Posts Tagged Default
Sometimes we’re a bunch of idiots. As a nation I mean, not so much as individuals (though some would certainly qualify). I’ve seen people advocating for not raising the debt ceiling and I honestly understand the frustration that leads to that argument. Those who advocate this position are really just upset that the country is carrying a deficit and going deeper into debt every day. They are thinking that $14.3 Trillion is an unimaginable sum and scratching their heads as to why the ceiling would need to be raised even further. They figure that by not raising the ceiling, it will force the government to reign in spending and balance the budget. Unfortunately, this simply isn’t true.
No matter what the final budget that comes out of Washington this year looks like, nothing changes the fact that we’ve already budgeted for the current year, and unless it’s raised, we’re going to hit debt ceiling. In fact, we already have, but Treasury Secretary Geithner took action to “create additional headroom” so that the department could continue to fund obligations and effectively extending the deadline to August 2. These are “measures” such as raiding government retirement funds for their treasury bonds. This is not good.
President Obama knows this is playing with fire saying:
“The full faith and credit of the United States is the underpinning not only of our way of life, it’s also the underpinning of a global financial system. We could actually have a reprise of a financial crisis, if we play this too close to the line….”
Federal Reserve Chairman Ben Bernanke is also sounding the alarm, noting a failure to raise the ceiling could cause:
“severe disruptions in financial markets,”
Even former Fed Chair and fiscal conservative guru Alan Greenspan says in plain English that he’s “scared” and calls the games being played over the debt ceiling an:
“extraordinarily dangerous problem for this country.”
Okay, but why is this such dangerous stuff? Why doesn’t it make sense to enforce the ceiling and let the government slash everything they need to in order to regain fiscal sanity?
I don’t want to sound alarmist here, but this really is important. There are real consequences to not raising the debt ceiling that would impact everyone in this country, potentially setting us back to the the great depression. Our country is already in trouble with a sluggish economy and huge levels of unemployment (myself included). Failure to raise the debt ceiling would cause credit rating agencies such as Moody’s and Standard & Poor’s to downgrade United States’ debt, just as they did on Monday to Greece’s. They did this because they felt that:
a default on some debt appears “increasingly likely.”
There are several negative consequences for us if this happens in the US. One is that the cost of borrowing will increase so that those lending us money, such as Japan, China and the UK, will demand (and be able to get) a higher rate of return in exchange for taking on the now riskier debt. This is also true for individual bondholders, companies who invest in T-bills, etc. Some large bondholders may, if the situation gets dire enough (although I don’t think it will), unload some or all of their US debt, causing a spike in the interest rate.
Another consequence is that the US government itself, the largest holder of Treasury bonds, with about $8.5 Trillion invested in them, may start to dip into these bonds to pay debts. These bonds are currently being held in trust funds (see my last article which references how these differ from discretionary spending here) for things like Medicare, Medicaid and Social Security. Selling them would destabilize Social Security and wreak further havoc on an already underfunded Medicare/Medicaid system. It would also have the effect of flooding the bond market with securities that nobody would want to buy, further driving up the interest rate and thus the cost of debt.
A flood of Treasury securities on the market will spur the Federal Reserve to purchase bonds if they wish to keep the lending rate low, putting more money into the system and lowering the value of our currency. This would have a deleterious effect on our buying power as citizens and thus create a huge drag on the world economy. Nobody would want to hold US dollars because there would be increasing fear that a government default would erode the economy. This in turn causes a panic induced “sell” mindset among currency traders, pushing the value of the currency down.
If the Fed opts not to purchase the bonds, interest rates would skyrocket, causing a those who can even get a loan right now to defer. This would have the impact of further reducing economic expansion through business start ups or freezing demand based upon borrowing. Because of the above factors, the stock market would also likely plunge due to falling demand and skittish/risk averse investors not wanting to get soaked. Falling demand would in turn precipitate another round of layoffs because, contrary to conservative ideas, companies hire when there is more demand, not when taxes are cut.
If the debt ceiling is not raised, the government would either have to default or immediately fill an an estimated $125 Billion per month hole (most likely with cuts). This is equivalent to approximately 40% of government spending, a Tea Party wet dream. If this occurs, it will almost certainly effect all functions of the government causing mass layoffs which further damage the economy. Lower levels of employment also further reduce the tax base of the government and increase demand for government services such as Unemployment Insurance, food assistance, cash assistance, etc. It also has the effect of further reducing market demand since people without income will spend significantly less.
Unfortunately, this is exactly the approach the right wingers want to take. They are attempting to force us into a choice between austerity and default. Nobody really wants the latter because of the reasons outlined above, but to those who wish to “drown [government] in a bathtub“, the former is pure bliss. People like Grover Norquist would love to force this on us again and again in order to roll back the great society and new deal. They’re taking the nation hostage over it because it could, in “one fell swoop“, eliminate the programs that the right has been fighting for years. Programs such as Social Security, Medicare/Medicaid, Headstart, Pell Grants, etc. Programs that help the poor, elderly, weak and disabled. Programs that prevent many people from slipping out of the middle class.
These are the kinds of cuts that come as the strings attached to IMF bailouts. Why do you think they’re revolting in Greece?
Time and again, it has been shown that recessions are when government spending is most needed, and in fact increasing spending puts people back to work putting money into people’s pockets and increasing demand, thus healing the economy. When people have more money and have economic security, they will spend more, creating more demand and more demand means more jobs. This is Keynesian Economics, a well known and simple formula that was proven to work back in the 30’s and 40’s. This is a time when we need to increase government spending, not decrease it, even if it causes a larger deficit. This will help pull us out of this recession and bring us toward greater and broader prosperity, it worked during the Great Depression and there is no reason it wouldn’t work today. While our immediate deficit and the national debt are important long term concerns, we must take a more long term approach to them, incurring more debt now, but coming up with a solid plan to pay it off.
Those on the right want to convince us that that there are only two choices here, default or austerity, but this is a false choice. There is actually a third option, tax increases. If we are serious about paying off the debt, and I know I am, we must implement tax increases, such as the Schakowsky Plan, on those who make the most in our society. Those who make the most benefit the most from the infrastructure provided by our government, and should therefore pay more for the privilege of living under it. If the government wasn’t there with all the incumbent legal, military, police and judicial protection their money receives, these people would have their wealth stolen. In anarchy, the bandits wouldn’t head to the ghetto, so it’s only fair that those who are benefiting the most from the government pay more for it. It’s the only just way to eliminate our deficit and pay off our debt.
Cross Posted on Daily Kos
Alan Greenspan, Austerity, Barack Obama, Ben Bernanke, Bonds, Budget Deficit, Credit Rating, Debt Ceiling, Default, Deflating Conservative Ideas, economy, Greece, Grover Norquist, Headstart, Interest Rates, Jan Schakowsky, Keynesian Economics, Medicaid, Medicare, National Debt, Pell Grants, People's Budget, Social Security, Stocks, Tax Increases, Timothy Geithner