Debt Ceiling Negotiations to End Badly

By this time next month, the long-running battle over raising our nation’s debt ceiling will have come to a resolution, one way or another.  Either the U.S. will be forced to default (or not?  see below) or an agreement will have been reached to raise the ceiling in return for a cut in the projected size of the deficit.  Possible outcomes range from a catastrophic global financial melt-down at one end of the scale to a mere collapse into the 2nd dip of the recession at the other end of the scale.  There are no possible good outcomes here.  This is going to end badly. 

Those who have bought into the notion that cutting our deficit, especially by cutting government spending, will somehow stimulate the economy couldn’t be more wrong.  Cutting the deficit, regardless of whether it’s done by cutting spending, increasing revenue or some combination of the two, will take money out of the economy.  Collecting revenue takes money out of the economy as Republicans correctly point out.  Government spending puts money back in, as Democrats correctly claim.  Taking more out in the form of revenues or putting less back by cutting spending leaves the economy with less than it started.  While that helps the nation’s balance sheet in the long run, leaving the next generations better off, it’s bad for the economy in the short run. 

So the only possible outcomes here are either a U.S. default on its interest obligations on its bonds, which could conceivably render all U.S. bonds instantly worthless, wiping out banks and investors across the globe, or a recession-triggering pulling of the rug from under the feet of the U.S. economy, an economy barely kept above water by trillions in deficit spending by the federal government and quantitative easing by the Federal Reserve – all of which has come to an end.  No wonder the two sides are battling so bitterly.  Both know the outcome will be bad.  Each wants the other to take the blame. 

And that’s not the half of it.  Even if a deal is reached, the deficit is cut and the debt ceiling is raised, the only thing that will have been accomplished is that the “can” will have been kicked a bit further down the road.  It’s not as though we’ll be cutting the deficit; we’ll only be cutting the projected growth in the deficit.  The deficit, projected to grow by another $15 trillion or so in the next ten years, will instead grow by only $10 or 11 trillion, a situation that will leave us in far worse shape than now.  What are the odds that it’ll be dealt with then?

I’m not arguing that the problem shouldn’t be addressed or that no good outcome is possible regardless of what our lawmakers do.  The problem is that nowhere in these talks is the real problem that drives the deficit spending being addressed, and that is the trade deficit.  As I said earlier, anything that takes money out of the economy, which includes taxes, cuts in deficit spending – even personal savings, is a drag on the economy.  And our trade deficit currently drains over $500 billion per year from the economy.  If that draw-down from the economy isn’t made up by deficit spending, then economic recession is absolutely unavoidable.  Furthermore, without any deficit spending, then the U.S. will not be issuing any more bonds, leaving foreign countries with trade surpluses with the U.S. no way to plow those dollars back into the American economy, throwing a big monkey wrench into the gears of the global economy.  Ultimately, that might be a good thing, forcing a rebalancing of the global economy and global trade. 

So, without a comprehensive approach to fixing our economy that includes restoring a balance of trade (and perhaps even addressing our goofy immigration policy, but that’s a different topic), merely cutting the deficit and raising the debt ceiling is just another round in a game of economic whack-a-mole, a futile effort to deal with economic side-effects that pop up faster than Congress can swing its little economic mallet. 

Greece is a good example of what we’re facing.  Like the U.S., Greece has a large trade deficit – about the same as the U.S. in per capita terms.  Like the U.S., Greece is heavily dependent on imported oil.  And like the U.S., its debt exceeds its GDP and has been growing rapidly.  The austerity measures imposed upon Greece by its creditors have resulted in violent civil unrest in that nation in recent weeks.  And the Euro zone has warned Greece that it faces loss of its sovereignty and the prospect of much higher unemployment as these austerity measures take hold.  (See http://www.reuters.com/article/2011/07/03/us-eurogroup-greece-idUSTRE76219J20110703.)  The U.S. will face the exact same things if we implement drastic deficit reduction programs without addressing our trade deficit.

Things are coming to a head soon and, regardless of how it turns out, it won’t be good. 

