Off the Debt Limit Hook for at Least the Next Four Months

By Joe Firestone

Provided that the Senate and House follow through on the scenario now on the table, it looks like the game of chicken worked for the Democrats this time. We’re off the hook on default and Government shutdown for now, and Washington village pundits are in full-throated cries of celebration.

Congress is off the hook too. They don’t have to offer any solutions to real, rather than manufactured, problems.

The President is also off the hook, he won’t, for now, need to exercise any of the options, like minting the coin, using consols, or premium bonds, or asset sales to the Fed, or others available to him to render the debt limit legislation impotent. So, he gets to preserve debt limit threats from the Republicans as a negotiating tool they can use to “force” him into entitlements cuts later on.

In fact, as I write Jay Carney is already talking about the President taking “a balanced approach” to future negotiations of fiscal policy so that the burdens of sacrifice will fall on everybody fairly. And, a bit later, there’s Nancy Pelosi echoing the Administration line on future negotiations. That, of course is also the Pete Peterson, Bowles-Simpson, catfood line for justifying further victimization of food stamp recipients, seniors, children, and the people who have paid the price for the Crash of 2008 and the neoliberal period in American fiscal policy beginning in 1977.

However, the deal that looks like it will happen isn’t a solution, but just kicking the can down the road including built-in pretty good possibilities for future Government shutdown and debt ceiling crises in just three – four months, if Congresspeople have the guts to subject the American people to this nonsense again in an election year. Here’s Annie Rose-Strasser’s outline and analysis of the deal at Think Progress:

— Government funded through January 15 at sequestration levels

— Debt limit extended until February 7, subject to vote of Congressional disapproval, which Obama can veto

— A budget conference established to come up with long-term spending plans by December 13

— Income verification for recipients of subsidies under Obamacare’s newly-established exchanges

— Backpay for furloughed workers

Also, notably, here are some of the demands that Republicans have made in the last few days, but that are NOT in the bill:

No repeal of the “extraordinary measures” provision that allows the Treasury to do accounting tricks to avoid default

No ‘Vitter Amendment‘ that would have taken away employer contributions from the health plans of Congressional staff

No provisions related to birth control access

No flexibility in how government agencies make budget cuts to their programs, as they are required to under sequestration

No repeal or delay of the medical device tax

No repeal or delay of the reinsurance tax

No repeal, replacement, or delay of any aspects of Obamacare’s exchanges or individual mandate

It might look like this is overall a good deal for Democrats given the number of things that Republicans aren’t getting. It is good: It reopens the government and lifts the debt ceiling without doing any major additional damage to existing programs.

The word “additional” is the key here, since enormous damage has already been done to people and programs due to the various compromises made to avoid shutdown and debt ceiling threats since August 2011. These deals have placed increasing fiscal drags on the American economy and, increasing Government austerity that is preventing full recovery from the Great Recession. The current “deal” already involved a pre-surrender by Democrats to Republican proposed CR spending levels. Annie Rose – Strasser recognizes this.

But it’s important to remember that the baseline for negotiations wasn’t exactly even: Democrats accepted the major budget cuts of sequestration (slated only to get worse on January 15, the same day their budget deal expires), and their only demand was actually the status quo: Keeping the government running and having the country fulfill its financial obligations. They didn’t request to restore the funding sequestration took away, they didn’t demand any new programs or initiatives that Democrats support. And if the previous budget conference is any indication, the one established under this deal has the potential to blow up in Democrats’ faces, leading to more cuts instead of an actual, long-term budget. In that sense, while it is the best, cleanest deal we can get, the Democratic party has been pulled slightly from center to right, not from left to center.

Meanwhile, Republicans threw everything but the kitchen sink into their negotiations. It’s no surprise they’re taking a lot of losses.

Yes, we will have the Government open and the debt ceiling temporarily raised to get us through a few months, and the President is saved from going outside his comfort zone and giving the teahadists an excuse to try to impeach him, but the fundamental problem of the gradual imposition of increasing levels of government austerity creating economic stagnation is not being addressed, and, in addition, the even more serious problem of having laws in place that give a small minority in Congress the possibility of holding both the US and world economies hostage to their ideology is also neither being addressed nor solved.

So this is no victory, and no cause for celebration. The conditions are still there supporting a Great Betrayal, and another slide into recession, along with the possibility of another Global Crash due to financial manipulations in the mortgage international derivative markets.

Meanwhile, what can we look forward to? A brief respite from budget battles and then a rush through a manipulated membership budget conference designed to produce a Bowles-Simpson austerity “solution” to be completed by December 13, to be voted up or down, and with a good likelihood that this Conference will either fail to come up with a result, or that its results will be rejected by teahadists or fellow travellers who will never accept tax increases, and by progressives who will be unwilling to vote for entitlement cuts in the face of upcoming elections.

