Return Of The Debt Kamikazes
They're back.......
Back during the last time we went through a manufactured crisis over raising the debt ceiling, there was a sizable portion of the then-Freshman House GOP Caucus that questioned the very idea of whether or not we needed to raise the debt ceiling at all. Not surprisingly, most of the people taking this position publicly were either closely identified with the Tea Party or owed their elections in 2010 to support from the Tea Party movement. At some point during the controversy, someone gave these people the label “debt kamikaze” given the fact that they appeared to be entirely willing to let the Federal Government, and potentially the U.S. economy and world financial system, crash and burn to prove some kind of political point. At the time, I thought the label was quite appropriate and began using it on a regular basis. Based on this report from National Journal, it appears that it’s time to dust it off and put it to good use again:
The White House is sounding alarms about the fast-approaching Oct. 17 deadline for raising the nation’s borrowing limit. Failure to do so, President Obama and Treasury Secretary Jacob Lew have warned, could result in a first-ever default on America’s debt and trigger global economic calamity.
But some Republicans in Congress aren’t buying it.
Not only do some conservatives say Oct. 17 is an artificial deadline—“Nobody thinks we’re going to default on Oct. 17th,” said Rep. Tim Huelskamp, R-Kan.—but they also are attempting to narrowly define what would constitute default.
In interviews with more than a dozen GOP lawmakers, the Republicans rejected the notion that Washington could default on its debt unless a borrowing increase is approved before Oct. 17. For the United States to actually default, these Republicans argue, the Treasury Department would have to stop paying interest on its debts—something GOP lawmakers claim is inconceivable.
There’s always revenue coming into the Treasury, certainly enough revenue to pay interest,” said Rep. Justin Amash, R-Mich. “Democrats have a different definition of ‘default’ than what we understand it to be. What I hear from them is, ‘If you’re not paying everything on time that’s a default.’ And that’s not the traditionally understood definition.”
If this sounds familiar, it’s because it has been Republicans’ line of attack since their debt-ceiling battle with Obama in the summer of 2011.
These legislators aren’t alone. Last week, Senator Rand Paul said that there was no need to raise the debt ceiling to prevent a default and Florida Congressman Ted Yoho said essentially the same thing. Perhaps the most surprising statement came today when Senator Tom Coburn, who has ordinarily been quite rational during the course of this years twin fiscal crises, joined the camp of those that dismissed the idea that default was a risk if the debt ceiling wasn’t raised. Undoubtedly, there are plenty of other Republicans on Capitol Hill who feel the same way, and while some of them may just be saying this for public consumption (Coburn, for example, is someone I expect would vote for a “clean” debt ceiling hike if that became the only option), the fact remains that they are presenting the image of a party that seems largely unconcerned with an event that, by all accounts, could have serious implications for the economy going forward.
Part of what’s going on here, of course, involves ignoring the fact that there are two different types of default that could happen if we breach the debt ceiling without raising it by October 17th.
The type of default that the media talks about the most, and indeed the most serious form, would be if the United States failed to make the payments on the interest due on its bond obligations or failed to have sufficient funds to pay off bondholders who wished to redeem their bonds when they reached maturity. According to reports, there will be at least two bond redemption/interest payment dates in October after October 17th. If the Treasury was unable to meet the obligations that the bonds set forth on either of those occasions then it would have serious and immediate consequences for world financial markets. Investors would likely start pulling assets out of riskier investments over concern on the implications that such a default would have, and interest rates on U.S. obligations, currently at or nearly a real rate of zero once inflation is taken into account, would likely skyrocket. Unless the situation were resolved immediately, it would, at least according to most major analysts, pose a serious risk of throwing the world economy into a crisis on a par with the 2008 financial crisis. (For a possible breakdown of how such a crisis could unfold, this detailed timeline by Reuters is an excellent guide.) One financial analyst has projected that a default could cause U.S. stock markets to lose between 20 to 30% of their value in a relatively short period of time.
