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Debt Ceiling: No Chance of US default

By Warren Mosler

Republican Senator Pat Toomey is now making the point that with debt payment an executive priority, and with tax receipts more than sufficient for interest payments, not raising the debt ceiling will not mean default, instead it will mean other federal spending will get cut, which he pronounced analogous to a partial government shut down. While this has always been factually correct, it is only very recently that this has become the lead response from the Republicans, in direct response to warnings by the Democrats of a US default.

With the Democrats being exposed as factually wrong and guilty of at least innocent fear mongering, their entire negotiating position is weakened by both the facts and their reduced credibility in general. So I have to conclude the end result will be dramatic spending cuts, no tax increases, a large reduction in long term aggregate demand, and most likely reductions in short term aggregate demand as well.

The Democrats are now left with fighting for alternative spending cuts, with the military a prime target. In fact, they may already be cutting military spending, as the executive branch is not necessarily compelled to spend the funds authorized by Congress, but can selective not fund or delay funding in the normal course of business. So, for example, they may be able to cut $150 billion a year from actual military spending and score it as something over $2 trillion in savings over 10 years, which would reduce the need for other cuts currently under consideration. And this might be the motivation for brining as many troops back home as possible, from all over the globe.

These kinds of cuts would remove maybe 1-2% of nominal GDP from 2012, support unemployment and the dollar, help keep the Fed on hold, as, in general, fear of becoming the next Greece continues to cause us to work to turn ourselves into the next Japan.

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6 Comments

  1. Mike Valotta says:

    How about a substantial tax cut that puts money directly into consumer pockets? I can’t imagine a better stimulus. Payroll tax holiday. Enough of the monetarism.

  2. Not going to happen. The animus for spending cuts is deficit reduction. Tax cuts wouldn’t get you there. And the Tea Party is riding herd n this one. They are annoyed that Boehner did his little deal in December and they want no more part of that kind of thing. So there will no no tax cuts but also no tax raises. Spending cuts is where this is headed.

  3. Mike Valotta says:

    You’re right. I’m ok with cutting “wasteful” spending, but it seems absurd to me that tax cuts are off the table considering 1. Taxes are not really a source for revenue. 2. it’s the fastest way to help improve short run demand. What world are these guys living in? I’m in full agreement with Koo. It seems we have learned nothing from Japan and MMT. A substantial tax cut would make the tea party folks happy. Their phobia of government debt is based on a misunderstanding unfortunately.

  4. It’s all abut deficits. Ask anyone who isn’t steeped in this stuff what they think. When I speak to my sister, mother, anyone, they all say these deficits are reckless; they’re bad and we need to cut them. So, that’s the mainstream view.The Tea Party is just putting this out as a big priority where others have not. I came to accept this long ago (back in late 2009). I would have thought that the cuts would have happened already. Bottom line: regardless of your thinking on the issue, the political climate is clear – in the US and Europe. Deficits will be cut.

  5. Mike Valotta says:

    Very true. :( very frustrating, from my perspective.

  6. ralph says:

    There is something
    seriously wrong with a system in which people with zero qualifications in
    economics (politicians) can play fast and loose with aggregate demand. Even more
    absurd is that in the US and many other countries there are two bodies with a
    say over demand: the central bank and parliament (i.e. politicians). You might
    as well have a car with two steering wheels one controlled by a husband and the
    other controlled by a wife in the middle of a marital breakdown.

     

    The central bank (or some
    other independent committee) should have complete control over the size of the
    deficit, interest rates, and other aggregate demand influencing factors. While
    politicians could concentrate on the strictly political factors, like the
    proportion of GDP grabbed by the public sector and how the latter spends its
    money.
     

  7. ralph says:

    There is something
    seriously wrong with a system in which people with zero qualifications in
    economics (politicians) can play fast and loose with aggregate demand. Even more
    absurd is that in the US and many other countries there are two bodies with a
    say over demand: the central bank and parliament (i.e. politicians). You might
    as well have a car with two steering wheels one controlled by a husband and the
    other controlled by a wife in the middle of a marital breakdown.

     

    The central bank (or some
    other independent committee) should have complete control over the size of the
    deficit, interest rates, and other aggregate demand influencing factors. While
    politicians could concentrate on the strictly political factors, like the
    proportion of GDP grabbed by the public sector and how the latter spends its
    money.