* * * * *

Regarding the whole issue of default, there is a little-known sentence in the 14th amendment that seems to forbid the U.S. from failing to pay its obligations.  That sentence reads, “The validity of the public debt of the United States … shall not be questioned.”  The Obama administration is considering whether, in the event that the debt ceiling isn’t raised, it can invoke this statement and ignore the debt ceiling and continue paying the government’s bills.  Imagine the ramifications.  Without the limitation of the debt ceiling, there will be no rein on government spending.  It would be interesting to see just how fast an amendment to balance the budget, already being suggested by Republicans, would be introduced.  But, again, bear in mind that balancing the budget without balancing trade is a virtual (if not physical) impossibility.  At least such an amendment would pretty quickly force a re-evaluation of trade policy. 

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7 Responses to Debt Ceiling Negotiations to End Badly

  1. ClydeB says:

    Welcome back. Do you think a Balance Budget Amendment has even a ghost of a chance of being ratified? With half of the population spending the other halfs money, where will the votes to amend come from? I see it as merely another “kick the can’ stall. I continue to press the trade deficit and population growth problems in every communication with representatives and candidates, but it falls on deaf ears for the most part.

    • overlooked says:

      clyde Oh thats was a great example of how they are using this to succeed in their plan to collapse this system we current have

    • Pete Murphy says:

      I do think it has a chance. It’s one thing for Democrats to oppose spending cuts and for Republicans to oppose tax increases. But opposing the concept of a balanced budget is much harder to defend. Virtually every state in the union has it in their constitutions. Why not the U.S. constitution? I think such an amendment would have to make exceptions for financing a declared war, and perhaps some other extraordinary circumstances.

      A balanced budget is just one of many ways in which the constitution is in dire need of amendment. This blog mentions a couple of others. Even the concepts of free speech and just who exactly is meant by “the people” is in desperate need of clarification.

      Keep up your badgering of your representatives. They’ve got to hear it from someone.

  2. overlooked says:

    Wall Street needs to realize this before they have nothing left in the way of leverage , and once its gone your Money means NOTHING people because you are SERFS !!!!
    The time has come for FAIR TRADE in American Trade policy rules , ALONG WITH SPENDING CUTS IN OUR FEDERAL GOVERNMENT !! Wall Street needs to realize this ! Allow for some changes to be made Or the Consumers are going to run out of Consuming Capital because we the people are running of of equity durable work production that comes with creating our own basic vital needs which includes a mining base that creates the iron ore we then forge in our foundries which we then create our NUTS and BOLT that we HOLD OUR LIVES TOGETHER WITH , and we are Depending on other now to do thins and they are getting ready to Physically USE this Leverage Against us because we do not have a Operational Industrial base and they Know this , its called Extortion and Forced SERFDOM , and then Nothing will work for Wall Street or ANYONE !!

    And if we cannot find a way to negotiate a balance Trade policy that all agree with then we should not just keep doing the same thing like we have been thats Creating all this debt owed to Foreign Countries with No agreeable solution that all can agree on , and so we the people must go back to making our own needs so WAR is not the result by these International disagreements . And to continue to allow the debt of this Unfair trade policy to just keep building up with raising the debt ceiling and the eventual collapse of our Economic system because of this is Unacceptable Monetary policy .

    The Consumers are Bleeding out of their Privately Formed capital because there is NO Private capital formation originating in the USA any more at sustainable levels due to the Unenforced Free Floating Currency Rules of the Free Trade agreement and this is leaving the USA in debt because we cannot Openly compete with a 40 cent per hour wage level that a Result of these countries manipulating their currencies to keep them artificially suppressed so as to create the Demand for their Countries Production of durables over any other countries demand for their Production of durables , all except for German which is explained beautifully in this article and why we the people in the USA need to understand this and Debate it in a forum that forces the Congress and wall Street to realize this and Change their Oppressive Control over how Trade Policy is continued in the USA !!!!

