Tuesday, July 19, 2011 3:30:37 AM
GOP foot-dragging on debt ceiling worsens economic strain
The Rachel Maddow Show [video]
July 18, 2011
John Stanton, reporter for Roll Call, talks with Rachel Maddow about the apparent lack of urgency among Republicans as the debt ceiling debate continues to erode U.S. economic standing and puts the entire world economy at risk.
http://www.msnbc.msn.com/id/26315908/vp/43803126#43803126
===
Wall Street Warns Congress: The Economy Post-Default Is A Man Post-'Suicide'
7/13/11
http://www.huffingtonpost.com/2011/07/13/wall-streets-warns-congress-debt_n_897472.html [with comments] [major reference; further to http://investorshub.advfn.com/boards/read_msg.aspx?message_id=65130160 earlier this string (seven posts back)]
===
Treasury cash squeeze would wreak economic havoc
By John W. Schoen
updated 7/15/2011 2:45:01 PM ET 2011-07-15T18:45:01
Speaking at his third news conference in two weeks on the stalled talks over raising the debt ceiling, President Barack Obama urged Congress on Friday to "do something big" for the economy to avert the unthinkable: a U.S. default.
Behind his words was the acknowledgment that without more borrowing authority, government spending cuts will begin to hit hard and fast in early August and ripple through the economy.
Though no one can predict exactly how it might play out, the resulting cash squeeze would wreak havoc on an already fragile economy, say analysts and economists.
For the moment, there appears to be little threat of a default on government debt; there is more than enough cash coming in to make the nation's interest payments.
The greater worry is that by robbing Peter's coffers to pay the interest on Paul's debt, the government will have to make tough choices about which federal programs won't get paid, and that could throw people out of work and send the economy back into recession.
Without the authority to borrow more money, the Treasury will come up short by about $134 billion in August. That spending shortfall would amount to more than 10 percent of gross domestic product for the month.
"If there's no deal by early August," Capital Economics economists wrote in a recent research note, "the drop in other spending would, if it lasted more than a few days, drive the economy into recession."
After scrambling for two months to buy more time, the government is rapidly running out of options.
When the debt ceiling was reached on May 16, the Treasury undertook what it called "extraordinary measures" to borrow from various accounts. That freed up about $232 billion to tide it through the next few months while Congress and the White House worked out a budget plan.
That cash cushion has been melting away; it rose briefly in June as tax payments and other receipts exceeded outlays. But it's on a downward track toward zero sometime in early August. The Treasury projects that it will be flat broke on August 2, with no way to raise enough cash to cover all the bills.
On or about that date, government officials have to begin making hard choices. For August, the Treasury projects it will take in roughly $172.4 billion to cover $306.7 billion worth of spending that, by law, it has to pay. To demonstrate what those choices might look like, Jerome Powell and his colleagues at the Bipartisan Policy Center took a look at how far the money would go.
They started with the widely held assumption that interest on the debt ($29 billion for August alone) would be paid first, thus avoiding the disastrous impact of a default.
The rest of the incoming cash would cover a month's worth of Social Security ($49.2 billion), Medicare and Medicaid ($50 billion), veterans affairs programs ($2.9 billion), education and tuition programs ($14 billion), housing assistance for the poor ($6.7 billion), food stamps ($9.3 billion), and unemployment insurance ($12.8 billion).
That's where the cash runs out and the list of unfunded programs begin. There would be no money left for defense contracts ($31.7 billion) or military active duty pay ($2.9 billion).
The Department of Justice ($1.4 billion) would close, shutting down the federal court system and halting operations at the Federal Bureau of Investigation. So would the Department of Energy ($3.5 billion), including national nuclear energy programs.
The Transportation Department ($1.3 billion) would cease functioning, including the Federal Aviation Administration and air traffic control system. So would the Centers for Disease Control ($0.5 billion).
And there would be no money to cover tax refunds ($3.9 billion) from the IRS. Even if there were, there would be no federal workers ($14.2 billion in salaries and benefits) to mail the checks.
"You can move the chess pieces around, but you can't win," said Powell, a former Treasury undersecretary in the George H.W. Bush administration. "There is no way to do this without creating a massive public uproar. There just isn't."