Meanwhile, the drag on the economy and the unhappiness of the 99% will continue with no real relief in sight because no in either party has the courage to repudiate the dogma that a sovereign fiat currency nation like the United States can have a long-term debt problem requiring a long-term deficit reduction solution. Truly, everyone in Congress needs to be replaced by people who understand the Modern Money Theory (MMT) approach to economics and who are willing to explain it to their constituents and to advocate for fiscal policies based on it.

35 responses to “Off the Debt Limit Hook for at Least the Next Four Months

  1. “Truly, everyone in Congress needs to be replaced by people who understand the Modern Money Theory (MMT) approach to economics and who are willing to explain it to their constituents and to advocate for fiscal policies based on it. ”

    We could probably get along with replacing a little over half with people who understand MMT, although the more the better.

  2. Question: When is “debt” not really debt as people understand it from their car loan and mortgage?
    Answer:When it is the “National Debt” or our USG deficit.

    I think I finally figured out a way to describe how our fiat monetary system actually works to help people understand why getting rid of deficits and paying off/back the entire National Debt is not necessarily a good thing. I’d love feedback on making this clearer or more accurate. I intend to create a Powerpoint and/or a podcast to spread it around.

    OK, the U.S. is a sovereign currency issuer and since 1971 we have been on a fiat monetary system. People assert that we tax and borrow to have enough money to operate the government, but that is actually not so and this example, if Texas seceded (King Rick and Prince Ted made it so) and created its own monetary system and currency, will show you why.

    Which comes first, the taxes, the spending or the currency creation (with apologies to the chicken and egg)?
    If Texas seceded from the U.S.A. it would need to do three things to operate its economy and a monetary system for that economy, not necessarily in this order.

    #1 Tax (there is zero need to borrow at all unless borrowing supplied some other need – you will see why)
    #2 Spend
    #3 Create currency (let’s call it the Texian and initially one Texian will equeal 1 Dollar)

    #1 – Texas will be a sovereign currency issuer with a fiat monetary system.
    #2 – Texas will only accept tax payments in its own currency, the Texian, and it will only buy in its own currency.
    #3 – Texas will not be a money changer, i.e. it won’t take U.S. Dollars in exchange for Texians.

    So, if you look at this logically, the order of what Texas has to do is as follows:

    #1 – Issue currency – Texians (can’t do anything without currency can you?)
    #2 – Spend a lot of the currency so it is in the hands of the private sector i.e. individuals and businesses (no one has it until the government spends it do they?)
    #3 – Only then can the private sector conduct commerce with the native currency – Texians.
    #4 – Only then can the private sector pay their taxes with the native currency – Texians.

    The accounting works this way:
    #1 – Texas creates a Billion Texians (that equal one dollar initially, like the Euro)

    #2 – That puts $1 Billion Texians on the Texas govt. balance sheet as a $1 Billion deficit

    #3 – Texas buys a bunch of stuff for its government, office supplies, computers, vehicles, etc.. and spends a bunch on services, electric, gas, internet access, catering – now a big chunk of that $1 Billion deficit (let us say all of it) is in the public sector and they can pay their bills, buy stuff and pay taxes. This is public sector “savings”.

    #4 – OK, so now we see that the $1 Billion deficit that the Texas government has, once spent, is actually now savings in the private sector.

    Let’s say that there is a 5% flat tax on everything, income, VAT, etc….

    #4 – now the private sector has to keep spending because it has bills and needs to pay salaries and buy supplies and stuff to keep its businesses running. The taxes are paid on the first round of circulating currency at 5% so that means that 5% of that $1 Billion deficit is taken out of circulation leaving only $950,000,000 Texians in the private sector.

    #5 – Now it gets interesting because if the government quits spending, then more and more of that private savings, i.e. money in the private sector gets sucked up at 5% a round until it is all gone. But that is good because it pays down the deficit, right? Right, it does pay down the deficit, but it isn’t all good. But if the deficit gets completely paid down now and we then run a balanced budget, how much savings does the private sector have? Zero, that is how much. So basically, we need to keep the government spending in order to keep money in circulation so that we don’t drain the private sector of savings.

    It gets more complicated when you bring central bankers like the Fed into the mix and even more so when you factor in fractional reserve banking so I won’t go there yet. Are you getting the gist of how this works now?

    • Yes, so far so good.

    • Good example. Easier to relate to than stories about historical examples, and unencumbered by the complexities of real history. J.D. Alt has written an excellent piece about this using a Monopoly (the game) context. I like this context better.

