debt ceiling

Go Ahead, Celebrate — You're Celebrating Failure

Not you at Voices on the Square. You know who.

Well it seems this continuing debacle every 3 months has ceased, for now. However, I really can't get over this pathetic celebration over the really low bar involved with regard to avoiding what I call a political default on the public debt. This is the same embarrassing type of celebration that ensued in 2011. We need to get real. Despite the government being opened up again, there's nothing to celebrate. We've already lost. After all, the debt ceiling was a precious gift Obama bestowed onto John Boehner in the 2010 tax deal as he put his full faith in Speaker John Boehner hands, as he took the full faith and credit of the United States hostage.

Of course, it was a deal struck between both of them to put who they called the "extremists" of both their parties in check, for a grand bargain like in 1983 when Tip O'Neil and Ronald Reagan cut social security. President Obama and Speaker Boehner weren't fooling everyone, though. Just those involved in their hyper deluded, hyper partisan, claptrap. To some of us, this was entirely predictable and preventable. Now people are suffering because some people, blinded by their hyper-loyal partisan illusions, couldn't or didn't want to see what was there. Maybe their lack of sight reveals they don't really care? It doesn't matter though. This will continue to be what we go through when some of this crap continues again in 4 months in February, regardless.

This austerity government will reopen at sequester levels of funding; a sequester I predicted would be born out by the stupid Super Committee from the super austerity Budget Control Act of 2011, which I saw was inevitable since the 2010 tax deal led to the first, now ongoing, debt ceiling debacle; a miniature crisis to crisis government with no plans to invest in its citizens' future. Anything else is possible though, from government shutdowns over the false prospect of defunding Obamacare, to any austerian Senator or Congressman using the threat of default for whatever demands they want.

We, the so called professional left as the White House derisively called us, warned about this. Anyone who denied this can either apologize now or forever restrain from speaking about matters regarding politics, civics, political deals, and the debt ceiling. We told all of you back in 2011 around this same time when that debacle was coming to its end — until this one and the next one 4 months down the line — that this was no victory.

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Economic Populist: Premium Bonds Would Disarm Default Threat

Just as the GOP Shutdown was getting underway, 2 October, Matt Levine at Bloomberg was calling on the administration to Mint the Premium Bonds!.

The creepy trick that has swept the nation* is the platinum coin option, in which Treasury mints a $1 trillion platinum coin, deposits it at the Fed, and suddenly has an extra $1 trillion of money to spend without incurring any debt (and, thus, without breaching the debt ceiling). This is a good trick as tricks go, and it's been extensively advocated by Josh Barro, Paul Krugman, Matt Yglesias, Joe Weisenthal, basically every economics blogger really. I am unaware of any good arguments that the platinum coin wouldn't work, but it does have the problem that it is really really really really obviously a trick. I mean, it's a trillion dollar coin, come on. So it's sort of sub-optimal symbolically, and would make people really mad. It's a crisis-enhancer, although with the benefit of avoiding immediate default.

So there is an alternative that Matt Levine is putting forth:

Instead of just rolling those Treasuries -- paying them off at 100 cents on the dollar by issuing new Treasuries at 100 cents on the dollar -- it should pay them off at 100 cents on the dollar by issuing new Treasuries at 275 cents on the dollar and using the extra money to pay its bills. The 10-year yield today is around 2.6 percent, so you could sell a 10-year with a 23 percent coupon for 275 cents on the dollar.**** The 30-year is about 3.9 percent, so a 14 percent coupon should get you there. Etc. Math here.

Now, given my previous writing on Fixed Interest Payment Consol Bonds ... would this work too?

Yes, in a functional sense, of course it would. Its a similar, though not identical, answer, but it goes through the same loophole. Premium bonds are, by law, counted on their face value. So any bond with a face value substantially below its issue price that is used to roll over maturing long term bonds would "roll back" the debt ceiling count.

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President Obama Gave Speaker Boehner the Debt Ceiling to Play With in 2010

Disclaimer: This forum rules like the moderators and contributors.

And here we are again! It started in 2010. The Bush tax cuts were about to expire. There was leverage to negotiate a debt ceiling raise or to just let them expire. How do I know there was leverage? I know Republicans like tax cuts for the rich, and there was a deal for the purpose of extending them with Republican votes. It passed with those Republican votes, which led to this whole thing because there was no debt ceiling raise included.

Maybe others are unaware of this? I don't know. It doesn't matter though; the uninformed shouldn't dictate fantasy as reality in a reality based community. This is the actual reality and why we are worried about a global financial calamity with regard to a possible political default on the public debt, which is a choice and otherwise impossible for a sovereign currency issuer.

Obama on the Debt Limit — December 2010

Q Mr. President, thank you. How do these negotiations affect negotiations or talks with Republicans about raising the debt limit? Because it would seem that they have a significant amount of leverage over the White House now, going in. Was there ever any attempt by the White House to include raising the debt limit as a part of this package?
 

THE PRESIDENT: When you say it would seem they’ll have a significant amount of leverage over the White House, what do you mean?
 

