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The Debt Ceiling and the Remainder of the Fiscal Cliff

wile-e-coyote-moment

If I’m ever taken hostage and someone hires a hostage negotiator on my behalf, I hope it isn’t President Obama. Based on his history thus far, he’s been far too willing to make offers of spending cuts when Republicans demanded them and wouldn’t detail them out. How do you negotiate when they won’t provide specifics? At a minimum, if they want spending cuts and you’re inclined to go along, they should be made to own them. The other thing that stands out with Obama as a negotiator is he’s willing to disarm himself; e.g., he has already ruled out using the 14th amendment route to get around the debt ceiling altogether. Even if you think it’s the wrong thing to do legally, don’t tell your opponents that!

Also, people seem to have forgotten about the sequester. We did settle the matter of how to deal with the Bush tax cuts, but the sequester is still out there and has always been a part of the fiscal cliff (plus I wanted to use a picture of Wile E. Coyote). The media seems to have abandoned that narrative in favor of the debt ceiling. One thing that baffled me going into the resolution of the Bush tax cuts last week is that the Republicans were asking for spending cuts up to the end, when the sequester will provide them with very large spending cuts without doing anything. They apparently don’t like this option, and should Obama fold and enter negotiations, he should use the sequester as a bargaining chip over the debt ceiling.

At any rate, the Democrats seem to be standing behind the president on the “no negotiation” position and in a few weeks we will find out if it’s just bluster or not:

Echoing President Obama’s refusal to negotiate on the debt limit, Sen. Chuck Schumer (D-NY) warned Republicans on Friday that Democrats have no intention of giving in to any of their demands in exchange for lifting the nation’s borrowing limit to pay its bills.

“I think that risking government shutdown, risking not raising the debt ceiling, is playing with fire,” Schumer told reporters in the Capitol, in response to a question from TPM. “Anyone who wants to come and negotiate, and say ‘we will raise the debt ceiling only if you do A, B, C’ will not have a negotiating partner. And if then they don’t want to raise the debt ceiling, it’ll be on their shoulders. I would bet that they would not go forward with that.”

The No. 3 Democrat declared that Obama and congressional Democrats have learned their lesson from the 2011 fiasco that nearly led to a default. He predicted that Republicans will give in and cleanly raise the country’s borrowing authority — which expires around March — if Democrats stonewall and give them no other option.

“If they realize for sure that they’re not going to have a negotiating partner, they’ll have to find another route to bring the change that they want and they won’t risk the full faith and credit of the United States. The only way they get leverage is when they think we might negotiate on those issues.” he said. “There was a very sad moment in 2011 when that happened. And I think there’s a strong consensus at both ends of Pennsylvania Avenue among Democrats not to repeat what I would call — I think what most of us would regard — as a mistake.”

Republicans feel burned after swallowing a deal that permits some $620 billion in tax hikes from current levels without any spending cuts. And they’re raising the stakes for the debt limit fight, promising that they’ll withhold their votes for lifting the ceiling unless Democrats agree to meaningful spending cuts, particularly on entitlement programs.

House Speaker John Boehner (R-OH) is preparing his members for the battle, telling them he’ll insist on at least one dollar in spending cuts for each dollar of increase in the debt limit. Boehner’s spokesman Michael Steel said of Obama’s refusal to negotiate: “Wishful thinking is not a solution.”

This isn’t just about a potential government shutdown, though that is one option if Obama has to start prioritizing payments. It’s also about the potential for default.

If we should default, here are a couple of the things I think can happen; if I’m wrong, please correct me in the comments.

  • Interest rates on treasuries will go up (duh!). Now, under normal circumstances, interest rates going up might be a sign of economic growth, given our currently weakened economy; it would be desirable if it were due to economic growth. If we default, though, the increase in interest rates will be due to risk, and that’s definitely no good.
  • Currently, the dollar is the world’s reserve currency and it seems to me a default (or a lesser problem that priced more risk into treasuries) would jeopardize this. As I understand it, central banks around the world hold a lot of treasuries as reserves because they are largely risk free and just as good as dollars. If they become risky, this will no longer be true. Now, there isn’t a single currency right now that would be suitable to replace the dollar (Japan has spent a lot of time fighting off deflation and the Eurozone is a mess) but the IMF’s Special Drawing Rights might be a suitable replacement if enough countries went along.

I don’t want any of this to happen, but I doubt the Tea Party folks either care, or even understand what might happen if we default. The other day I saw a tweet or a site comment that referred to the Tea Partiers as “pathological narcissists and highly functioning psychopaths.” If they keep this up, the description will be apt.