The impending cash crunch has been compared to the government shutdown in late 1995, when federal workers were briefly furloughed after Congress and the Clinton White House couldn't agree on a budget. Most government spending, however, continued at levels authorized under the previous budget.
In this case, though Congress has legally obligated the Treasury to pay for government programs and services, it has cut off the cash needed to do so.
"That's put the executive branch in the situation of trying to decide which spending laws not to obey," said Powell. "There is no precedent. There is no rule book."
With no rule book to follow, it's unclear just how the Treasury would decide which bills to pay. Treasury lawyers face a legal minefield sorting through specific contractual obligations spelled out in thousands of laws authorizing individual government programs.
Some analysts suggest it might have to operate day to day, spending only as much as it receives on a given day. That could make for even tougher choices. Unlike a household juggling its finances with fixed weekly paycheck, the flow of money in and out of the Treasury is subject to wide swings.
On Wednesday August 3, the day the government is expected to run out of cash, the Treasury expects to take in $12 billion in revenues, according to Powell's analysis. But it also has to cover $32 billion worth of bills coming due that day, including $23 billion in Social Security payments. With only enough cash to cover about half those checks, there is no legal framework for deciding which retirees get paid and which don't.
The next day, Treasury expects to collect just $4 billion to cover another $10 billion in bills. On August 5, there's only $7 billion coming in to cover $12 billion in scheduled payments. By the end of the first week of the government's cash squeeze, roughly $7.5 billion in Medicare and Medicaid bills would have gone unpaid, along with $4.8 billion worth of defense costs.
Some opponents of raising the debt ceiling suggest that it will force the government to make spending cuts that Congress and the White House have been unable to make. Simply starving the Treasury of cash, however, won't accomplish that goal, according to former Congressional Budget Office Director Douglas Holtz-Eakin
"Once you pass laws that say spend the money, you have an obligation to spend the money," he said. "When the revenue comes in, the spending still happens. So not raising the debt ceiling actually doesn't cut spending."
*
Video: Obama addresses press on debt talks
July 15, 2011
http://today.msnbc.msn.com/id/26184891/vp/43770117#43770117
*
© 2011 msnbc.com
http://today.msnbc.msn.com/id/43769894/ns/business-eye_on_the_economy/ [with comment]
===
Moody's suggests U.S. eliminate debt ceiling
An elderly man walks past The National Debt Clock, which displays the current United States gross national debt and each American family's share, on a wall in midtown Manhattan, in New York July 13, 2011.
Credit: Reuters/Brendan McDermid
By Walter Brandimarte
NEW YORK | Mon Jul 18, 2011 10:33am EDT
NEW YORK (Reuters) - Ratings agency Moody's on Monday suggested the United States should eliminate its statutory limit on government debt to reduce uncertainty among bond holders.
The United States is one of the few countries where Congress sets a ceiling on government debt, which creates "periodic uncertainty" over the government's ability to meet its obligations, Moody's said in a report.
"We would reduce our assessment of event risk if the government changed its framework for managing government debt to lessen or eliminate that uncertainty," Moody's analyst Steven Hess wrote in the report.
The agency last week warned it would cut the United States' AAA credit rating if the government misses debt payments, increasing pressure on Republicans and the White House to come up with a budget agreement.
Moody's said it had always considered the risk of a U.S. debt default very low because Congress has regularly raised the debt ceiling during many decades, usually without controversy.
However, the current wide divisions between the House of Representatives and the Obama administration over the debt limit creates a high level of uncertainty and causes us to raise our assessment of event risk," Hess said.
Stepping further into the heated political debate about U.S. debt problems, Moody's suggested the government could look at other ways to limit debt.
It cited Chile, widely praised as Latin America's most fiscally-sound country, as an example.
"Elsewhere, the level of deficits is constrained by a 'fiscal rule,' which means the rise in debt is constrained though not technically limited," Moody's said, adding that such rule has been effective in Chile.
It also cited the example of the Maastricht criteria in Europe, which determines that the ratio of government debt to GDP should not exceed 60 percent. It noted, however, that such a rule is often breached by the governments.
In the United States, Moody's said the debt limit had not effectively curbed the rise in government debt because lawmakers regularly raise it and because that limit is not related to the level of expenditures approved by Congress.
