After carefully reading through this column by Asia Times’ Spengler–who is consistently extremely thoughtful–I find his logic, unfortunately, compelling.
Quite some number of Ricochet commenters have argued that if August arrives without an increase in the debt ceiling, there are no good reasons for a new financial crisis to erupt. I broadly agree. But as Spengler points out–and this argument, I think, must be taken seriously–there are plenty of bad reasons.
Keynes wasn’t wrong about everything. We all, I assume, feel robust frustration with the idea that countercyclical fiscal policy is the way out of the recession. But those animal spirits of the market? I wouldn’t write those off yet. It’s almost trivially true to say that when people panic, they behave irrationally. Mass panic is a well-known phenomenon. You feel confident in ruling this scenario out? I don’t.
Now, before you say, “Well, if it happens, it happens, the stuff’s overvalued, the day of reckoning comes today or it comes tomorrow but it’s still coming” consider the ensuing political scenario he sketches out:
In that event, the Obama administration would declare an emergency, summon bankers to Washington for crisis-management sessions, slash every form of spending except for coupon payments on Treasuries, and so forth. Markets would swoon over the uncertainty. And the president would be on television denouncing the lunatics who brought things to this point. Congress would pass emergency legislation, markets would snap back, and Obama would declare himself a national savior.
Obama, meanwhile, would play the populist against the banks, demanding tougher government controls, consumer protection, and perhaps even the right to dictate that banks make loans to the Democrats’ pet projects in the name of job-creation (just as the Clinton administration forced banks into the subprime market, supposedly to help poor people buy homes).
No good crisis should go to waste, Rahm Emanuel said. …
That’s a little too plausible for my taste.
Spengler imagines Obama’s speech:
My fellow Americans, the Republican party has been in the pocket of the big banks for too long. After the last Republican administration led the country into the worst economic crisis since the Great Depression, you elected me to restore the balance in favor of working people. Now the Republicans have pushed America into yet another crisis, and again we are faced with the danger of depression.
In consultation with the Federal Reserve and world leaders, I have taken emergency measures that ensure that the irresponsibility of big financial institutions and their Republican friends will not harm your job, your pension or your bank account. And I am sending Congress a set of emergency reform measures to ensure that the banks put the needs of ordinary people ahead of their own fat bonuses.
And you know, that sounds about right.
Spengler’s key point is this: “In a crisis the executive authority holds all the aces, because only the executive can act to alleviate the crisis.” He warns against expending all the ammo on the debt-ceiling showdown. I think I have to agree. His logic is pretty compelling.
Peter was right to note that Margaret Thatcher picked her battles with caution. His example–her capitulation to the National Union of Mineworkers in 1981–is apposite.
Remember Reykjavik, yes. But also remember that when Thatcher took a look at the situation in 1981 and realized her government was not prepared for the fight, she caved. Immediately. It was not because she had no principles. It was because she knew what the situation was; she had a healthy respect for the constraints of the battlefield; and she did not propose merely to go down with glory. She proposed to win.
Spengler’s analysis is compelling, though ultimately if that’s what we’re faced with then its a rigged National Socialist deck until the White House is reclaimed. The only counterpunctual I can think of is Canada’s Meech Lake Accord which was supposed to bring Canadian armageddon if not passed.
It wasn’t passed. Nothing untoward happened, and the rest is herstory.
I read it. As always David Goldman can be persuasive.
Here are a few of the many not persuaded…
FreedomWorks, RedSate, American Majority Action, Let Freedom Ring, and the Club For Growth draft a letter to Republicans in Congress opposing the McConnell Plan. Of particular note, considering who all is on board this letter, is this paragraph:
“We will refrain from backing any Member of Congress or candidate for federal office, or a leadership position in a Republican Caucus, who supports the McConnell—Reid—Pelosi “Cut, Run, and Hide” plan, to the extent that our various legal structures and rules allow.”
http://www.redstate.com/erick/files/2011/07/CoalitionLetter.pdf
US 97% (official, or lying weasel US debt)
That 97% ratio of US debt to GDP (US GDP = $14.6 trillion, 2010) is composed of $14.3 trillion in official US debt. Which is what the current fight is about.