While this is a nightmare scenario in many ways, it’s one that most financial analysts don’t seem to be all that concerned about right now, at least now publicly. Raymond McDaniel, the CEO of rating agency Moody’s explains why:
The CEO of credit rating agency Moody’s ruled out the chance of a U.S. government default, even if an agreement over raising the debt ceiling is not achieved by mid-October.
As the U.S. government shutdown looked set to continue for a sixth day on Monday, concerns that the ongoing political stalemate will cause the Treasury to miss its October 17 deadline for raising the $16.7 trillion borrowing limit, remained at fever pitch.
If the U.S. government defaults on its debt, it could have negative consequences for financial markets worldwide.
“It is extremely unlikely that the Treasury is not going to continue to pay on those securities,” Moody’s CEO Raymond McDaniel said in an interview with CNBC.
“Hopefully it is unlikely that we go past October 17 and fail to raise the debt ceiling, but even if that does happen, then we think that the U.S. Treasury is still going to pay on those Treasury securities,” he added.
(…)
McDaniel attributed the markets’ seemingly complacent reaction to the relatively fresh memory of the 2011 political stalemate over the debt ceiling issue, which was ultimately resolved.
“[It] feels a lot like we’ve seen this movie before,” said McDaniel. “Ironically because we have had this experience in the recent past [it] gives people more of a sense of calm than perhaps they should have.”
“The fact that the market is reacting more calmly is good, but to the extent that policy makers are going to act when stress or distress reaches a certain level, the market can play a role in indicating that,” he added.
Of course, stock and bond market investors have lost billions of dollars over the years making assumptions that turned out to be untrue and, if it turns out to be untrue that the Republicans and Democrats will come up with some kind of last minute solution to this latest crisis, then you can expect to see markets start to react accordingly. This would seem to be especially probably as we get closer to the Treasury Departments “drop dead” date of October 17th. Indeed, there seem to be some political analysts who are almost hoping that the markets do start reacting negatively in the coming days in the hope that it will force some kind of action out of a Congress that seems exceedingly unwilling to act promptly.
Let’s assume, though, that it’s true that the U.S. Government will be able to avoid defaulting on our sovereign debt obligations after October 17th. Technically, as the Reuters analysis linked above notes, it would be possible given the fact that there would seem to be enough revenue coming into the government in October and November to allow those obligations, along with others, to be paid at least on a near-term basis. While it leaves open the probability that even mere uncertainty over whether or not a U.S. sovereign debt default might occur would wreck havoc with financial markets, it does take the worst case scenario somewhat off the table. That only solves half the problem, though, and it by no means removes the probability that failure to raise the debt ceiling could have a serious impact on the economy.
Interest obligations on the national debt and paying off redeemed bonds is only one of the many payments that the Treasury Department is required to make on a regular basis. In addition to those payments, there’s everything from salaries for Federal Employees, Social Security payments to beneficiaries, Medicare payments to providers, obligations owed to contractors who have provided services and supplies to the Federal Government, and any number of other obligations that the Federal Government owes that come up on a regular basis. As a simple matter of mathematics, it is quite often the case that the money that the Federal Government owes under all of these obligations is more than the amount of revenue (from tax payments and other sources) that comes into Federal coffers. Under ordinary procedures this isn’t a problem because the Treasury Department regularly floats new bonds to cover ongoing obligations.
If the debt ceiling is not raised, the Treasury Department’s authority to issue new debt to cover these already-incurred obligations would would be in serious legal doubt to say the least. Some have argued that the provision of the 14th Amendment which states that the public debt of the United States “shall not be questioned,” authorizes the President to order Treasury to issue new debt. However, as I noted in two posts that examined the issue (see here and here), that issue is by no means settled and it would appear that the most this provision would authorize Treasury to do is to issue sufficient new debt to ensure that it can meet its obligations to pay existing debt, not that it could issue new debt to cover obligations that don’t fall under the category of “public debt.” Furthermore, even if that interpretation of the law is correct, it would still have the potential to create vast legal uncertainty about the validity of any debt obligations issued after the debt ceiling is breached. For financial markets, uncertainty like that would be nearly as bad as an actual default.
