Debt Ceiling Updates

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Jason Kuznicki

Jason Kuznicki is a research fellow at the Cato Institute and contributor of Cato Unbound. He's on twitter as JasonKuznicki. His interests include political theory and history.

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25 Responses

  1. Avatar North says:

    Phew, scary stuff Jason. Glad to see you’re somewhat ready for it. The hubby and I both work in mortgage finance so you can imagine we’re both sweating bullets even though our personal finances are okay.

    That said I’m still hopeful that the limit will be raised, not even the GOP could be so stupid as to refuse the current deals being offered could they? Reid has a backup plan in the wings too and then if all that fails obviously there won’t be a default since the treasuries will definitely get paid but there will be a lot of other things not getting paid and there’ll be serious threat of a credit downgrade.

    When pondering the potential run, though, I find myself a touch stymied. In your ordinary currency run or bank run even you get all the depositors yanking out their money/investments so they can put them somewhere safe. In this case, however, we’re talking about a run on the “safe” investment/currency. Where does all of it go? The EU is tottering along being held together with spit and duck tape. Unlike the US Greece and some of their other worse shape countries literally can’t raise the dough to pay their debts (very much unlike the US which can but doesn’t want to).
    Russia is a vodka fuelled petro state, no one would want to park their money there nor could they even if they wanted to. China’s financial sector is a twisting labyrinth of corrupt obscured 1950’s style instruments. Investors would be better off rolling their dollars up and lighting them on fire in hopes of getting high off the smoke than they would trying to put money there. Israel, Canada, Brazil, New Zealand and Australia have economies in good shape and governments in good financial order but how much capacity to absorb money do they have? Are investors going to pay those governments to sell them bonds?

    I mean we’re talking about trillions of dollars here, where can it run. Keep in mind also that if the US shakes even a bit I imagine it’s a good bet that the EU banks that are holding on by their fingernails will collapse en masse and even the countries in good financial shape will likely be looking at a new recession.Report

    • Avatar Jason Kuznicki says:

      Metals.Report

      • Avatar St.John McCloskey says:

        Or whiskey! It’ll be a better investment, even if not in purely financial terms. When the world goes down the toilet you can have the biggest stockpile of alcohol…now doesn’t that sound like a better plan than sitting on metal? 😛Report

      • Avatar North says:

        The commodities sector can absorb that much money? That should be something to see. If people actually thought it’d go that bad they’d be better off investing in bullets or canned goods.Report

        • Avatar St.John McCloskey says:

          But canned goods don’t gain value over time…alcohol does! plus you’re investing in liquid happiness and courage if you think outside of the purely financial terms. your net benefit/utility/happiness will be an awful lot higher than if you invested in bullets (unless of course you had a real need to use them…in which case the alcohol might not save you)Report

          • Avatar Just John says:

            Armageddon isn’t a good metaphor for what will happen. Some significant portion of the trillions in current market value of US debt will evaporate as sellers accept lower and lower prices. Those poised to buy will buy lightly on the way down and increase their purchases as the floor prices they’re betting on approach. Sellers will do any of the variety of things they’re planning to do with their proceeds, and prices for all the things they’re planning to buy will be driven up. If it gets bad enough trading will be suspended on exchanges. A bunch of people will lose a lot of money, some people will make a lot of money, the total value of all markets will probably go down. Somewhere along the way the US government will declare that it will make good on its debt, and this will probably happen long before widespread civil disorder can threaten the existence of the world as we know it. Debt will become more expensive for the US government, future deficit projections will go up because of higher rates on future debt issues. Lots of people in the US and all over the world will suffer, a few will believe that they are benefiting because even the extreme suffering of others doesn’t register in their awareness. Lots of people will change their minds in unpredictable ways.

            So I’ll have to side with those going long on whiskey.Report

  2. Avatar Steve Horwitz says:

    I think your doom and gloom is misplaced Jason. Not raising the debt ceiling is NOT “defaulting.” We have the funds to pay our interest and principal obligations on government debt, avoiding default. We’ve been down this path before and the economy did not collapse.