© Copyright 2011 Thomson Reuters
http://www.reuters.com/article/2011/07/18/us-usa-debt-moodys-idUSTRE76H0WH20110718 [with comments]
===
The damage already done by the debt ceiling debate
Felix Salmon
Jul 14, 2011 13:55 EDT
Listen to anybody on Capitol Hill, and they’ll tell you that the debt ceiling debate is turning into a complete disaster, with the Republican rank and file such an inchoate mess [ http://www.reuters.com/article/2011/07/14/us-usa-debt-republicans-idUSTRE76D0KH20110714 ] that it increasingly seems as though no deal will get done at all. Look at the Treasury market, however, where the 10-year bond currently yields something less than 3%, and it looks decidedly sanguine; short-term debt maturing shortly after the drop-dead date of August 2 is similarly unaffected by the news from Washington.
Megan McCardle [ http://www.theatlantic.com/business/archive/2011/07/the-giant-disconnect-between-wall-street-and-washington/241889/ ] thinks this shows a “giant disconnect” between Wall Street and Washington — things which Wall Street thinks are easy turn out in reality to be extremely hard, and things which any Wall Streeter would just do as a matter of course can be de facto impossible when political posturing starts getting in the way.
I’m not sure the disconnect is all that huge, for a couple of reasons. For one thing, US default risk is impossible to hedge. US default is an end-of-the-world event, and markets by their nature can’t price such things. Conceptually, there’s no point in buying something which pays off if the world ends, since the world will have ended at that point, and in any case your counterparty won’t be able to make good on the contract.
On top of that, remember that we already hit the debt ceiling on May 16 [ http://www.treasury.gov/connect/blog/Pages/Geithner-Implements-Additional-Extraordinary-Measures-to-Allow-Continued-Funding-of-Government-Obligations.aspx ] — two months ago. Since then, the amount of outstanding Treasury securities — a number which normally rises steadily — has been stuck at $14.3 trillion. The fact that supply of Treasuries has been artificially constrained by the debt ceiling has surely, at the margin, helped to support prices.
And more generally there are still a lot of individuals and institutions who want to buy Treasury bonds. That number might have been falling in recent weeks, but it’s still large. The U.S. is not facing the kind of emergency we’re seeing in the eurozone, where countries want to borrow money but no one’s willing to lend to them. If Treasury asks to borrow money from the markets, the markets will always lend it money; the only question is how much interest they will charge.
This is where McArdle goes awry, incidentally: she’s worried that any new debt issued after August 2 won’t be able to find buyers if Congress doesn’t raise the debt ceiling. But there will always be buyers, and there will always be buyers at yields very, very close to the secondary-market price for Treasury bonds. Treasury bonds are fungible, and to underscore that fact Treasury could easily just reopen old bond issuances instead of creating new ones. That would ensure that there was no way of telling the difference between bonds issued “legally” and bonds issued after the debt ceiling was breached.
Even if Treasury can still sell bonds, however, that doesn’t mean for a minute that breaching the debt ceiling is something which should be considered possible for the purposes of the current negotiation. Tools like the 14th Amendment or even crazier loopholes like coin seignorage [ http://www.correntewire.com/coin_seigniorage_and_irrelevance_debt_limit ] would be signs of the utter failure of the US political system and civil society. And that alone could mean the loss of America’s status as a safe haven and a reserve currency. The present value of such a loss? Much bigger than $2 trillion. (Coin seignorage, if you’re wondering, is the right that Treasury has to mint a couple of one-ounce, $1 trillion coins and deposit those coins in its account at the New York Fed. It could then withdraw cash from that Fed account to make all the payments it wanted.)
This is one reason why I worry a lot about clever ideas like Mitch McConnell’s plan to get the debt limit raised through a novel use of the Presidential veto — or, for that matter, Matt Yglesias’s [ http://thinkprogress.org/yglesias/2011/07/14/269022/is-mitch-mcconnells-debt-ceiling-gambit-really-that-clever/ ] even cleverer plan for Democrats to game the McConnell scheme. McConnell is one of Congress’ foremost tacticians, but cunning tactics on either side of the aisle are the last thing that anybody needs right now.