Q Just in the sense that they’ll say essentially we’re not going to raise the — we’re not going to agree to it unless the White House is able to or willing to agree to significant spending cuts across the board that probably go deeper and further than what you’re willing to do. I mean, what leverage would you have –
 

THE PRESIDENT: Look, here’s my expectation — and I’ll take John Boehner at his word — that nobody, Democrat or Republican, is willing to see the full faith and credit of the United States government collapse, that that would not be a good thing to happen. And so I think that there will be significant discussions about the debt limit vote. That’s something that nobody ever likes to vote on. But once John Boehner is sworn in as Speaker, then he’s going to have responsibilities to govern. You can’t just stand on the sidelines and be a bomb thrower.

You know, we on the left knew what this would lead to. You don't trust John Boehner with the full faith in credit of the United States unless one is completely clueless or an economic nihilist. The resulting signs we are starting to see of a financial panic in response to the prospects of a default on top of the ongoing depression, the jobs crisis, the continuing climate and ecological crisis all converging into one huge Epochal crisis, point to a special kind of disdain for the public that all our elected leaders have for us. I mean, we have enough problems without adding to them through a self induced global financial then economic crisis caused by the President's pursuit of a deficit terrorist grand bargain whether through incompetence or outright corruption.

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Economic Populist: Will the White House Accept A Government Default, When It Doesn't Have To?

Over at Wonkblog Ezra Klein, one of MSNBC;s favorites neoliberals, writes:

The problem with President Obama’s shutdown strategy
...
 
The political theory here is clear: Obama is trying to marshal public opinion against the GOP. If enough Republicans are getting angry calls from their constituents and seeing polls that look disastrous for their party, they'll find a way to back down.

 
But it can backfire badly. Every second Obama stood at that podium made it a bit harder for the Republican Party to retreat. The more he repeats that this is their shutdown and they need to end it, the more their party suffers if they can't find a way to prove the president wrong. Obama's efforts to move public opinion toward him also moves Republican opinion against him.
...

 
... the White House is still pursuing a strategy that makes it harder for Boehner and the Republicans to back down. Their gamble is that the power of public opinion will overwhelm the power of presidential polarization. And if the Republican Party loses totally -- loses in a way where they can't tell themselves it was a win -- that'll be the end of these tactics.

The problem with this kind of brinksmanship tactics is that they may lead to an economic collapse ~ and given Europe's ongoing problems with the scourge of harsh austerity policies in the context of a monetary system built broken, that might be a worldwide economic collapse.

Now, the threat of the economic collapse does not come from the Government Shutdown, it comes from the risk of default on the government debt, due to the US Treasury running out of juggling options before it needs to sell a new issue of Treasury bonds to avoid a default on payment of government obligations.

And the puzzling point is that the Administration insists that the risk of default is real, even though the Administration itself can take the threat of default off the table.

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Economic Populist: How Fixed Interest Payment Consol Bonds Avoid A Default

I have talked about the broader economic/historic and political/ethical dimensions of Consol Bonds, but this diary is simply about how a certain type of Consol Bonds can be used to avoid default.

What do I mean by "Fixed Interest Payment" Consol Bonds? I mean a bond without a maturity date, that specifies the dollar amount to be paid as interest twice a year. These would be sold on the open market, just as we sell ordinary 10yr bonds. Since the dollar value of the interest payment is specified, and there is no maturity date, no Face Value is required, and so no Face Value is specified.

Consol Bonds are actually a quite old-fashioned type of bond, widely covered in elementary financial mathematics because of their simplicity.

The point of a Consol Bond was that there is no maturity date. Instead, the government just pays the interest, and if they want to retire the debt, they buy the Consol Bond back from the open market. "Consol" stands for "Consolidated", since they were originally used by the British, starting in Colonial Days before the French and Indian war to "consolidate" a number of different bonds with different maturity dates.

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Galbraith: Government Doesn't Have to Borrow to Spend

James K. Galbraith in Government Doesn’t Have to Borrow to Spend quite clearly and without economic jargon explains why the debt ceiling debate is puppet theater:

The debt ceiling was enacted in 1917 for one purpose: to fool the rubes back home. Just as Congress started running up debts to pay for the war, they voted in the ceiling to pretend otherwise. And that is why whenever reached, it must be raised.

...

In the modern world, when the Treasury writes you a check, your bank credits your account. That's how money creation works. The Treasury then issues bonds to absorb that money. Banks like this because bonds pay more interest than reserves. But there is nothing economically necessary about the bonds. This is obvious since the Federal Reserve buys back many of them, leaving the public with the cash it would have had in the first place.

...

Under present law, Jack Lew could even pay off public debt held by the Federal Reserve by issuing a high-value, legal-tender coin – so long as the coin happened to be platinum. A coin is not debt, so that simple exchange would retire the Fed's debt holdings and lower the total public debt below any given ceiling.

James Galbraith admits that this is a gimmick ... but then, so is the debt ceiling, so it would be one gimmick fixing the fact that one faction of one political party is holding the faith and credit of the US government hostage over what was originally and has always been since a gimmick.