      “Pay down the deficit” is the wrong terminology, and the wrong idea. The misunderstanding about monetary sovereignty involves paying down the debt, not the deficit. In your example, there is no debt! Texas didn’t borrow the first billion Texians, they just created them electronically. There is no debt. There is nothing to pay back. They could not owe them to anyone, because they could not have borrowed them from anyone, because none existed anywhere until Texas spent them.

      The first billion Texians spent did not go to the balance sheet, it went to the income statement as a deficit. There are no deficits on the balance sheet. Debts would appear on the balance sheet, if there were any. The deficit is not a stock, it is a flow.

      In the third #3 you said “public sector” when you meant “private sector”. In that same section, private sector savings is the portion of income that is not spent. But most of it is spent in the course of a year, usually more than once. In the aggregate, that $1B minus the $50M taxes is net private sector savings. When the music stops, that money is in someone’s bank account, income that is not yet spent. Even though it will be spent very soon, at the moment of accounting it is savings.

      In this startup environment, it will be necessary for the government to run a vary large deficit, near 100% of budget for a year or a few years, to “seed” the economy with Texians. After that, the deficit should be approximately equal to GDP growth each year. Perhaps Texas should buy US dollars from its citizens, paying for them with Texians, to get started, instead of running a very large deficit. Once in a “steady state” situation, they could spend the dollars on imported products from other States, since they have no other need for them.

  3. Too much to hope for, but I’d like to see a bill which prohibits this nonsense drama from playing out again (not that the politicians mind taking the stage). A new piece of legislation which supports a “clean CR” whenever an appropriations bill is not legislated and which mandates alternatives if the debt ceiling is reached- options, amortized bonds, consols, and issuing currency (politically speaking, “as a last resort”). Of course, if a failure to appropriate spending meant an automatic continuation in spending levels instead of cuts to government programs and breeching the debt ceiling meant the President had to switch to amorticized bonds or options instead of hanging default over people’s head, then the ruling political elite couldn’t use fear to rally support to their demands and concessions.

    • That would be a good bill. But the fact is that the Government can already use the options outlined in my recent series under existing law to make the debt ceiling a dead letter.

  4. Despite the raasing of the debt ceiling, Obama should ask treasury to try out consols and PCS to fund deficit. If they are challenged, it will become clear whether that is an option that exists on Feb 07, 2014 or not. It may be tricky in the case of consols since their issuance today would not violate any laws even if they are to be considered debt subject to the ceiling. But a court ruling on PCS or other asset sales to Fed would definitely clear the air regarding those options. That is assuming Obama really doesn’t want to be held hostage by House Republicans.

    The “surrender” by Republicans is very suspicious. Was there an understanding that if they agreed to lose this round, they can win in substance, if not in form, at the next round? If not why would they risk another humiliation even closer to the next elections and not approve a CR and debt limit until after the next elections in 2014? Or is that a strategy to continue being “humiliated” until very close to the 2014 elections, when they refuse to cooperate and allow the government to default, which they can, with some conviction, blame on the Democrartic intrassigence?

    • I’m a little bit news-deprived lately, but I saw one screen of the woman counting the votes in the House screaming and being forcibly removed, and they had the vote count on the screen: Democrats for it like 200-0, and Republicans 34-200. It looked like a typical 2008 vote. You’d never know the speaker was a Republican.

      Based only on this, it seems like Boehner has abandoned the Hastert rule. He has said consistently that he would not allow a default, and I can’t imagine that he would not have told the Tea Party representatives that if it came down to default or surrender, he would surrender. They should have known their strategy was a loser. Over the past weeks the Republican offers got closer and closer to surrender, and the Dems stayed put, even asking for more at the end. In the game of chicken, Boehner signaled that he would blink first. Everyone knew that the Republicans would be blamed for whatever bad outcome, as they were blamed for the shutdown. Obama raised him all in, and so he folded.

      I don’t see how it can be any different in January, or February. I see no reason for the Dems to concede anything. They know now they can push to the end and get whatever they want on the eve of default, because Republicans will always be blamed and Boehner will always fold.

      • Wasn’t that the claim that the Republicans made before, that Obama would always fold in the end, or that he would compromise with himself before negotiations even began? If Obama can change, so can the Republicans, especially the Tea Party wing who have nothing left to lose but seem safe in their districts. I’m not sanguine that the outcome would be the same in January or February.

        • I’m sure the Tea Party reps, who are safe in their districts regardless of shutdowns, will not change. The only way they could lose is to go along with the Dems. They are “true believers”. And they are a minority. Boehner can’t afford to be rigidly ideological. He’s responsible, at least partially, for the results. Reid will never allow a vote on any bill that could pass the House with a majority of Republicans. He’s in control, because if Congress does nothing it means continuation of current law, which means the Dems win. If government shuts down, the R’s get blamed and the Dems win. They have no incentive to negotiate anything but unconditional surrender.