When Bob Rubin did a nifty sidestep around Congress and magicked Mexico’s bailout billions from some dusty account no one knew about, he was playing a dangerous game. When Hank Paulson and Ben Bernanke stretched the limits of their powers almost beyond the legal breaking point during the financial crisis, their actions were understandable but also set yet another precedent. And so now, when there’s no immediate emergency at all, people are looking to the executive branch to find a way to do the right thing, and thereby giving Congress implicit permission to play out and generally behave with all the maturity of a group of rampaging destructive adolescents.
The base-case scenario is, still, that the debt ceiling will be raised, somehow. But already an enormous amount of damage has been done: the US Congress has demonstrated clearly that it can’t be trusted to govern the country in a responsible manner. And the tail-risk implications for markets are huge. Think of the speed with which the Egyptian government collapsed earlier this year, or the incredible downward velocity of News Corporation right now. When you build up large stocks of mistrust and ill will, nothing can happen for a very long time. But when something does happen, it’s much quicker and much worse than anybody could have anticipated. The markets might not be punishing the US government at the moment. But the mistrust and ill will is there, believe me. And when it appears, it will appear with a vengeance.
© Copyright 2011 Thomson Reuters
http://blogs.reuters.com/felix-salmon/2011/07/14/the-damage-already-done-by-the-debt-ceiling-debate/ [with comments]
===
Obama still seeking biggest possible debt deal
WASHINGTON | Mon Jul 18, 2011 1:45pm EDT
WASHINGTON (Reuters) - President Barack Obama is still pushing for the biggest possible deficit reduction package, White House spokesman Jay Carney said on Monday.
He said conversations and communications between the White House and Republican congressional leaders have been continuing. He said there has to be a mechanism in place to ensure the U.S. does not default on its debt obligations.
(Editing by Sandra Maler)
© Copyright 2011 Thomson Reuters
http://www.reuters.com/article/2011/07/18/us-usa-debt-biggest-idUSTRE76H4MR20110718 [no comments yet]
===
(linked in) http://investorshub.advfn.com/boards/read_msg.aspx?message_id=65308230 (and preceding) and following
The Rachel Maddow Show [video]
July 18, 2011
John Stanton, reporter for Roll Call, talks with Rachel Maddow about the apparent lack of urgency among Republicans as the debt ceiling debate continues to erode U.S. economic standing and puts the entire world economy at risk.
http://www.msnbc.msn.com/id/26315908/vp/43803126#43803126
===
Wall Street Warns Congress: The Economy Post-Default Is A Man Post-'Suicide'
7/13/11
http://www.huffingtonpost.com/2011/07/13/wall-streets-warns-congress-debt_n_897472.html [with comments] [major reference; further to http://investorshub.advfn.com/boards/read_msg.aspx?message_id=65130160 earlier this string (seven posts back)]
===
Treasury cash squeeze would wreak economic havoc
By John W. Schoen
updated 7/15/2011 2:45:01 PM ET 2011-07-15T18:45:01
Speaking at his third news conference in two weeks on the stalled talks over raising the debt ceiling, President Barack Obama urged Congress on Friday to "do something big" for the economy to avert the unthinkable: a U.S. default.
Behind his words was the acknowledgment that without more borrowing authority, government spending cuts will begin to hit hard and fast in early August and ripple through the economy.
Though no one can predict exactly how it might play out, the resulting cash squeeze would wreak havoc on an already fragile economy, say analysts and economists.
For the moment, there appears to be little threat of a default on government debt; there is more than enough cash coming in to make the nation's interest payments.
The greater worry is that by robbing Peter's coffers to pay the interest on Paul's debt, the government will have to make tough choices about which federal programs won't get paid, and that could throw people out of work and send the economy back into recession.
Without the authority to borrow more money, the Treasury will come up short by about $134 billion in August. That spending shortfall would amount to more than 10 percent of gross domestic product for the month.
"If there's no deal by early August," Capital Economics economists wrote in a recent research note, "the drop in other spending would, if it lasted more than a few days, drive the economy into recession."
After scrambling for two months to buy more time, the government is rapidly running out of options.
When the debt ceiling was reached on May 16, the Treasury undertook what it called "extraordinary measures" to borrow from various accounts. That freed up about $232 billion to tide it through the next few months while Congress and the White House worked out a budget plan.
