There used to be an old joke in Europe that America had Bob Hope, Percy Faith and Johnny Cash, and Country X had no faith, no hope and no cash. Well things have changed a bit…
This sorry media-hyped drama on the debt ceiling is becoming a tiresome, rather maudlin affair. There are no shortage of pundits and “celebrities” who are eager for the microphone.The doomsayers and naysayers are predicting financial armageddon. Clarity on the issue is subordinate to ideology. The GOP will likely be blamed, with their only apparent option being being to defy supporters and compromise on taxes.The battle is who gets the blame, and the entire political class is taking a PR bath. The hysteria is palpable: U.S. consumer sentiment is declining due to the debt showdown, the Expectations Index is down, but the markets seem to taking it in stride, though its difficult to predict how markets will react if a deal doesn’t get done. Political theater? Considering 40% of the population has no savings, you can look at the debate as something of a lotto…
Even out pope of finance Ben Bernanke, helicopter Ben, as he was called has been weighing in with predictable rectitude: “The analogy about balancing your cheque book and getting your finances in order is wrong. The right analogy for not raising the debt ceiling is going out and having a spending spree on your credit card and then refusing to pay the bill. That’s what not raising the debt limit is.”…
…“We need an increase in the debt limit, which will prevent us from defaulting on obligations we have already incurred, and which will create tremendous problems for our financial system and our economy. But we also need, of course, to take a serious attack on the unsustainability on our fiscal position.”…“The assumption is that as long as possible the Treasury would want to try to make payments on the principle and interest of the government debt because failure to do that would certainly throw the financial system into enormous disarray and have major impacts on the global economy. Read More:http://business.financialpost.com/2011/07/13/not-raising-debt-ceiling-like-refusing-to-pay-your-credit-card-bernanke/
Below are some excerpts from an article by Michael Ferguson of which It makes good sense to read in its entirety:
As usual, The Mediocracy, is throwing around statements about the U.S. Deficit, Debt Ceiling and future financial solvency that only make sense in 30 second sound bites. Look into it deeply and very quickly it becomes apparent that we, collectively, are victims of demagoguery from all sides….
…So, if you read, as I did today, that we have a looming default, that author is either not competent or is willfully engaging in prevarication. The funds that will come into the government in August will not be sufficient to make all payments. However, there will be enough to meet the most critical items, such as debt service and meeting the obligations of Social Security….Read More:http://thefuture101.blogspot.com/
…Several options exist. First, about $4.6 Trillion of the debt is held by other governmental agencies, primarily the Social Security Trust Fund and the Federal Reserve Bank. The government could sell some of that debt to meet expenditure requirements. It would most likely be at a discount, but this is a cash flow issue right now. This would cause an uproar, of course, since it would turn a debatable ‘raiding of the trust fund’ argument into an actual, undeniable one. So, we must assume that most of the cash flow shortfall would need to be met by the government actually cutting expenditures or at least deferring them until a deal to raise the debt ceiling could be reached….
…And that is the point. This is not about defaulting on loans. Even if cutting discretionary spending was not sufficient, it would most likely be done by deferring some Social Security payments based upon means testing. This is about draconian cuts in government that would get the public outraged and politicians fired. Fortunately, the whole notion that the debt ceiling shouldn’t be raised is demagoguery, itself. We simply need to get the growth on a more sustainable path….Read More:http://thefuture101.blogspot.com/
…Our objective should not be to eliminate debt or even freeze debt, but rather to determine prudent debt levels as a percent of GDP and then enact budgetary constraints that will ensure that we stay within those boundaries. We may say, as the most liberal constraint, that the Federal Debt as a percent of GDP should stop increasing. That actually gives us a great deal of wiggle room….
…This means that for that year, the deficit must remain under $480 billion. Since these numbers are fairly close to the current situation, it means that the goal should not be to freeze the debt ceiling, but rather to take the deficit down from around $1.5 trillion to under $500 billion.
To be sure, this will be difficult. However, it is at least doable and will relax the various markets. They will feel confident that, while the debt problem is far from solved, it is at least under control and the long term solvency of the U.S. Federal Government is reasonably assured. This will also change the dynamic of the relationship between the Government and the Federal Reserve. In other words, monetizing some of the debt will result in inflation which, in turn, will ‘earn’ the government more deficit spending ability….Read More:http://thefuture101.blogspot.com/
…As stated in another article, the Federal Reserve Bank will find it necessary to monetize government expenditures to compensate for the deflationary pressures of technological unemployment. With the income explosion, this actually means that the Federal Reserve will begin to crowd out other buyers of Treasury debt instruments. The Federal government will have excess budget to spend and as I have advocated in another article, they will most likely spend it easing the transition for those displaced by technological unemployment.
In conclusion, there is absolutely no doubt that Federal Deficits of $1.4 to $1.5 trillion, at this time, are not sustainable. They need to be brought under control. However, the Democrats are misrepresenting the situation in order to find cover for tax increases and the Republicans are misrepresenting the situation in order to cut programs with which they disagree. Neither is giving an accurate representation of the actual situation. Furthermore, for whatever reason, the pundits are not correcting the demagoguery….Read More:http://thefuture101.blogspot.com/
Bernanke:“But clearly if we went so far as to default on the debt, it would be a major crisis because the Treasury security is viewed as the safest and the most liquid security in the world. It’s the foundation for much of our financial system and the notion that it would become suddenly unreliable and illiquid would throw shockwaves through the entire global financial system.
“The risk is that interest rates will begin to rise as our creditors lose confidence in our ability to repay, or willingness to repay. When Treasury rates rise, of course it makes the deficit worse and makes the problem even worse. Interest rates on Treasury debt feed into all other interest rates in our economy, including farm mortgages, capital for oil or natural gas exploration, and consumer loans of all kinds.
“It would weaken our economy, make the deficit worse and it would hurt confidence and be a negative. I am very much in favor of trying to address this problem in a big way, again taking a long-term perspective and understanding this is a long-term problem.”
“I think it reflects a lot of things. It reflects global uncertainties. The reason people hold gold is as a protection against what we call tail risks, really, really bad outcomes. To the extend that the last few years have made people more worried about the potential of a major crisis, then they have the protection of gold….“No. It’s not money. It’s an asset, but it’s not money.” Read More:http://business.financialpost.com/2011/07/13/not-raising-debt-ceiling-like-refusing-to-pay-your-credit-card-bernanke/