One last thing that gets me about this. There is an assumption that, if the debt ceiling / borrowing authority expires, the president will have the power to cut spending on his own. I wonder about this. Both, the SCOTUS case “Train v. City of New York” and the “Congressional Budget and Impoundment Control Act of 1974″ would seem to prohibit this. Wouldn’t the president’s refusing to fund projects that Congress has appropriated money for amount to impoundment? If so, how can he unilaterally cut spending that Congress has appropriated? He can’t raise taxes on his own and if he can’t cut spending on his own, then borrowing is the only option left to him. As President Clinton might say, it’s arithmetic.

One final note: if he does end up prioritizing payments, he should obviously pay the bondholders first, ahead of defense, Social Security and Medicare. If I were him, I would put paying bills in the Tea Party districts at the bottom of the list. Their constituents should feel the most pain from this.

If you want to see a rather angry post of mine from the previous debt ceiling debacle, go here.

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About Robert Prather
Robert Prather formerly blogged at the now defunct Insults Unpunished and, unlike his co-blogger Dodd, can not kill a mime using only his thumb. Follow him on Twitter.

Comments

  1. Ron Beasley says:

    The only way this gets resolved is for Boehner to come up with a bill that the Democrats and enough sane Republicans will sign off on. The Speaker has to know that. Most of the Republican House members are not lawmakers but terrorists and suicide bombers.

    Like or Dislike: Thumb up 7 Thumb down 1

  2. The odds of actually defaulting on bond payments seems to be rather low as the revenue coming into the Federal Government on a regular basis would seem, at the very least, to be sufficient to cover this along with other necessary expenses. The problem comes when you get beyond that. According to most calculations, the Federal Government would end up at least $44 billion short every month without the authority to issue new debt. This means countless vendors, contractors, and, potentially, employees, going without payment. Perhaps for an extended period. As I noted the last time that this came up, the shock that this would have to the economy should not be understated.

    Like or Dislike: Thumb up 6 Thumb down 0

  3. @Doug Mataconis: Absolutely agreed. Did you see my attempt at legal reasoning above, regarding the SCOTUS case and the impoundment law? Am I close to correct?

    Like or Dislike: Thumb up 1 Thumb down 0

  4. Coop says:

    Politically, the Democrats are right to call the Republicans bluff. That’s all it is. A bluff. Republicans want to raise the debt ceiling. They want to spend (defense, social security, medicare, you name it). They understand the economic damage that would result from failing to raise the ceiling. Don’t give ‘em an inch. Democrats have the perfect opportunity to expose the disconnect between Republican rhetoric and policy.

    Like or Dislike: Thumb up 3 Thumb down 0

  5. cd6 says:

    I look forward to the fiscally responsible GOP finally shutting down Obama’s TAX AND SPEND administration by holding the line on the debt ceiling. The GOP are the true adults in the room. Nobody in the GOP would evervote for and support the kind of reckless spending LEFTISTS crave so much.

    Back in the nineties when the GOP controlled the house, what did we have? Balanced budgets. Fast forward through a decade where nothing significant happened (EXCEPT THE WAR ON TERROR, A JUST AND NECESSARY COST) and suddenly its Obama bailouts and kickbacks to the wind industry. And spending is through the roof.

    Party’s over moonbats. Obama’s spending stops now.

    And last but not least: we aren’t afraid of you chicken littles in the MSM and your “waa waa we’re gonna default.” This is the same alarmism that you clowns tried to gin up with so called global warming and delicious trans-fat. The AMERICAN PEOPLE are tired on your fearmongering. They won’t be able to cut the White House lawn, but the economy will survive. Quit your bellyachin.

    Sarah/Rubio ’16

    Hot debate. What do you think? Thumb up 11 Thumb down 10

  6. Tony W says:

    Damn you cd6 – are you Jonathan Swift reincarnated?

    Like or Dislike: Thumb up 4 Thumb down 0

  7. Ben Wolf says:

    Interest rates on treasuries will go up (duh!).

    This is a logical assumption, but I don’t think it will be the biggest concern. The debt ceiling is functionally an authorization to service obligations already made by Congress, including yield payouts on our debt. The yields on outstanding Treasurys are fixed, they cannot be changed after being sold on the primary market. Yields on new Treasurys would potentially rise if we chose to voluntarily default, but a failure to authorize an increase in the debt limit means no new Treasurys anyway. The most serious potential outcome, I think, is mass bank-runs as savers try to get their money out before it’s too late, but as no one will willingly buy the Treasury you’re trying to offload, you ain’t getting your money.

    Ultimately the non-government sector will lose interest income as the Treasury ceases to pay out yields, which will compound the impact of an immediate 40% cut in government-sector spending. So the resulting depression will be that much worse. Not extending the debt limit is a deliberate decision to become Greece.