That cash cushion has been melting away; it rose briefly in June as tax payments and other receipts exceeded outlays. But it's on a downward track toward zero sometime in early August. The Treasury projects that it will be flat broke on August 2, with no way to raise enough cash to cover all the bills.
On or about that date, government officials have to begin making hard choices. For August, the Treasury projects it will take in roughly $172.4 billion to cover $306.7 billion worth of spending that, by law, it has to pay. To demonstrate what those choices might look like, Jerome Powell and his colleagues at the Bipartisan Policy Center took a look at how far the money would go.
They started with the widely held assumption that interest on the debt ($29 billion for August alone) would be paid first, thus avoiding the disastrous impact of a default.
The rest of the incoming cash would cover a month's worth of Social Security ($49.2 billion), Medicare and Medicaid ($50 billion), veterans affairs programs ($2.9 billion), education and tuition programs ($14 billion), housing assistance for the poor ($6.7 billion), food stamps ($9.3 billion), and unemployment insurance ($12.8 billion).
That's where the cash runs out and the list of unfunded programs begin. There would be no money left for defense contracts ($31.7 billion) or military active duty pay ($2.9 billion).
The Department of Justice ($1.4 billion) would close, shutting down the federal court system and halting operations at the Federal Bureau of Investigation. So would the Department of Energy ($3.5 billion), including national nuclear energy programs.
The Transportation Department ($1.3 billion) would cease functioning, including the Federal Aviation Administration and air traffic control system. So would the Centers for Disease Control ($0.5 billion).
And there would be no money to cover tax refunds ($3.9 billion) from the IRS. Even if there were, there would be no federal workers ($14.2 billion in salaries and benefits) to mail the checks.
"You can move the chess pieces around, but you can't win," said Powell, a former Treasury undersecretary in the George H.W. Bush administration. "There is no way to do this without creating a massive public uproar. There just isn't."
The impending cash crunch has been compared to the government shutdown in late 1995, when federal workers were briefly furloughed after Congress and the Clinton White House couldn't agree on a budget. Most government spending, however, continued at levels authorized under the previous budget.
In this case, though Congress has legally obligated the Treasury to pay for government programs and services, it has cut off the cash needed to do so.
"That's put the executive branch in the situation of trying to decide which spending laws not to obey," said Powell. "There is no precedent. There is no rule book."
With no rule book to follow, it's unclear just how the Treasury would decide which bills to pay. Treasury lawyers face a legal minefield sorting through specific contractual obligations spelled out in thousands of laws authorizing individual government programs.
Some analysts suggest it might have to operate day to day, spending only as much as it receives on a given day. That could make for even tougher choices. Unlike a household juggling its finances with fixed weekly paycheck, the flow of money in and out of the Treasury is subject to wide swings.
On Wednesday August 3, the day the government is expected to run out of cash, the Treasury expects to take in $12 billion in revenues, according to Powell's analysis. But it also has to cover $32 billion worth of bills coming due that day, including $23 billion in Social Security payments. With only enough cash to cover about half those checks, there is no legal framework for deciding which retirees get paid and which don't.
The next day, Treasury expects to collect just $4 billion to cover another $10 billion in bills. On August 5, there's only $7 billion coming in to cover $12 billion in scheduled payments. By the end of the first week of the government's cash squeeze, roughly $7.5 billion in Medicare and Medicaid bills would have gone unpaid, along with $4.8 billion worth of defense costs.
Some opponents of raising the debt ceiling suggest that it will force the government to make spending cuts that Congress and the White House have been unable to make. Simply starving the Treasury of cash, however, won't accomplish that goal, according to former Congressional Budget Office Director Douglas Holtz-Eakin
"Once you pass laws that say spend the money, you have an obligation to spend the money," he said. "When the revenue comes in, the spending still happens. So not raising the debt ceiling actually doesn't cut spending."
*
Video: Obama addresses press on debt talks
July 15, 2011
http://today.msnbc.msn.com/id/26184891/vp/43770117#43770117
*
© 2011 msnbc.com
http://today.msnbc.msn.com/id/43769894/ns/business-eye_on_the_economy/ [with comment]
===
Moody's suggests U.S. eliminate debt ceiling
An elderly man walks past The National Debt Clock, which displays the current United States gross national debt and each American family's share, on a wall in midtown Manhattan, in New York July 13, 2011.