However, unfunded liabilities (S/S, Medicare, Medicaid, Obamacare) amount to $61.6 trillion (a conservative low end estimate, CATO says $119.5 trillion).
Guarantees using the full faith and credit of the US (Freddie, Fannie, student loans, Exchange Stabilization Fund (ESF), The Temporary Liquidity Guarantee Program (TLGP), etc. amount to $16 trillion, an amount larger than the official US debt itself.
So 14.3 + 61.6 + 16 = $91.9 trillion or 642% of GDP (1026% using CATO figures)
As I said we definitely are in a league of our own.
And to make matters more difficult total obligations are rising much faster than GDP annually even without new official borrowing. Which means every year the situation gets much worse. Unlike Japan, whose debt is mostly self-financed, our debt is owed to foreigners. A small rise in interest rates on our debt would be catastrophic.
Mr Murphy would agree with the term “Tea Party Amateurs”. I guess we should leave it to the Professionals who are leading us towards Greece. Mrs Thatcher, I am pretty sure, would not approve.
Actually, I’m surprised by how well the Republicans are doing – but I think they know they can’t do much until 2013 – maybe lose another trillion or two – a trillion here, a trillion there, and pretty soon we are talking real money. Well, not really – they just print it or, these days, type some zeros into a computer at the Fed.
First off, I don’t know if her Serene Highness, Queen Claire, recently received a blood transfusion from one Michael Murphy, but I can’t say I like the term “amateur” in the headline. This is especially so when you consider what “professional” management has done for the Federal Government.
The Obama chickens have come home to roost. This continued recession is his baby. Even if Congress reaches a deal on the debt ceiling American business is still not going to invest or make new hires until this government is reined in. See Wynn, Steve.
Gaming a market is one of the most difficult ways to consistently make money in the world.
That said, it’s what market participants don’t see coming that overturns their book. We are only a few trading days away from August 2nd and everybody and their brother knows about the impending tsunami washout of a debt crisis.
I don’t claim to have a crystal ball on the markets but it sure does look like this fear headline is a yawn as far as the markets are concerned. If this weren’t the case, yields would already have spiked.
Claire, Claire, don’t tell the Republicans to cave. That is the one thing that they are good at.
If Obama is determined to become a national saviour, then If it’s not this crisis, he’ll manufacture a different one. The rest of the country can’t simply hide under the bed until it all goes away.
I don’t think this was a good fight to pick. I don’t think roiling wold markets and then win or lose resolving the crisis with something less than what you want and then the lifted uncertainty probably helps the market…it doesn’t make us look good.
Paul, what’s your plan for dealing with the scenario outlined? Do you not share my feeling, when you read that, of “Yep, that’s all too plausible?”
I’m happy to say do not cave if I think this scenario has really been anticipated and plans have been made for dealing with it, politically. Do you see that? Or do you see something more like the kind of tunnel vision that led us to go into Iraq (basically morally and strategically the right decision) without a serious plan for dealing with an insurgency (madness)?
All my instincts favor taking a hard line on principle. But this piece by Nicole Gelinas gives me pause: http://city-journal.com/2011/eon0715ng.html
There are a lot of plans but they are not always in the NY Times or on CNN.
Coburn deficit plan offers $9 trillion in savings
http://www.washingtonpost.com/business/economy/coburn-deficit-plan-proposes-9-trillion-in-savings/2011/07/18/gIQArcBvMI_story.html
http://coburn.senate.gov/public/index.cfm/pressreleases?ContentRecord_id=1d817708-76ed-4b2b-9cc2-076415409d44
http://coburn.senate.gov/public//index.cfm?a=Files.Serve&File_id=5d66088c-40d4-40e5-ad95-bc5d88774595
Cut, cap and balance
http://rsc.jordan.house.gov/Solutions/debtceiling.htm
http://rsc.jordan.house.gov/UploadedFiles/Cut_Cap_Balance_Act_Summary-FAQ–07-15-11.pdf
http://www.cutcapandbalanceact.com/
(a lot of Tea Party amateurs there)
I’m happy to say do not cave if I think this scenario has really been anticipated and plans have been made for dealing with it, politically. Do you see that? Or do you see something more like the kind of tunnel vision that led us to go into Iraq (basically morally and strategically the right decision) without a serious plan for dealing with an insurgency (madness)? ·Jul 19 at 6:58am
I think that we should call Obama’s bluff. The markets will swoon . . . briefly — and then, for the first time in my lifetime, it will be recognized that in these matters the legislature is supreme. If the Republicans cave, our side will lose heart . . . as happened in the days of Bill Clinton.