So, that leaves us with the probability that tens of thousands of Federal obligations that don’t fall under the “sovereign debt” category would go unpaid if the nation went along for an extended period of time without raising the debt ceiling. That means, potentially, Social Security and pension recipients not being paid, Federal employees not being paid or being paid late, and Federal contractors and suppliers not being paid. For better or worse, the Treasury Department will be forced to make choices about who gets paid and who doesn’t, and those who don’t get paid are going to suffer real economic harm even if it just means that there is a delay in receipt of payment. The economic implications of this should be blindingly obvious. Cut off payments to the contractors, and they won’t have money to pay their employees, who won’t have money to pay their own bills or spend money in their community. Delay or cut off payments under Social Security, Medicare, or to Federal employees to cover salaries, and the same thing will happen. The economic chaos would, to borrow a phrase, “trickle down” and, absent a quick resolution, would quite obviously do real harm to the economy.
There is, I would submit, a valid argument to be made that raising the debt ceiling is an appropriate time for a debate about how to bring about a longer term plan that reduces the growth of National Debt and the Federal Budget Deficit. However, the suggestion that we don’t need to worry about not raising the debt ceiling is an absurd enough idea that anyone who advances it as a serious proposal doesn’t really need to be taken seriously.
Translation: “No big deal. Who cares how the domestic and foreign financial markets will view this, or what the collateral damage (if any) will be?”
Again, how do you negotiate with people like this?
If only we could be sure the Kamikazes would suffer the usual fate of the Kamikaze on impact I’d say go for it. Alas, they can run us into the ground and still howl how it’s not their fault afterwards, the ground should have accommodated us.
I know everyone else has already laughed at Yoho, but I can’t get over that quote. That’s some industrial strength crazy right there. Not just that it won’t have a negative impact, but that it would have a positive impact.
The US needs to default, it’s one of the conditions for the Second Coming of Ronaldus Magnus.
It’s simply astounding how moronic and ignorant some of these Kock brothers congress critters are. It would almost be amusing if we weren’t facing the collapse of the world economy. The rest of the world must be thinking it’s time for a new reserve currency and then the US is really screwed.
@Ron Beasley:
The Euro isn’t the greatest currency but at least there there aren’t any major parties trying to tank it on purpose…
1) That some Republicans claim there are revenues coming in to continue paying yields suggests a gross misunderstanding of government accounting. Monies ostensibly coming to the Treasury are not stored in any sense as they wait to be spent. The interest payments are credited via the Federal Reserve as it marks up accounts.
2) The short-term interest rate cannot skyrocket, as the Fed will simply purchase the securities via the secondary market.
3) Treasury has authority to issue alternative securities with no defined period for repayment at maturity.
4) With empirical evidence of spending multipliers in the 1.5-1.7 range, sudden withdrawal
of $1 trillion in spending will put the country into a depression.
5). What the Republicans are really saying is they want the banking system to have more securities and fewer reserves. Point this out to them and I very seriously doubt they’ll have a clue as to what you’re talking about, which should give everybody pause about trusting them with these sorts of decisions. They are attempting to force the United States into a fixed-rate currency, a de facto gold standard. The Tea Party caucus is utterly clueless about the consequences of such an act, although I question whether they would care even if they did understand.
There is, I would submit, a valid argument to be made that raising the debt ceiling is an appropriate time for a debate about how to bring about a longer term plan that reduces the growth of National Debt and the Federal Budget Deficit.
Sure, but you don’t get to refuse to negotiate the budget for 7 months, wait until the 11th hour, put a gun to everyone’s heads and scream “negotiate!”. Oh, and by the way, “negotiate” means give us everything we want or I shoot.
Our problem is far bigger than some tea partiers not understanding the consequences of their actions. We have a political party that has completely abandoned the concept of representative democracy and have embraced terrorist tactics as their only method. This does not bode well for the republic.
@David M:
This is another example of the absolute power that News Corp has on the minds of right-leaning Americans. If it’s not on Fox, it doesn’t exist. If the story changes, it really does not matter at all, because it’s still Obama and the Democrats’ fault (we’ve always been at war with Eastasia), and every detail, no matter how contradictory, supports that belief. Nothing can puncture this will to believe.