Credit: Reuters/Brendan McDermid
By Walter Brandimarte
NEW YORK | Mon Jul 18, 2011 10:33am EDT
NEW YORK (Reuters) - Ratings agency Moody's on Monday suggested the United States should eliminate its statutory limit on government debt to reduce uncertainty among bond holders.
The United States is one of the few countries where Congress sets a ceiling on government debt, which creates "periodic uncertainty" over the government's ability to meet its obligations, Moody's said in a report.
"We would reduce our assessment of event risk if the government changed its framework for managing government debt to lessen or eliminate that uncertainty," Moody's analyst Steven Hess wrote in the report.
The agency last week warned it would cut the United States' AAA credit rating if the government misses debt payments, increasing pressure on Republicans and the White House to come up with a budget agreement.
Moody's said it had always considered the risk of a U.S. debt default very low because Congress has regularly raised the debt ceiling during many decades, usually without controversy.
However, the current wide divisions between the House of Representatives and the Obama administration over the debt limit creates a high level of uncertainty and causes us to raise our assessment of event risk," Hess said.
Stepping further into the heated political debate about U.S. debt problems, Moody's suggested the government could look at other ways to limit debt.
It cited Chile, widely praised as Latin America's most fiscally-sound country, as an example.
"Elsewhere, the level of deficits is constrained by a 'fiscal rule,' which means the rise in debt is constrained though not technically limited," Moody's said, adding that such rule has been effective in Chile.
It also cited the example of the Maastricht criteria in Europe, which determines that the ratio of government debt to GDP should not exceed 60 percent. It noted, however, that such a rule is often breached by the governments.
In the United States, Moody's said the debt limit had not effectively curbed the rise in government debt because lawmakers regularly raise it and because that limit is not related to the level of expenditures approved by Congress.
© Copyright 2011 Thomson Reuters
http://www.reuters.com/article/2011/07/18/us-usa-debt-moodys-idUSTRE76H0WH20110718 [with comments]
===
The damage already done by the debt ceiling debate
Felix Salmon
Jul 14, 2011 13:55 EDT
Listen to anybody on Capitol Hill, and they’ll tell you that the debt ceiling debate is turning into a complete disaster, with the Republican rank and file such an inchoate mess [ http://www.reuters.com/article/2011/07/14/us-usa-debt-republicans-idUSTRE76D0KH20110714 ] that it increasingly seems as though no deal will get done at all. Look at the Treasury market, however, where the 10-year bond currently yields something less than 3%, and it looks decidedly sanguine; short-term debt maturing shortly after the drop-dead date of August 2 is similarly unaffected by the news from Washington.
Megan McCardle [ http://www.theatlantic.com/business/archive/2011/07/the-giant-disconnect-between-wall-street-and-washington/241889/ ] thinks this shows a “giant disconnect” between Wall Street and Washington — things which Wall Street thinks are easy turn out in reality to be extremely hard, and things which any Wall Streeter would just do as a matter of course can be de facto impossible when political posturing starts getting in the way.
I’m not sure the disconnect is all that huge, for a couple of reasons. For one thing, US default risk is impossible to hedge. US default is an end-of-the-world event, and markets by their nature can’t price such things. Conceptually, there’s no point in buying something which pays off if the world ends, since the world will have ended at that point, and in any case your counterparty won’t be able to make good on the contract.
On top of that, remember that we already hit the debt ceiling on May 16 [ http://www.treasury.gov/connect/blog/Pages/Geithner-Implements-Additional-Extraordinary-Measures-to-Allow-Continued-Funding-of-Government-Obligations.aspx ] — two months ago. Since then, the amount of outstanding Treasury securities — a number which normally rises steadily — has been stuck at $14.3 trillion. The fact that supply of Treasuries has been artificially constrained by the debt ceiling has surely, at the margin, helped to support prices.