    It’s true that we might get a downgrade on pessimism about the possibility of eventually solving the problem, but I’m not at all convinced that will happen, nor that if it did, we’d hit the disaster scenario you’ve laid out.

    http://www.coordinationproblem.org/2011/07/maxing-out-the-credit-card-is-not-default.html From everything I’ve read, what I say in that post is correct.

    Don’t let the Scaremeister-in-Chief scare you.Report

    • Avatar Jason Kuznicki says:

      While it’s true that we would not default on August 2, this Reuters story suggests we’ll start to default by mid-August.Report

      • Avatar Rob says:

        When, in that other comment thread this morning, I said there are “various reasons” that people think intensifying the (deficit) contradictions is a good thing, this is the other major class of reason. Not “yes, there will be collapse, and that is a good thing” but “no, there is no impending problem”.

        Maybe the two sets of intensifiers could get together and hash it out (since they agree on what (not) to do, but have diametrically opposed reasons for (not) doing so), while the rest of us could live in a world where first we avoid imminent economic collapse, and then we deal with long-term problems.Report

      • Avatar Brandon Berg says:

        Unless I’m much mistaken, there’s some equivocation on the term “default” here.

        There’s “default” in the narrow sense, which is when the federal government is unable to honor bonds as they come due. Creditors care about this for obvious reasons. This seems implausible, given that interest on the debt is only about 10% of tax revenues.

        Then there’s “default” in the broad sense, which is when the federal government doesn’t have enough money to pay for everything in the budget. I don’t see why creditors would care about this. In fact, if the government were to prioritize redeeming bonds over other items in the budget, I would expect this to make creditors more confident in the federal government’s commitment to honor its debts.

        The beneficiaries of transfer payments would obviously care if they got smaller welfare checks, but what are they going to do? Take their business elsewhere?Report

    • Avatar Anderson says:

      “Scaremeister-in-chief”? That’s cute. I guess you can put Bill Gross, who runs the largest bond holding fund in the world (http://www.washingtonpost.com/opinions/warning-to-washington-dont-mess-with-the-debt-ceiling/2011/07/12/gIQA5Q4ADI_story.html), the folks at the Economist (http://www.economist.com/node/18866851), Repub Douglas Holtz-Eakin (http://www.theatlantic.com/business/archive/2011/07/douglas-holtz-eakin-explains-it-all-to-you/242345/) and myriad other economic minds into that camp of common sense too. Sure, we can afford to pay interest and principal to our bondholders past August 2nd, but what about all of the government’s other financial obligations (i.e. all of our discretionary, defense, and medicaid spending, assuming we still pay SS/medicare)? Not paying all those contractors, employees, businesses, etc sure sounds like a default on an obligation to me. Sure, the Armageddon folks probably exaggerate the immediate consequences, but you’re absolutely out of your mind if you think making the government pick and choose which checks to send and bills to pay is meaningless to the economy. Remember, any increase in interest rates that stems from lenders doubting our financial (and political) stability only ADDS to our deficit.Report

  3. Avatar wardsmith says:

    Debt to our government is like drinking to an alcoholic. Raising the debt ceiling is like raising the breathalyzer blood alcohol limit to “cure” drunk driving.

    Do our politicians want to have a serious discussion about the disease, or keep sweeping it under the carpet (kicking the can down the road)?Report

    • Avatar Rob says:

      “Raising the debt ceiling is like raising the breathalyzer blood alcohol limit to “cure” drunk driving.”

      This analogy would have a lot more weight if anyone anywhere were claiming that raising the debt ceiling would solve the deficit problem. (People are certainly claiming that *not raising* it will make the problem worse — because having to borrow at increased interest rates does tend to make deficit problems worse — but that’s another thing entirely.)Report

    • Avatar St.John McCloskey says:

      I disagree with your analogy. Debt is not always bad and it CAN be moderated. It needs to be monitored, but trying to minimize debt at all times is a bad thing. As we grow, we’ll need more cash flow. As we hit troubled times, we’ll need more cash flow. During good times we should cut spending. It doesn’t always happen like that, but it’s not exactly the same. Borrowing money is not bad, however not paying it back IS. We should borrow less than we do, but putting a hard deadline on it, in a hard economic time is not the answer.Report

      • Avatar wardsmith says:

        LOL, I disagree with your disagreements. I wasn’t saying “debt” /itself/ is bad, just debt to our /government/. Huge difference.