I have no doubt that Rep. Yoho and others firmly believe the default will be a desirable correction. It is preached by their faith, proven by scripture produced by their trusted brethren and reinforced with repetitive sermons (complete with visuals and chyrons). Their belief is proven by their stout resistance to the temptations from the Unfaithful.
I’m still gobsmacked that folks don’t get this.
Honestly…are Republicans ever right about anything???
Austerity for instance. WTF?
Anti-Gay rights.
Anti-immigrants.
Pro Drug war.
Denying science.
These people are idiots.
Pure and simple.
Some more, from Dave Weigel:
https://twitter.com/daveweigel/status/387333392662274048
https://twitter.com/daveweigel/status/387334525422174208
Business Week / Bloomberg have another good article about what not raising the debt ceiling could mean.
A U.S. Default Seen as Catastrophe Dwarfing Lehman’s Fall
So Ted “Who thinks we’re heading into socialism” Yoho or Business Week, who to believe?
Denying its importance means they’re all in filibustering a clean debt limit increase. This doesn’t end until the financial crisis hits.
So you know, it’s inevitable.
One of the great strengths of our country is that people around the world invest vast sums of money here. I wonder how much that is going to change as we drift away from being a rational actor. How much crazy will investors tolerate before they start looking for another safe harbor?
Seriously???
These people know nothing.
Yet they are willing to burn the house down over their idiotic beliefs.
By the way…Bachmann says we are living in the end-times. So none of this matters. Oh wait…she might be wrong???
I’m beginning to think the Dems should refuse to raise the debt ceiling as well, and just start pushing for it to be repealed. What’s the point of keeping it around, if it just allows the GOP to threaten the economy for no reason, and it it requires mostly Democratic votes to pass.
This would be a really good time for David Banner to show up.
Hulk Smash!
Puny GOP…
I wonder if Banner is a Democrat…and the Hulk is a Republican?
Good and evil.
All that…
I think this is related:
2/3 of Americans over age 50 flunk this simple 3 item financial literacy quiz
Good news…I got all three right…and I’m over 50.
I guess public education is vindicated.
You mean they left? When?
So it’s okay to raise the debt ceiling when deficits are growing year over year due to foreign wars, but it is not okay to increase the debt ceiling when deficits are shrinking? It’s okay to pass Medicare part D and add to the deficit, but not okay to have a law that your 2012 Prez nominee implemented as a hallmark law during his governorship. Weird
Doug, one other point. If we breach the debt ceiling then the treasury has to prioritize what to pay. Isn’t that Obama essentially writing his own budget? Isn’t it unconstitutional for the President to not spend money Congress has authorized?
My fear is that a lot of GOP crazies see this as an easy way to “balance” the budget and force the government to “live within its means”. They really don’t understand how our government works. It pays out millions of bills every day, its revenues and expenditures vary from day to day. IT simply can not balance the budget like a family does.
@ Hal….
Actually most families that own their homes don’t have a “balanced budget”.
The same applies to most companies as well.
@Hal 10000:
Exactly right, it’s against the law for the President to not spend money that Congress authorized.
And the credible opinions on the payment prioritization options range from “no they can’t” to “maybe they can, but it’ll be horribly ugly and probably won’t work”.
@john personna:
I simply cannot believe that anyone flunked that.
And yet, I know they did. I know they did….
But how?!?! HOW?!?!
@Hal 10000:
“Isn’t it unconstitutional for the President to not spend money Congress has authorized?”
Not unconstitutional, just against the law. The law in question was written in the 1970’s in response to Nixon trying to write his own budget by not spending money Congress appropriated.
And yes, that means that if Obama does what the Republicans are suggesting, they would have grounds to impeach him.
One thing to keep in mind in all this, there are some very rich hedge funders who are poised to make a massive killing in the markets if they tank. Sure, so far, average investors and their placid fund managers are remaining calm, but there are sharks waiting to win big by betting against America.