    Currently, the dollar is the world’s reserve currency and it seems to me a default (or a lesser problem that priced more risk into treasuries) would jeopardize this. As I understand it, central banks around the world hold a lot of treasuries as reserves because they are largely risk free and just as good as dollars. If they become risky, this will no longer be true. Now, there isn’t a single currency right now that would be suitable to replace the dollar

    I’ve been giving this a lot of thought and broadly agree. The problem for the U.S. and the rest of the planet is the balance of trade. China, for example, wants to save in dollars, otherwise they wouldn’t run a surplus against us. As there is no (and I do mean no) desirable alternative currency issued by a country able to run massive current account deficits, I think the rest of the world will be thrown into chaos as they desperately scramble for more dollars, which will very quickly become scarce. They will also see their trade balances against the U.S. rapidly deteriorate as we stop buying their products because we’re too busy putting ourselves through another Great Depression. No dollars to acquire will force foreign currencies like the Yuan and Yen to appreciate as well.

    Like or Dislike: Thumb up 3 Thumb down 0

  8. Gustopher says:

    The Republican Party’s position seems to be that of threatening to dine-and-dash.

    Congress has dictated where money will be spent via the various appropriations bills, but when the time comes to actually pull out either a wad of cash (increase revenues) or the credit card (increase debt limit), they think they can just walk away.

    Like or Dislike: Thumb up 5 Thumb down 0

  9. al-Ameda says:

    @cd6:

    I look forward to the fiscally responsible GOP finally shutting down Obama’s TAX AND SPEND administration by holding the line on the debt ceiling.

    So you approve of the House Republican tactic of forcing a downgrading of American Debt, thereby negatively affecting the investment holdings of millions of Americans? No wonder this country is on the crazy train.

    Like or Dislike: Thumb up 2 Thumb down 0

  10. @cd6: You are beyond satire. You’re like a parody of a parody.

    Like or Dislike: Thumb up 8 Thumb down 0

  11. anjin-san says:

    they think they can just walk away.

    We had a name for people like that when I was coming up. Deadbeats.

    Like or Dislike: Thumb up 4 Thumb down 0

  12. Scot says:

    I don’t get it. Nobody thinks we need to cut spending?

    Like or Dislike: Thumb up 0 Thumb down 1

  13. @Scot: it’s not that simple; timing matters. We are still emerging from a financial crisis and cuts to spending would be contractionary and, if not done right, it would put us back in a recession.

    Also, Obama signed a bill in the Fall of 2011 that cut non-defense discretionary spending by $1.5 trillion over ten years, and we still have to hear Republicans whine about $650 billion of tax increases on the rich over ten years. Everything is out of balance.

    Like or Dislike: Thumb up 4 Thumb down 0

  14. Ben Wolf says:

    @Scot: The deficit has already fallen by nearly $500 billion without austerity. Without cuts. So why make them now?

    Like or Dislike: Thumb up 2 Thumb down 0

  15. Scot says:

    @Robert Prather: I”ll buy that there are tiiming issues but we need to plan ahead. What is the plan to get thing back in balance?

    @Ben Wolf: According to Robert we did make cuts. Maybe they are woking. I saw a post earlier discussing the aging population. I don’t think we can afford to standby and hope for the best.

    As far as the Dems and the Repubs go, they both seem to be playing games while their respective supporters line up and fight each other. What a racket!

    Like or Dislike: Thumb up 0 Thumb down 0

  16. Ben Wolf says:

    @Scot: The deficit reduction we’ve experienced is a result of the cyclical budget component adjusting to increasing employment and revenues. Deficit reduction is automated if we just leave it alone.

    Like or Dislike: Thumb up 1 Thumb down 0

  17. bill says:

    and better yet, it gives us a topic to trash each other over back and forth for a few weeks, even though we know what’s going to happen at the 11th hour again. they do too, it’s a ruse to detract from the reality of dealing with our economic blight and necessary shrinking of the federal gov’t.

    Like or Dislike: Thumb up 0 Thumb down 1

  18. Ben Wolf says:

    @bill: You can shrink the government so long as you shrink the economy with it.

    Like or Dislike: Thumb up 0 Thumb down 0

  19. bill says:

    @Ben Wolf: maybe it’s time to get our economy off of life support and see if it’s really alive? the fed gov’t is too big, states need to pick up the slack- that’ll separate the successful states from those who just vote for more help via pork and such.

    Like or Dislike: Thumb up 0 Thumb down 0

  20. Ben Wolf says:

    @bill: You can shrink the deficit in absolute dollar terms, but the only way to do that is to shrink the economy. Are you willing to do that?

    Like or Dislike: Thumb up 0 Thumb down 0