agree. The 14trh amendment seem to forestall default on debt interest.
I was trying to determine how the how that might actually happen. If the bulk of the debt is just rolled over at par value, there is no change in debt and by definition the debt ceiling. Interest also is not a consideration, except for that which is higher. That’s also why I proposed issuing only discounted treasuries. No interest on which to default.
That proposal also adds to the liquidity issue, but that is the core of the negotiations now.
Rusty, I’m not sure to whom the comment was aimed, but this is what I considered the issue: ”
Despite all the rhetoric and posturing we see in the media and in Washington D.C., it is safe to say categorically that the U.S. Treasury will not default on its debt after August 2nd, even if the debt ceiling is not raised. Not only will the Treasury be able to pay interest on U.S. debt obligations, but there is money for other essential programs as well. However, there will be some serious cutting that has to happen because spending clearly exceeds revenues.”
I believe the Rove commentary follows the first bolded item. Sammy and I are trying to define how default might happen, and its expenditure impacts. I am leaning to a very minor impact if well managed.Some examples of “got the facts straight.” might be helpful. Your second comment re: tabloid headlines kinda follows that first bolded subject.
“…..incompetent liberal….” An interesting choice of a phrase coming from a key player in the Bush administration that slashed revenue and dramatically increased war spending resulting in a seriously deficient budget. While Obama may not have found a solution to the Bush budget busting administration, he has had no help from the dysfunctional Congress that was hampered by a combination of crimson conservative Democrats and fool hardy Republicans and is now dead locked by an increased number of fool hardy Republicans. You can try as you might to rewrite or simply ignore the facts of the Bush decade. The facts remain the same. Bush with the assistance of a docile Congress slashed revenue (that’s what a significant tax cut is) and saddled the budget dramatically with not one but two wars of questionable value and merit.
For those who would suggest that tax cuts result in job creation again I refer back to the Bush years. Serious tax cuts and rather than job creation we have seen the jobless rate colimb continuousy. No secret there. Demand creates jobs. When there is more demand for GM cars GM expands its factory space and hires more workers. It is the same for all industries. When more product is requested more people are required to fill that need. Demand, demand, demand. A demand economy is a growing economy. A tax free economy goes bust sooner or later. We don’t even need Kimmel’s data to understand the relationship between demand and production. One follows the other. Tax cuts have not created anything other than an increasingly distorted distribution of wealth and at the same time a serious deficiency in the budget process. This isn’t rocket science. Demand is the key. Without sufficient income spread amongst the population there is less demand and the result is all around us.
Jack,
he is an incompetant liberal – ask cactus.
Bush may have been busting the budget, but he has nothing on Obama and the Dems. See attached graph. The Dems are spending money faster than they can print it and will run the debt up more than GW even dreamed of. Your complaint about budget busting is with Obama, not Bush Jr.
But I do like your idea of increasing demand by taking money out of the economy and giving it to the government. We all know that Democrat Government workers (like the people at the DMV) with their omniscent ability to spend on just the right areas, like High Speed Rail, will bring instant end to unemployment and LBJ levels of GDP growth. This is magnified by having ‘the One’ as are dear leader. After three years it all should be milk and honey…
…Oh wait…
Islam will change
“But I do like your idea of increasing demand by taking money out of the economy and giving it to the government. We all know that Democrat Government workers (like the people at the DMV) with their omniscent ability to spend on just the right areas, like High Speed Rail, will bring instant end to unemployment and LBJ levels of GDP growth. This is magnified by having ‘the One’ as are dear leader. After three years it all should be milk and honey…” Buff
You’re ranting mindlessly so there’s little to gain from the conversation. Paying taxes is not even remotely like taking money out of the economy. The government spends the money we pay in taxes, or haven’t you been listening to the Republican leadership. Or haven’t you heard that taxation is just another liberal plot to redistribute wealth. In fact wealth redistribution would be very helpful in regards to economic growth. Any expenditure of money is, in effect, an addition to the demand side which is far better than continuing to await the trickle down mythology of the supply side conceptualization.
What’s the reference to Democrat Government workers? Are they a totally different set of workers than when Bush had been President? Or are you simply complaining about policy makers? They have little to do with day to day operations of the government, so you’re making little sense with that reference. Minnesotans are now beginning to recognize the value of their public employees. Want a fishing license? Or do you own a small hotel and want your guests to be able to get that fishing license? DMV workers got your goat? They don’t work for the Feds, but try getting your car registered or titled without them. Try to buy a car in Minnesota right now. Neat trick that will be.
Jobs are vanishing because corporate America has exported our manufacturing base. No, the service sector isn’t a satisfactory alternative. Service jobs don’t pay well. Demand, demand, demand. Those are the three best ways to produce jobs. Create demand by letting workers earn enough to have something left after essentials. They will spend what’s left. They will acquire up to the limits of their earnings. Ship their jobs to the far east and pay them junk wages for the jobs that are left here and demand will die, as it has. In Texas they’re racing to the bottom stealing jobs from their neighbors and rewarding their workers with crap wages. The elite are living well, but that’s one small sector of the economy. You wnat an individual solution? Sell luxury to the rich.
