The Shut-Down, the "CR" and the Debt Ceiling

[johnkarls]

.
Suggested Discussion Outline for "The Current U.S. Government Shut-Down, The Continuing Resolution (“CR”) and The Debt Ceiling"

1. The basic reason for both disputes is the massive annual deficits that the U.S. government has been running, as a result of which our accumulated national debt is about to pass through $17 TRillion = more than 100% of our annual national output.

2. Traditional economics teaches that it is necessary to run governmental deficits during recessions in order to stimulate the economy.

3. This is the view of our author and of the two book reviews posted on http://www.ReadingLiberally-SaltLake.org -- one by Harvard Economics Prof. Lawrence Summers (who was the Director of President Obama’s Economic Council 2009-2010 and who was President Obama’s first choice until two weeks ago to head the Federal Reserve beginning next year) and the other by Princeton Economics Prof. Paul Krugman (Nobel Laureate and NY Times OpEd Columnist).

4. However, all three recognize (and dispute to some extent) the widespread belief that when a country’s national debt reaches 90% of the country’s annual output, the country is no longer able to borrow in the markets.

5. Indeed, if such a country were able to borrow at even a 30% interest rate (which unwise individuals have to pay on their credit cards and corporations have to pay on their “junk bonds” if they can borrow at all), the country would have to have an average 27% income-tax rate just to pay interest, without having anything left to spend for anything else.

6. All of Europe’s “problem children” governments that ran into trouble (Greece, Ireland, Spain, Italy, etc.) had passed through that level when the markets refused to lend them any more money.

7. All of them were trapped in the Euro-Currency Zone so they couldn’t just print more money to cover their excess spending for as long as the world was willing to accept their money.

8. Since none of them could borrow in the markets, all of them tried to get handouts from Germany and France (and German and French taxpayers/voters).

9. Immediate disaster was averted when the U.S. Federal Reserve agreed to lend (and print the money that was lent) to provide untold TRillions of dollars (A) commencing September 2011 to bail out the Italian and Spanish governments through 12/31/2011, and (B) commencing October 2011 to bail out all European banks, not just Italian and Spanish banks, through 2/1/2013.

10. Of course, as soon as the 2/1/2013 cut off for all European banks was reached, the markets immediately “tested the waters” by attacking the debt of Cyprus and its national banks. In order to remain solvent, Cyprus confiscated 47.5% of all Cyprus bank deposits in excess of the 100 thousand Euro equivalent to FDIC insurance that prevails in the Euro-zone countries.

11. “Austerity” or “belt tightening” in common parlance is what a country such as Europe’s “problem children” countries must do when it cannot borrow in the market at any interest rate and has to accept whatever terms are imposed for handouts by German and French taxpayers/voters -- which, at least, is a bit less austerity than if no handouts were available.

12. Since a country’s currency is nothing more than a zero-interest infinite-maturity debt, a country that has its own currency will usually see its currency “go in the toilet” at the same time as its bonds.

13. Two prominent historical examples are starving 1930’s Germany trying to run on the British Pound Sterling after the Reich-Mark became worthless, and starving 1990’s Russia trying to run on the U.S. dollar.

14. In such situations, non-farmers are/were forced to raise their own food in their backyards and/or hope that they are related to a sufficiently attractive young woman who can barter sex for food.

15. According to http://www.treasurydirect.gov, our national debt on 10/3/2013 was $11.94 TRillion held by the public and $4.81 TRillion held by U.S. governmental agencies such as the Social Security Trust Fund, for a total of $16.75 TRillion.

16. Even the $11.94 TRillion held by the public represents 73% of the economy’s annual output according to a 9/17/2013 announcement of the Congressional Budget Office. According to http://www.cia.gov, this percentage increases at approximately 7%/year.

17. This puts the U.S. in exactly the same position as Spain in 2011 when its national debt was attacked by the markets and Spain had to be bailed out by the U.S. Federal Reserve (please see Item 9 above). [According to http://www.cia.gov, Spain’s national debt was mushrooming from 68.5% in 2011 to 83.2% in 2012.]

18. There is no Celestial Reserve Bank to bail out the U.S. if its debt (and even its currency) come under attack by the markets.

19. Most news-media “talking heads” blithely opine that the U.S. dollar will never be attacked as the world’s de facto “national currency” (often called the world’s “reserve currency’) because “where would investors go instead” -- as if investors have to hold their wealth in investments denominated in currencies of real countries without bothering to realize that it wouldn’t take much imagination for our young financial whizzes to invent a synthetic currency that is NOT tied to any particular nation’s currency (but floats on its own) and that DOES displace the U.S. dollar as the world’s reserve currency.

20. Our author and Prof. Summers (though cautious) and Prof. Krugman (gung ho) argue that we have nothing to worry about for the foreseeable future if we continue to run large deficits and continue to mushroom our national debt in order to stimulate the economy.

21. But they have no empirical data to support their claims because we are truly in “uncharted waters”!!!

22. So we may really be “betting the ranch” on whether tomorrow we will all have to be back-yard farmers and our daughters will have to be whores.

23. Though, of course, failing to “bet the ranch” also involves a lot of economic hardship for our citizens.

24. Everyone is welcome on Wednesday evening to dispute any point on this list and/or add any other points s/he thinks are relevant.