    I absolutely agree with the reasoning in the article by Donald Allen on whats happening to the USA and its Independence . SERFDOM is our Direction as we have become DEPENDENT and Leveraged over the years due too this Incompetent Congress all because they have been playing the fascist association with the multi-nationalists at the Lobby rooms in the Back door policy making during the past 18 years of the FREE Trade agreement under the WTO and enough is enough !!!
    We need to Replace this Barbaric Relic called the Federal Reserve with the Restoration of the USA sound money policy so we the people can have a voice in our Monetary and Trade policies again because its NOT working and these 2 policies seem to be whats the root of the Economic crisis we the people are facing today from which we had NO say SO over this set of Policies over the years thats put us In the positions we are in and fighting the WARS we have and Are today .
    A Century of Failure: Why It’s Time to Consider Replacing the Fed | George Selgin

    I believe the Commies in the world and the USA are using this UN-Fair FREE Trade agreement to collapse the current economic system and its those that actually call the policy Unfair and Point it out that are TRUE Independent Patriots of FREEDOM and this story needs to be told !!!!
    Tariffs = National Security
    DONALD MCKINLEY ALLEN
    Freelance author with eyes focused on America’s future

    http://dmaview.newsvine.com/_news/2011/06/09/6823345-tariffs-national-security

    They even admit that the problem we have is due to Currency manipulation by our trade Partners so its time for a Understanding of this in the Public forums of America and we get some politicians that won’t Lie to us and tell us they are going to change the trade Policy and then get Bought off again and again , we can’t take much more of this before we are toast and the Fraudulent Debtors come to take us away .

    Geithner warns Beijing on currency policies ;

    http://www.washingtontimes.com/news/2011/jan/12/geithner-warns-beijing-currency-policies/

    China Manipulates Its Currency—A Response is Needed
    Josh Bivens Robert E. Scott

    http://www.epi.org/publications/entry/pm116/

    The High Cost of the China-WTO Deal: Administration’s own analysis suggests spiraling deficits, job losses; By Robert E. Scott; February 1, 2000:

    http://ning.it/cNJn9O

    And

    http://ning.it/bTIt9f

    It has also taken Mexico\’s Jobs away over the years too. Europe\’s Jobs too. This is all because of a Simple Currency manipulation that does nothing to promote quality in our products.
    Remember what Ross Perot said , we would Hear a Giant Sucking Sound with this Trade Policy , he was right . http://www.thenation.com/article/new-giant-sucking-sound

  3. ClydeB says:

    Overlooked,
    As Pete has proven again and again, currency manipulation is bad but not a causative factor in our trade deficit. Population explosion around the world is the cause and must be recognized by the politicians before they will see the light and initiate corrective action. We absolutely MUST stop the bleeding before it is too late. Balancing tariffs as the start is something the President could initiate with an executive order, but he must first understand the problem. He doesn’t have a clue now.
    The phrases, ‘free trade’ and ‘being competetive’ are bandied about with absolutely no idea of what they means. In a practical sense, they mean we compete at the lowest common denominator for labor and in an economy where every country but ours require purchase of domestic production with imports as a last resort.

    • Pete Murphy says:

      Clyde, excellent point about currency manipulation.

      Overlooked, you’re right on target about our trade deficit and its role in ruining our economy. I do hope we’re able to convince you of the critical role of population density in driving our trade imbalance. As long as all the focus is on the popular scapegoats of low wages and currency manipulation, no progress will ever be made since neither of these is much of a factor at all.

  4. Pete Murphy says:

    Sure enough, it has ended badly, with a compromise that does absolutely nothing to help the economy, short-term or long-term. For the long term, the deficit reductions are insufficient to halt the worsening of national debt relative to our ability to pay it off. National debt per capita will continue to rise, just not at as fast a pace.

    And because it’s insufficient, it’s likely that one or more ratings agencies will follow through with a promised downgrade of our debt.

    Finally, shrinking the deficit by the amount in this debt deal will suck about $300 billion per year out of the economy and result in the loss of about 4 million jobs.

    Not once during the whole debate did the subjects of trade or our trade deficit, or the potential use of tariffs to generate revenue, ever come up. Would we have any fiscal problems whatsoever if our cumulative trade deficit since 1975 hadn’t sapped $11 trillion from our economy?

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