And more generally there are still a lot of individuals and institutions who want to buy Treasury bonds. That number might have been falling in recent weeks, but it’s still large. The U.S. is not facing the kind of emergency we’re seeing in the eurozone, where countries want to borrow money but no one’s willing to lend to them. If Treasury asks to borrow money from the markets, the markets will always lend it money; the only question is how much interest they will charge.
This is where McArdle goes awry, incidentally: she’s worried that any new debt issued after August 2 won’t be able to find buyers if Congress doesn’t raise the debt ceiling. But there will always be buyers, and there will always be buyers at yields very, very close to the secondary-market price for Treasury bonds. Treasury bonds are fungible, and to underscore that fact Treasury could easily just reopen old bond issuances instead of creating new ones. That would ensure that there was no way of telling the difference between bonds issued “legally” and bonds issued after the debt ceiling was breached.
Even if Treasury can still sell bonds, however, that doesn’t mean for a minute that breaching the debt ceiling is something which should be considered possible for the purposes of the current negotiation. Tools like the 14th Amendment or even crazier loopholes like coin seignorage [ http://www.correntewire.com/coin_seigniorage_and_irrelevance_debt_limit ] would be signs of the utter failure of the US political system and civil society. And that alone could mean the loss of America’s status as a safe haven and a reserve currency. The present value of such a loss? Much bigger than $2 trillion. (Coin seignorage, if you’re wondering, is the right that Treasury has to mint a couple of one-ounce, $1 trillion coins and deposit those coins in its account at the New York Fed. It could then withdraw cash from that Fed account to make all the payments it wanted.)
This is one reason why I worry a lot about clever ideas like Mitch McConnell’s plan to get the debt limit raised through a novel use of the Presidential veto — or, for that matter, Matt Yglesias’s [ http://thinkprogress.org/yglesias/2011/07/14/269022/is-mitch-mcconnells-debt-ceiling-gambit-really-that-clever/ ] even cleverer plan for Democrats to game the McConnell scheme. McConnell is one of Congress’ foremost tacticians, but cunning tactics on either side of the aisle are the last thing that anybody needs right now.
When Bob Rubin did a nifty sidestep around Congress and magicked Mexico’s bailout billions from some dusty account no one knew about, he was playing a dangerous game. When Hank Paulson and Ben Bernanke stretched the limits of their powers almost beyond the legal breaking point during the financial crisis, their actions were understandable but also set yet another precedent. And so now, when there’s no immediate emergency at all, people are looking to the executive branch to find a way to do the right thing, and thereby giving Congress implicit permission to play out and generally behave with all the maturity of a group of rampaging destructive adolescents.
The base-case scenario is, still, that the debt ceiling will be raised, somehow. But already an enormous amount of damage has been done: the US Congress has demonstrated clearly that it can’t be trusted to govern the country in a responsible manner. And the tail-risk implications for markets are huge. Think of the speed with which the Egyptian government collapsed earlier this year, or the incredible downward velocity of News Corporation right now. When you build up large stocks of mistrust and ill will, nothing can happen for a very long time. But when something does happen, it’s much quicker and much worse than anybody could have anticipated. The markets might not be punishing the US government at the moment. But the mistrust and ill will is there, believe me. And when it appears, it will appear with a vengeance.
© Copyright 2011 Thomson Reuters
http://blogs.reuters.com/felix-salmon/2011/07/14/the-damage-already-done-by-the-debt-ceiling-debate/ [with comments]
===
Obama still seeking biggest possible debt deal
WASHINGTON | Mon Jul 18, 2011 1:45pm EDT
WASHINGTON (Reuters) - President Barack Obama is still pushing for the biggest possible deficit reduction package, White House spokesman Jay Carney said on Monday.
He said conversations and communications between the White House and Republican congressional leaders have been continuing. He said there has to be a mechanism in place to ensure the U.S. does not default on its debt obligations.
(Editing by Sandra Maler)
© Copyright 2011 Thomson Reuters
http://www.reuters.com/article/2011/07/18/us-usa-debt-biggest-idUSTRE76H4MR20110718 [no comments yet]
===
(linked in) http://investorshub.advfn.com/boards/read_msg.aspx?message_id=65308230 (and preceding) and following
Greensburg, KS - 5/4/07
"Eternal vigilance is the price of Liberty."
from John Philpot Curran, Speech
upon the Right of Election, 1790
F6
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