Note the polls. The Republicans in Congress are not especially popular. Obama’s support is collapsing.
The Ryan Plan
http://www.roadmap.republicans.budget.house.gov/Plan/
http://gregmankiw.blogspot.com/2011/04/ryan-plan.html
http://www.cbo.gov/ftpdocs/121xx/doc12128/04-05-Ryan_Letter.pdf
I guess now the choice is McCoward’s plan or default. I would suggest the house could pass a 300B. increase in the debt ceiling with 300B in. cuts attached, in addition I would also do away with the corporate jet so called loop hole and ethanol subsidies. Take away all of Obama’s excuses. Let Obama either sign or veto it. FY 2012 begins Oct 1 and the house Republicans can pass CR’s for individual departments cutting fat, waste and duplication. The problem isn’t winning the PR battle. The problem is many establishment Republicans love big government and McCoward and Bonehead are two prime examples.
There’s also a principled reason for “caving” (in addition to preventing possible financial calamity). The issue is really spending, not borrowing. Congress has already baked in most of the spending. It’s strange to have approved the spending but not to approve issuing bonds to support the spending. I understand the desire to restrain spending, but one could argue that threatening not to allow borrowing to meet these already existing obligations is reckless. Do we want to be tarred with that? Would a better fight be to demand an actual budget (as required by statute), and on that battleground to demand lower spending?
Are the Dems going to go for broke (no pun intended)?
Bill Clinton Would Declare The Debt Limit Illegal
http://www.nationalmemo.com/article/exclusive-former-president-bill-clinton-says-he-would-use-constitutional-option-raise-debt
A Democrat putsch in the wind?
I think that we should call Obama’s bluff. The markets will swoon . . . briefly — and then, for the first time in my lifetime, it will be recognized that in these matters the legislature is supreme. If the Republicans cave, our side will lose heart . . . as happened in the days of Bill Clinton.
Note the polls. The Republicans in Congress is not especially popular. Obama’s support is collapsing. ·Jul 19 at 7:17am
The legislature is supreme — and Republicans only control one of two houses. I’m beginning to see some of Mike Murphy’s points. . . .
Viator hit on the problem above: once you reach certain debt levels, monetary policy simply stops working. Fiscal policy then appears to be the only solution to climbing out of a recession… but at that point the “stimulating” effect of fiscal policy become so short-lived, it can not overcome the animal spirits Keynes theorized were holding back economic growth.
Keynes was not entirely wrong, but his “correct” ideas about animal spirits are only applicable in a very narrow set of economic circumstances. And he had very little useful to say about how his theories interacted with debt.
In short, things may go haywire if the debt ceiling isn’t raised. But that doesn’t mean raising it and spending more would make us better off.
(If you want the full argument, Henry Hazlitt debunked most of Keynes’ General Theory in his book The Failure Of The New Economics.)
Cut taxes, increase spending: doesn’t work. Raise taxes, increase spending: doesn’t work. Cut taxes, cut spending: works.
Bruce! Hi! So glad to see you here–how are you?
Old friend of mine.
Plans, plans and more plans..