Bastille Day
“Bastille Day”
For every action there is a reaction. It is basic to both natural and behavior physics. In France 222 years ago the recalcitrance of elitism was met by the explosion of grief and despair. Thank goodness circumstances in modern day America are not so bleak for most, but the abject poor are increasing in numbers and the burden on the working class knows no relief. The five percent at the top of the heap should take the past as a harbinger of what is possible in the future if the direction of the past several decades does not change. We are always no more than an episode, or two, of natural disaster to bring about an apocalypse. No one benefits from such a situation.
Interesting phrase “incompetent liberal” which some folks here seem to mean “wrecks the country by mistake.” As compared to “competent conservative” which clearly means, given the clear record of the Bush / Rove years, “wrecks the country by design.”
Interesting phrase “incompetent liberal” which some folks here seem to mean “wrecks the country by mistake.” As compared to “competent conservative” which clearly means, given the clear record of the Bush / Rove years, “wrecks the country by design.”
Interesting phrase “incompetent liberal” which some folks here seem to mean “wrecks the country by mistake.” As compared to “competent conservative” which clearly means, given the clear record of the Bush / Rove years, “wrecks the country by design.”
CR,
No interest on which to default.
Sorry, it doesn’t work that way. If you issue a security at a discount you collect only say $900 on a face value of $1000. So you are behind the eight ball right away debt ceiling-wise. Secondly, when you redeem/roll over at $1000, the other $100 gets charged to interest expense.
If we were half as smart as we think we are, we’d be twice as smart. So don’t forget stupidity. The effects of our stupidity are vastly underestimated by ourselves. Which, come to think of it, makes sense.
The private economy killed what, 11 million jobs? So we need jobs. What to do? Hmmmmm. We have something north of $2 trillion in infrastructure projects engineers have already identified. If each billion creates 10,000 jobs that’s what, 20 million jobs?
Eeeeek! Who’s going to pay the bills? Dunno, maybe the 20 million people earning Davis Bacon wages can help us out (they’ll all be employed by for-profit, private corporations don’t forget). Or the productivity improvements these public work projects would provide might generate additional profits and jobs.
Nah. The smart thing is to get rid of the New Deal and the Great Society and replace them with the Raw Deal. I repeat, stupidity is underestimated.
If we were half as smart as we think we are, we’d be twice as smart. So don’t forget stupidity. The effects of our stupidity are vastly underestimated by ourselves. Which, come to think of it, makes sense.
The private economy killed what, 11 million jobs? So we need jobs. What to do? Hmmmmm. We have something north of $2 trillion in infrastructure projects engineers have already identified. If each billion creates 10,000 jobs that’s what, 20 million jobs?
Eeeeek! Who’s going to pay the bills? Dunno, maybe the 20 million people earning Davis Bacon wages can help us out (they’ll all be employed by for-profit, private corporations don’t forget). Or the productivity improvements these public work projects would provide might generate additional profits and jobs.
Nah. The smart thing is to get rid of the New Deal and the Great Society and replace them with the Raw Deal. I repeat, stupidity is underestimated.
buff,
Useless Democrat Government workers . How about profligate, unperforming DoD contracts?
Mc Cain and Levin (see AWIN First 14 July) are on to the slight of hand in the 2011 DoD reprogramming notice where the DoD is slipping another $750M in overruns through in just this one already 75% done fiscal year, for the flawed (being kind here) F-35.
Just kill it.
The world did not end when B-2 and A-12 were terminated.
F-35 overruns makes DMV employees look down right capitalistic.
Just terminate F-35.
Time for US citizens to eat cake.
Marketwatch is owned by Murdoch’s minions, not CBS.
The only point that matters is that the deficit is 10% of GDP and absent that borrowing, and spending, the economy will shrink by that approximate amount. Credit expansion is the only way the GDP expands. Governmet borrowing has been an existential necesity to keep the system intact as household credit is contracting, I am not sure about buisness credit but I assume it is contracting and anyway bank loans and leases are contractiong. If the market will not borrow, and spend, then if the government doesn’t then it is game over.
I am not advising 10% deficits going forward and it’s possible that someday the Treasurey couldn’t borrow that much. All I am saying is that borrowing is an existetial necessity. It’s the devil we know. Take that away and it will be many devils we don’t. Which usually concentrates the minds of politicians but not this time apparantly. They have adopted a bizzaro sort of religious view of the economy based upon faith, and ignorance.
You all are missing the point. It isn’t expenditures that are impacted by the debt ceiling, but payments.
The Administration is requed to expend the monies Congress appropriated (including for Lockheed, Boeing, General Dynamics and Northrop). Those companies just might have to carry the Accounts receivable longer than than expected.