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Economic Populist: Consol Bonds are the Debt Ceiling Walk Off Home Run

The Debt Ceiling debate is Yet Another GOP Abuse of the System, but the entire debate runs under the pretense that the Treasury cannot sell new bonds if the Debt Ceiling is not raised.

Look at the history of the debt ceiling, and its easy to see where people get that idea. Way back when, the Treasury went to Congress for each and every new bond issue. Then in 1917, with war breaking out in Europe, Congress reformed the system to give the Treasury more freedom of action, establishing an overall ceiling within which it could issue bonds. It was like moving from a series of individually negotiated loans with a bank to obtaining an approved credit line with the bank.

From 1917 to 2010, the increase of the debt ceiling when required was a routine transaction. But after the radical reactionary wing of the Republican party ran under the successful "Tea Party" branding, a number of radical reactionary GOP Congressmen balked at this routine transaction, and took the full faith and credit of the US Government hostage. This resulted in the "sequester" debacle, in which spending cuts that were deliberately designed to punish the American people in case Congress could not agree on the insane policy of cutting spending in the middle of what is now a five year old Depression. Congress could not agree, and so the brain-dead punitive spending cuts were put in place instead.

After that experience, turning out as badly as progressive populist critics at the time said it would, now there are bold words from the White House demanding a clean debt ceiling vote, without any hostage taking.

The good news is that if the Treasury turns to Consol Bonds, they can win this fight no matter what the radical reactionary wing of the House Republicans decide to do.

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Calling the Debt Ceiling Bluff: Taking It To The Owners

Joe Firestone has written an excellent piece at New Economic Perspectives on the phony fear mongering about the risk that the Republicans might not vote to raise the debt ceiling. He uses as his point of departure exquisitely fraudulent framing that Ezra Klein adopted for the proposal to trade a budget continuing resolution without defunding Obamacare, for taking the fight to the debt ceiling.

The reason the Republican leadership is making the case for that trade is that a continuing resolution has to pass both Chambers, and the version that defunds Obamacare is Dead On Arrival in the Senate, which will amend the bill to restore Obamacare funding and refuse to budge in reconciliation. So sooner or later, the House will have to pass a continuing resolution that includes funding for Obamacare, or else shoulder the political blame for shutting down government.

But what Joe focuses on is the framing of trading off a budget fight for a debt ceiling fight, in which Ezra says:

his is terrifying that this is the argument. And the analogy I would use is this is like trading a bad flu for septic shock. it is the worst trade in the history of all trades you could imagine . . .

Trading a bad flu for septic shock might be the worst trade in the history of all trades, but the only thing that makes the debt ceiling dangerous is the administration's refusal to call the bluff. As Joe lays out, there are not one, not two, not three, not four, but five options, and three of them would succeed in eliminating the threat that the debt ceiling vote can every again be used for political blackmail.

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Yes, the Sequester is President Obama's Fault. These are facts.

This won't be FP material everywhere, but it's the truth. That is, unless one just hasn't paid attention to the events and Congressional deals facilitated by this administration in response to said events that led up to the sequester. If one did pay attention, this conclusion is undeniable. The sequester was basically an invention of Gene Sperling and Jack Lew.

In case we all need a refresher, Gene Sperling was and still is the Director of the National Economic Council under President Barack Obama. In case the denial is too thick with regard to Jack Lew, Jack Lew was head of Obama's Office of Management and Budget when the first grand betrayal was written only to be fall apart by John Boehner's doing in 2011. For that, and his time on Wall St helping Citigroup as OCC crash our economy while denying that deregulation was a problem, he is insultingly being rewarded with a post as our next Treasury Secretary.

These are the people that were hired by and work in the Obama administration that wrote the damn Sequester! It's pretty hard to deny, but some will try.

This was during the debt ceiling debacle many of us warned about but were ignored in favor of 11th dimensional chess. In reality, this is a vile violent rigged chess game that makes seniors starve to death through lack of meals on wheels. This form of deficit terrorism also threatens many of my friends and their relatives through layoffs and furloughs while slowing all essential government operations down.

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The Sequester: Bipartisan Craponomics at Its Worst

Yes, because no one listened to those that warned(including myself) this would happen in 2010 with the Bush tax cut sellout leading to the debt ceiling debacle in 2011 to now, it looks like the sequester created by this White House and Congress is going to happen. Back then, there was leverage with the Bush tax cuts expiring for using the High Value Platinum Coin, invoking the 14th amendment, or legislating the debt ceiling away entirely. None of this was considered even as a temporary measure to avoid this epic failure fixing to hit our shores.

It's insulting to the public that none of this was even tried, because this sequester will be painful and more painful in the future. The political damage as we create more miniature crisis will be even costlier than what is projected as more bills have to be passed every few months which always get worse the more they are revisited, all needlessly created all in the name what I call deficit terrorism. Through each bipartisan crisis more austerity is brought out in these miniature Shock Doctrine scenarios especially on the debt ceiling. This austerity will eventually terrorize the public because a failure to govern or understand our economy.

Sure, it will take awhile to be phased in and each federal agency will implement its cuts differently, on its own timeline, but by April 4th, 2013 some real pain is likely to be felt by the public.

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