The Macroeconomic and Budgetary Effects of an Illustrative Policy for Reducing the Federal Budget Deficit , July 2011
As requested by Senators Kent Conrad and Jeff Sessions, Chairman and Ranking Member of the Senate Budget Committee
http://www.cbo.gov/doc.cfm?index=12310
“Senators Kent Conrad (D-NDAK) and Jeff Sessions (R-AL) asked the CBO to “score” the consequences of a $2 Trillion ten-year deficit reduction package. The results of the work by the good folks at the CBO blew my mind. $2Trillion over ten years barely moves the needle.”
http://www.zerohedge.com/article/dc-duo
The Macroeconomic and Budgetary Effects of an Illustrative Policy for Reducing the Federal Budget Deficit , July 2011
As requested by Senators Kent Conrad and Jeff Sessions, Chairman and Ranking Member of the Senate Budget Committee
http://www.cbo.gov/doc.cfm?index=12310
“Senators Kent Conrad (D-NDAK) and Jeff Sessions (R-AL) asked the CBO to “score” the consequences of a $2 Trillion ten-year deficit reduction package. The results of the work by the good folks at the CBO blew my mind. $2Trillion over ten years barely moves the needle.”
http://www.zerohedge.com/article/dc-duo ·Jul 19 at 8:15am
Coburn said yesterday that we’ll spend more than $2 Trillion on debt service alone over the next ten years, and that is if interest rates don’t go up.
In short, things may go haywire if the debt ceiling isn’t raised. But that doesn’t mean raising it and spending more would make us better off.
The argument he advances isn’t about what would make us better off. Of course I (of all people) do not think spending more would make us better off. It’s about not getting sucker-punched. It’s about asking, realistically, what will happen if things “go haywire,” and not trusting to the argument, “Oh, don’t worry, they won’t, and even if they do, everyone will blame Obama.”
Iraq is an interesting comparison. Moral strategy, terrible implementation plan—or so we describe the latter because we know all its failings but do not know what would have happened had we not taken down Saddam and so cannot make a temporal comparison with events on the ground but instead tend to contrast them with our expectations going in. Severe economic disruptions are in the American future. If the debt is actually confronted, great tragedies will result. If it is not confronted, great tragedies will result. Which will be worse? Depends on one’s expectations going in. Politically, we should not be surprised to see Obama use Iraq as a victory of his administration, despite his expectations going in. Who’s to say hitting economic bottom won’t be viewed the same way later on?
It’s 11:30a ET (8:30 PT). In the three hours since Claire wrote the original post the national debt has risen by $275,581,932.75.
At the end of the 24-hour period when we’ve commented on everything else in the world we will all be $6,613,966,386 deeper in the hole. Keep that in mind as we wrestle over the size of the “cuts.”
Failure is not an option. And the math indicates that failure–unprecedented nation-ending failure–is exactly where we are headed and where the Obama administration intends to keep us heading. So if we must have a crisis, bring it on on our terms, bring it on before the die is cast, before no fiscal headroom remains to restore limited government and robust economic growth. $14.3 trillion in sovereign debt is manageable for our economy, as detailed in budget roadmaps from Paul Ryan and also the Heritage Foundation, but only if we reverse course.
And we can only reverse course by…reversing course, not by becoming junior partners in this administration’s fiscal insanity
The president must be the one to blink for a change. Assuming he won’t, our representatives need to execute a PR strategy calculated to put conservatives on the winning side of his latest crisis. The facts are on our side, as is necessity.
Claire, I understand Spengler was making a political prediction. If the facts on the ground match what he says–breaching the debt ceiling followed by emergency legislation to get us back to normal–then I agree the political narrative will run how you lay it out.
But the economics of the situation are worse than Spengler sees. Even if the debt ceiling was raised months ago, there is still a risk of a debt-based financial crisis (2008 was a liquidity/leverage problem). Why not get in front of it? Eventually, the economics must dictate the politics.
Obama has been flogging a thin yet politically viable narrative blaming the GOP ever since 2010… and it’s enough to squeak into re-election in 2012 with the help of his compliant media.
Even if the debt ceiling fight is a political sucker punch, what would you have fiscal conservatives do? Cave every time until 2016? Shouldn’t we lay down a track record of fighting the real problems before they become a crisis?
And we can only reverse course by…reversing course, not by becoming junior partners in this administration’s fiscal insanity
The president must be the one to blink for a change. Assuming he won’t, our representatives need to execute a PR strategy calculated to put conservatives on the winning side of his latest crisis. The facts are on our side, as is necessity. ·Jul 19 at 8:33am
I wholehearedly agree. If not now, when?