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Sunday, July 28, 2013

Bill McBride — They're Back! Congress threatens to Default Again

It is a bluff. As Republican Senator Mitch McConnell noted in 2011, if the debt ceiling isn't raised the "Republican brand" would become toxic and synonymous with fiscal irresponsibility.
The bottom line is Congress is being silly (again), and they will raise the debt ceiling.

"Congress"? Or the GOP-controlled House? Speaker Boehner is being jerked around by his unruly caucus.

Calculated Risk
They're Back! Congress threatens to Default Again
Bill McBride

19 comments:

  1. Let Congress default on Medicare. If they dare!

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  2. Behold the fruit of sovereign borrowing! The creation of a class who benefits from misery since deflation increases the real yields of sovereign debt but cannot increase the default risk since there can be none with sovereign debt.

    Hamilton should be shot! Oh never mind, he was.

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  3. This has nothing to do with sovereign borrowing. If they didn't have a "debt limit" they would enforce a "tax revenue limit". It's about spending and conservatives desire to limit the role of government.

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  4. Notice the wages of appeasement: They threaten one time and they get a fiscal cliff. They threaten another time, and they get a sequester. I wonder how long Obama will keep compromising like this.

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  5. It's about spending Dan K

    Indeed it is. A significant increase in spending by the monetary sovereign is likely to revive the economy and thus interest rates, leaving the sovereign debt owners with losses.

    and conservatives desire to limit the role of government. Dan K

    Yes, that too. So why not compromise? What is needed is not an increase in government per se but an increase in government SPENDING. So why not advocate the distribution of new fiat to the entire population equally? How can conservatives object to that? Unless their real motive is to protect sovereign debt yields?

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  6. Dan, I was just looking at a book published in 1957 by Herbert Agar entitled, The Price of Power.

    He argues that the history of political liberalism is about achieving the correct balance of power. Too much concentration risks tyranny and too little leaves a power vacuum that is up for grabs. He argues the the US presidency and the president's relationship with Congress is determined by shifts in this balance.

    Again, it is a states' rights v. federalism issue.

    When the president leaves Congress to much to its own devices then the power structure weakens to the degree that powerful people in Congress can drive the agenda if the president allows them to. He gives the example of Eisenhower permitting McCarthy to neuter the executive branch, Secretary of State John Foster Dulles in particular, from within the president's own party.

    I think that this fits Obama to the tee domestically. He is willing to assert power in foreign affairs and but not domestically when he knows he will will face opposition in Congress. In the face of opposition, he caves, giving the impression that he is either weak or agrees with the opposition at least to some degree.

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  7. Of course the conservatives will object to that. The entire conservative agenda is based on proving that the government is incapable of solving problems.

    A one-time helicopter drop might give us a little boost and knock a few points off the unemployment rate for a while, but it won't solve any of the structural problems that caused the 2008 collapse in the first place.

    Also, if Congress does a Treasury-initiated helicopter drop the Fed will probably cry inflation and counteract it by letting the treasury rate rise.

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  8. A one-time helicopter drop might give us a little boost ... Dan K

    Such timid thinking! Ban further credit creation, at least temporarily, and new fiat can metered out at least until all demand deposits are 100% backed by reserves. Interest rates should not change much at all if the distribution is metered to just replace existing credit as it is repaid. Or interest rates could be driven downward if the distribution was greater and thus impose a relative inflation tax on the rich.

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  9. On second thought, I retract "... and thus impose a relative inflation tax on the rich."

    One should not attempt to be too clever.

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  10. Of course the conservatives will object to that. Dan K

    Beat em with a bush, a G.W. Bush, since he sent out "stimulus checks", didn't he?

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  11. It's impossible to "ban" further credit creation. Human beings have been borrowing and lending for as long as we have historical records.

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  12. "Ban further credit creation"

    Maybe Congress should pass a law that bans people from doing stupid things?

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  13. This comment has been removed by the author.

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  14. Give me a break. Ban further credit creation BY THE BANKS.

    You guys say the banks are agents of the US Government but now they're NOT?!

    And of course purely private credit creation is ethical.

    But what part of government backing for debt creation is unethical don't you get? Is that different in principal from government backing for slavery?

    The rich rules over the poor, and the borrower becomes the lender’s slave. Proverbs 22:7

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  15. "I wonder how long Obama will keep compromising like this."

    Until he & his entire family are Sr. Partners at Goldman Sachs?

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  16. Also, the lending of existing fiat is NOT credit creation. Purchasing power is simply transferred, not created.

    What the banks do is charge us rent for the privilege of stealing purchasing power from each other; that is, if we're so-called creditworthy.

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  17. "What the banks do is charge us ... for [accurately] purchasing power [leveraged among] each other"

    Yes, that's exactly what banks are licensed to do in a fiat currency, or any other regime.

    The problems are ones of excess and failed regulation.

    1) incomes at the largest banks are FAR too high (no public purpose in it)

    2) fraudulent loans and investment schemes are out of control, sucking credit from the mundane, honest credit applications

    Both of these are regulatory failures, not failure of a given currency regime to work. We could easily make our present system work as well as it did from ~1933-1950.

    The few changes that triggered all the biased outcomes were - and remain - subtle.

    Our bigger problem is that our policy agility has slowed & even reversed course, constraining our Policy Space exactly when it absolutely must expand just to keep up with changing context.

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  18. Rodger, I know you can understand this:

    There is NO need for a government-backed credit cartel when purchasing power can be issued as shares in Equity.

    Or was the teaching that we should share in kindergarten a super effective vaccine against sharing as adults?

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  19. F. Beardg :)

    "There is NO need for a government-backed credit cartel when purchasing power can be issued as shares in Equity."

    It's not about the credit, it's about the structure of the accounting method. It's your choice whether to focus on banks as the medium or the coincidental accountant for fiat. In practice, it doens't matter to regulators (us), who have power to regulate as we see fit ... if we'd only express that leverage.

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