To the extent that it can be determined, shouldn’t we be wanting to know how heavily the Koch bros and other bankrollers of the Tea Folk are optioned up for a 30% stock slide??
There are so many false assumptions here:
Prioritize spending? Who is going to do that? Do we pay the bondholders, like the Chinese first? Or Social Security? Or Medicare? Who sets that priority?
Second, the system is not set up to make choices. Bill come in, bills get paid in that order. Let rewrite software on the fly. You think the health exchanges are messed; lets mess around with Federal accounting systems which probably still contain COBOL code from the 60s.
Ignorance is truly bliss.
I’m wondering if I should go and cash in my kids Savings Bonds before its too late.
@Jc: you refer to the pre-Koch GOP, the cut taxes and spend party.
These new guys are true throwbacks to the Gilded Age. Back to the Gold Standard, full stop!
The Republicans have convinced me not to pay my credit card bill – I’m sure doing this will increase my financial stability and Chase Visa will recognize and be glad that I’m finally doing something about my debt.
It doesn’t work for individuals and it sure as hell doesn’t work for governments.
Hey, the message going out on Fox radio stations is that a default is no big deal. Just mainstream media and dem scare tactics. All is well.
I know I will sleep better tonight.
As Steven Taylor’s post the other day suggested if the congress refuses to raise the debt ceiling the Obama Administration (Treasury Department) will be forced to ignore it. No matter what the President does or doesn’t do he will be in violation of the law. This will of course create a Constitutional crisis but don’t we have that already with a minority of the majority in one branch of government threatening the security and economy of the country. This will of course lead to impeachment which if if even makes it out of the House will go no further. The Supreme Court will have to decide. Obama needs to remember we don’t bargain with with terrorists.
I think the GOP is at the point where they realize they can’t go any lower popularity-wise so they might as well give the base what it wants in terms of impeachment.
Yeah, let’s just keep kicking that can down the road. We don’t need to figure out how to pay that debt back; let’s let the next generation deal with it. Or the next one. Or the one after that. Whatever.
“Something that can’t go on forever, won’t. Debts that can’t be repaid, won’t be. Promises that can’t be kept, won’t be.” — what a crock.
@Jenos Idanian #13:
Hey, why’d you drop the “Medusa” sock puppet from yesterday? Was it getting confusing?
George Lakoff said conservatives aren’t good with complex causality. We are overwhelmed with proof that this is correct.
@Rafer Janders: Your right. We must start cutting the deficit immediately. Oh wait…Obama already did that.
I give up, what does your comment have to do with the debt ceiling? You do realize the debt ceiling is about paying for past spending, not future spending?
@RaflW:
To a degree. There are certainly traders who are making a bet on instability and some distressed-focused funds that will make a great deal if markets drop — but only if they drop a certain point and no lower. Because once markets truly sink, as in 2008, there’s always a risk that the big banks go bust, and then no one makes any money because no one has any money.
Remember, a trade is a bet, and in order to collect on the bet, the guy you’re betting with has to still have money to pay you; if you make a million dollar bet with him but he only has $100 left, then you’ll never see that million. This is called counterparty risk — the risk that your counterparty will not pay.
Hedge funds, similarly, are exposed to counterparty risk, and they can only make money if there’s someone left to pay them, so they need a healthy functioning financial system. For every stock or loan or bond or swap or derivative sold, there has to be someone willing to buy. It’s always a one-to-one ratio.
@gVOR08:
Don’t think you mean to reply to me on that one.
It was obviously aimed at Jenos/Medusa/JayTea.
In any event, recent poll data is showing that for the first time I can recall, self-identified Democrats are as opposed to “compromise” (on this particular subject) as self-identified Republicans. The status quo ante was that Dem voters generally want compromise solutions by a 2-to-1 margin, with GOP voters being reversed.
Funny thing about using radical tactics: you radicalize your opponents. Skippy.
@Rafer Janders: You would be correct. Meant for Jenos one comment up. Sorry.
Jenos…the deficit is falling like a stone. Government is shrinking. Where were you when Bush was exploding the debt? And growing the Government? Your opinions just don’t comport with the facts. Ever. Have you ever considered that might be a problem?
