Wednesday, July 20, 2011

Debt Ceiling and Balanced Budget Amendment

What would happen if the government doesn't raise the debt ceiling in time?

To avoid default, the Treasury would prioritize interest payments, which means a lot of other bills won't get paid.

Chairman Bernanke said that this could cut 6% off of GDP and send the US into another recession with GDP going from positive to negative. How does that help boost sales or business confidence?

However, falling GDP means falling revenues which means more spending cuts, and revenues falling further.

It also means the automatic fiscal stabilizers of rising transfer payments will not be funded by deficit spending and therefore not provide the support they have provided in all prior downturns.

For the first time the US would experience an unchecked downward spiral, which could make the downturn that much more severe than the Fed Chairman suggested.

This likely would transfer to other nations for the drop in US consumer, business, and govt spending will mean a drop in sales for euro zone exporters, possibly sending that region into negative GDP growth and falling govt revenues.

This means their current solvency and funding issues further deteriorate as the entire euro zone could experience a funding barrier and general default.

While the ECB can, operationally, write any size check required to fund the entire region, it doesn’t want to do that, and can be expected to wait until things deteriorate sufficiently to the point were there is no other choice.

Ironically, the US debt ceiling, a seemingly innocuous relic of the gold standard, where it once served to protect the nation’s gold supply and should have been eliminated when the US dollar ceased to be officially convertible into gold, could now bring down the entire world economy, and threaten the world social order as well.

Paraphrased and quoted from here.

Similar effects could be expected with a Balanced Budget Amendment. House Republicans and even Senate Republicans (at least my senator, Jerry Moran, sent out an email saying he approved a BBA) are championing a Balanced Budget Amendment (BBA) as the solution to our fiscal woes.

I don't know what they think will happen if such an amendment were to pass, which is very highly unlikely, but it seems they believe that consumer and business confidence will go up and the crowding out (that they think is happening) will stop and businesses will begin to invest again; or I could be even more pessimistic and think that they are intentionally tanking the economy so as to win elections in 2012 ala Paul Krugman, but I really don't think that's the case.

Taking away a large chunk of deficit spending through a BBA would likely result in a large drop in GDP, followed by further drops in revenue, which would then require a further drop in spending...and you see how this cycle is self-defeating right? It would certainly accomplish the goal of a smaller goverment, but I don't know what good it would do for the common good. It would take away many needs of millions of people. Social order would be very difficult to maintain. Many evil regimes came to power amidst times of economic turmoil.

I also don't think that those who champion balanced budgets and deficit cutting understand that doing so would undermine their efforts to balance the budget. The government would certainly be reduced in size, but would the private sector take up the task of providing for the needs of those who aren't provided for by the market? What business invests when consumers aren't buying their products/services because a chunk of their income was taken away?

We could have a smaller government as the Republicans desire, but we can't have a smaller deficit (or no deficit) and not expect to face economic turmoil. We must have a deficit and we must raise the debt ceiling, or better yet abolish such a concept altogether (what's the point of a debt ceiling?). We can decrease government by reducing spending and taxes by more than spending or increase government by increasing spending and taxes by less than spending, and that should be the debate!. But the debate has been about how to reduce the deficit and on that note I disagree greatly with both sides.

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