        Here is the problem: Our political system is based on promises from our politicians to us, the citizens. The more they can promise (and then deliver via money they print), the more they feel we “owe” them votes. For some demographics, they are in fact already “owned” by their politicians. Many politicians have become so inured to the process that the billions they are throwing around don’t seem like “real” money to them anymore. This is dangerous. The more everyone realizes it is NOT “real” money anymore the closer our financial system is to disaster.

        Obama is increasing the national debt at a 15.2% clip annualized. That means in less than 5 years he will double it. That should be scary to anyone who understands the difference between a currency that has “reality” and one that just has a bunch of zeros printed on it (think Zimbabwe). There are many economists who are certain that the actions of this government are purposely intended to inflate our way out of our obligations. Things get even more complex and dicey when you add in “quantitative easing”. The economic meltdown of 2008 happened because banks wouldn’t lend each other money anymore because they didn’t trust each others’ balance sheets. They were right not to trust those balance sheets. What happens when we substitute countries for banks in this equation?Report

        • Avatar Jesse Ewiak says:

          Conservatives tell me Zimbabwean hyperinflation is coming every time the government spends any money on anything. Boy crying wolf and all that.Report

        • Avatar Anderson says:

          Yep, straight out of the Ron Paul playbook that “we’re only years away from turning into a post WWI Germany of hyperinflationary default and societal breakdown.” Of course, he’s been saying this for years upon years and, still, here we are in 2011 with a (low) 3% yield on 10-yr treasury bonds, very muted inflation, and no wage-price death spiral remotely in sight. All of this while, gasp, the Fed has held down all-time low interest rates and pursued two rounds of bond-buying. If Austrian economics were true to form we’d find ourselves in quite the inflationary pickle right now. Maybe there’s some truth to excess capacity (http://www.investopedia.com/terms/e/excesscapacity.asp) and the output gap (http://www.investopedia.com/terms/o/outputgap.asp). Not saying our deficit is fine, it’s not. In the long run, it’s all about how we cut entitlement costs. But we’re nowhere near Zimbabwe; only a country coming out of the worst financial crisis since the GD.Report

        • Avatar St.John McCloskey says:

          As I said, I’d agree that deficit spending CAN get out of hand, I might even agree that it HAS! 😛
          It’s the idea that deficit spending IS bad for the government. It’s not! we need that flexibility, particularly during hard financial times like these. It’s ridiculous to think that the government shouldn’t borrow.

          Yes, this:

          Not saying our deficit is fine, it’s not. In the long run, it’s all about how we cut entitlement costs. But we’re nowhere near Zimbabwe; only a country coming out of the worst financial crisis since the GD.

          Report

    • Avatar trizzlor says:

      I’m confused, if drinking = debt, what is driving? Government spending, I guess(although wouldn’t that be digesting/vomiting)? And drunk driving is then … non-defense entitlement spending?

      How about: “Debt to our government is like drinking to an alcoholic. Not raising the debt ceiling is like sealing your mouth with super-glue to cure the addiction”. What do you think?Report

  4. Avatar Michael Drew says:

    I haven’t seen it generally agreed that high inflation will be the primary result of a default or downgrade. Inflation expectations are currently extremely low. My expectation would be that any effects of this debacle would have to be quite sustained to end up causing a surge in prices. And, if anything, rising prices would be good for our economy right now. Wouldn’t a rise in interest rates cause individuals and businesses to suddenly have even less access to cash, and hence depress demand even further, making deflation or noninflation the greater danger in the short term than inflation?

    I’m not too sure about any of this, however. Care to expand on your connective logic between default/downgrade and rising inflation as its main effect? I’d like to understand better if possible.Report

    • Avatar Jason Kuznicki says:

      I had understood that if there were a flight away from Treasury securities, this would mean a huge decrease in the demand for dollars. When demand goes down, the value of the dollar weakens, and when that happens, you get inflation.

      Again though I’m terrible at macro, so I could be completely wrong.Report