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May 19, 2011 – Comments (6)

Interesting thoughts

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Debt Ceiling dynamics- no chance of US default
Posted by WARREN MOSLER on May 19th, 2011

http://moslereconomics.com/2011/05/19/debt-ceiling-dynamics-no-chance-of-us-default

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.

6 Comments – Post Your Own

#1) On May 19, 2011 at 3:50 PM, CluckChicken (39.51) wrote:

I find it kind of interesting that many Repb are so willing to say that they are for cuts but just last week were so agaist cutting funding to oil companies. I can only imagine the hell they will recieve from their defense company buddies about them lossing 150 billion. If the arguement from the Repb is that we can not cut giving a few billion to oil because of high oil prices and jobs in this economy, how can they justify cutting so much from defense which would actually mean jobs would be lost?

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#2) On May 19, 2011 at 4:24 PM, mtf00l (50.39) wrote:

CluckChicken,

Don't try to think of Government as Rebulicans and Democrats.  That would be too hard.  Realize instead there is no Government.

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#3) On May 20, 2011 at 1:53 PM, cbwang888 (25.67) wrote:

China, on the other hand, are buying metals and materials to build their infrastructure and military.

US needs some more creative accountings to dodge this crisis. Maybe this time Wall Street banks can help in return of bailouts?

 

 

 

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#4) On May 20, 2011 at 2:06 PM, whereaminow (< 20) wrote:

Oh Warren Mosler,

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.

Aggregate demand is meaningless.  It has no connection to economic reality.  For a school of economics that appeals to the hip underground, why do they borrow failed economic theories of ivory tower professors to supplement their new theory?  Is this just a new and improved Paul Samuelson?

Why would I care if aggregate demand goes up or down?  It tells me nothing either way.

In fact, they may already be cutting military spending,

ROFL, I'll believe it when I see it.

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. 

I think fear of being the next collapsing Empire should be the motivation for bringing troops home from all over the globe.

I don't know if Mosy is implying that cuts in military spending would result in a Japan style deflation-that-never-actually-happened-but-Mosler-thinks-it-did scenario.

Or is he simply saying that anything that cuts GDP (another meaningless aggregate) would bring about stagnant growth?

David in Qatar

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#5) On May 20, 2011 at 2:22 PM, catoismymotor (< 20) wrote:

Debt Headboard Dynamics is more like it. Except no fun is being had by us when we hammer our head into the fiscal one.

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#6) On May 24, 2011 at 11:06 AM, Melaschasm (54.40) wrote:

The republicans are asking for $1 in spending reductions for each $1 in debt ceiling increase.  They have already started negotiating down what they are asking for, even though the democrats have not made a counter offer.

Based upon the recent government shutdown debate, it is likely the final deal will be $200 billing in spending 'cuts', and a $1 trillion increase in the debt ceiling.  

But this gives the republicans to much credit.  Just as the government shut down was not about real cuts, but rather reducing the rate of growth, so to is this debate about slowing the rate of spending growth.

Even the hated Ryan plan does not cut actual spending, but rather it reduces the rate of spending growth.

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