Incidently, if the GOP wants credibility on debt, the next time they are in power, ala 2001-2007, they should act like they actually care about debt.
A large chunk of the GOP caucus voted to raise the debt ceiling again and again and again during the last period of Republican rule. Tax cuts were more important than balanced budgets. Hell, the first tax cut (2001) was explicitly justified as a Keynesian stimulus measure (which I’m not generally opposed to, though a FICA cut is far superior for that purpose) and then they doubled down in 2003. Iraq, The Sequel wasn’t paid for (IIRC, it was “off the books” in some way as well). Medicare Part D wasn’t paid for. And so on and so forth. When the GOP came to power in 2001, federal debt as a % of GDP was in the high 50s%, down from ~65% when Clinton took office. Bush & Co increased it back into the 60s and then the financial panic hit, pushing it past 80%. Even ignoring the finanical panic as an extraordinary event, Republican rule increased the debt as a % of GDP. And this is nothing new. Reagan started with debt at ~30% of GDP. Republican rule, driven by “supply side” ideology, doubled that figure. I have no reason to believe the same thing wouldn’t happen again.
So, not only do I believe that deficit reduction now is a bad idea, I don’t believe the GOP actually cares about deficit reduction/debt stabliization for real. I think they use it as a cudgel to beat Democrats with, in the hope of cutting social welfare spending. Then, when they get power, the #1 goal will be tax cuts for the affluent.
@Rafer Janders:
heh, now we need to give that test to the House.
Just out of curiosity, when Senator Barack Obama voted against raising the debt ceiling in 2006 was he deliberately trying to crash the world economy in order to prove a political point or was he just utterly clueless regarding the catastrophic consequences of his vote?
@Gavrilo:
For the record, his vote caused the crash of the financial and housing markets in 2008.
@Gavrilo:
So Gravito, is “voting against” exactly equal to “actually doing it” in your mind?
I don’t mind a little saber rattling, if it is kept under control. Did Obama also actually shut down the government in 2006?
The “pro tip” here is that the clean CR is a fair compromise and something that could be used to end the shutdown right now.
It is not Obama “actually doing it” in preference to the clean CR.
Basically the right wing meme machine offers this nugget to their followers:
“A protest vote, one which you know will go nowhere, is exactly equal to actually shutting down the Federal government, creating a national emergency, and risking default on the national debt.”
And … they find people to believe that shit.
@Gavrilo:
Neither. He was engaging in a little bit of risk-free grandstanding, which has long been normal behavior in congress. The GOP had control of the senate (55-45, I think), and had the votes to raise the ceiling. 2 or 3 GOP senators also voted no, because they were aware there would be no consequence to it.
Now, which of the five times John Boehner, Paul Ryan and the rest of the gang voted for debt ceiling increases were incorrect?
@Gavrilo:
Just out of curiosity, when Senator Barack Obama voted against raising the debt ceiling in 2006 was he deliberately trying to crash the world economy in order to prove a political point or was he just utterly clueless regarding the catastrophic consequences of his vote?
Neither. Since you are completely ignorant of how the legislature works, you may want to educate yourself. Look up things like “vote count” and “protest vote.” If you have a brain you will realize the debt ceiling is good for two things: inconsequential protest votes and destructive hostage taking. Its only really been used for the latter very recently, and failing to increase it has never been seriously considered until the Tea Party arrived to destroy us all.
The playbook:
Get into power, cut taxes on the affluent.
Try to blame the increased deficit on the Dems, or on extenuating circumstances (like, I dunno, a stupid war you decided to fight).
Democrats come to power.
Scream about debt, demand cuts to benefits. Fight attempts to raise revenue.
Get into power, cut taxes on the affluent…
Well, that worked for Reagan…
@An Interested Party:
And GWB, too.
True, but a lot of Republicans and conservatives now act like GWB didn’t exist or was just a RINO….their Saint Ronnie though…rather than dismiss him for the facts that actually happened they mythologize him with fantasies…