          In the old days, one side wanted A and the other wanted B, so they “compromised” and did both. The issues today are more binary. It’s not possible for both sides to get what they want, because they are opposites.

          • What I had in mind was: 1. the Tea Party Republicans convince Boehner and Cantor that if they repeat their strategy, the out come will be the same, 2. if they force a government default via the debt ceiling they will look like hero’s to other Rs for standing firm on the debt, and 3. Obama may fold first to get the ceiling lifted by agreeing to the Grand Bargain (Betrayal). This could be the outcome in Feb. 2014. Not too likely, but a possibility.

            • The Grand Bargain may proceed separately, or not. I think Obama will want tax increases that neither the Tea Party nor the establishment R’s could agree to, so nothing happens there.

              If it comes to another standoff, it will be again over Obamacare. A lot will depend on whether anyone can get signed up on the national exchange by then, or maybe a popular uprising against the cost. If the web site is still down, or the people revolt, then they may agree to delay the individual mandate, and make a deal on the CR and debt ceiling. If it is working by then, Obama again will not compromise on it and Boehner will not allow a default.

              If I were Boehner, I would get the Rs in caucus and not let them go until they were all in agreement on a position to take. If they’re still split, I just tell the Tea party that there will be no shutdown and no default, the establishment Rs will vote with the D’s again, and avoid all the drama. Then I pass the individual appropriations bills, pass fixes to Obamacare that Dems agree on, and let Reid block everything, and scream to the rooftops about it.

              • Joe Firestone

                If I were a Republican I’d probably recommend that too. However, I don’t think that trumps the strategy of blaming the Republicans for the new recession if the sequester isn’t ended. Between that and the memory of the shutdown and debt ceiling crisis, I think the Republicans are holding a losing hand. On the other hand, if they lift the sequester, then the economy will get stronger, and the Democrats still improve their position. So, I think that whatever the Rs do from here on, they’ve got a very good chance to lose in 2014 unless the Ds blow it by doing entitlement cuts. Durbin’s comments on Fox today mouuthpiecing for Obama were suicidal for the Ds. I hope the rest of them have sense enough to realize it. But I know at least two who won’t have the sense. My Senators, Warner and Kaine, two sanctimonious, puritanical, bluedog curs, who laugh all the way to the bank.

                Btw, anyone notice the poll that shows 74% of tea party respondents oppose cuts to SS. I’m telling you, I don’t think the Tea partiers are going to step up to those cuts, and without them chained CPI is dead. But if a majority of Dems vote for it, then could be toast whether or not it passes.

                • “strategy of blaming the Republicans for the new recession”

                  No doubt that will be the strategy. On that same Fox News today, George Will said Obama will blame Bush for the failure of the web site. In 2008 they successfully blamed Bush for a bad economy after 4 years of Dem policy. It may work again, sequester or not. But I don’t see the R’s agreeing to reverse the sequester. It has to do with the “baseline” in the budgeting process. If the sequester goes away, the 2009 stimulus becomes part of the baseline, permanent not temporary.

                  If there is a recession, I think the President takes the brunt of the blame.

                  An interesting R proposal now is to let Obamacare take place, and the people will rebel against it when they find out what it really is.

                  • Joe Firestone

                    I think that reaction to Obamacare will happen. It is a terrible bill, and not better than nothing when you factor in the opportunity cost. It would have been better for all concerned if the Ds had gone down fighting for Medicare for All in 2009. That said, I don’t think that disappointment with Obamacare will be great enough by 2014 to make a difference. Then a rising tide of dissatisfaction in O’s last two years may see the Democrats work very hard to push through fixes to the program.

                • The sequester was Obama’s poison pill that he didn’t think the Republicans would swallow, but they did. It’s going to be hard for Obama to shift responsibility for it to the Republicans, IMO.

                  • Joe Firestone

                    They’ve been the ones refusing to lift it since it went down. The Dems can run against it if they distance themselves from Obama.

                  • It was a joint poison pill. It’s just that when it came time to swallow, it seemed the best alternative to a negotiated agreement, for both sides. But there is no evidence that the general public believes it was a bad thing, or will be the cause of whatever bad happens to the economy. They think that whatever problems we have are due to high debt and deficits. They are dissatisfied and disappointed that the politicians could not agree on a plan, b

                  • It was a joint poison pill. It’s just that when it came time to swallow, it seemed the best alternative to a negotiated agreement, for both sides. But there is no evidence that the general public believes it was a bad thing, or will be the cause of whatever bad happens to the economy. They think that whatever problems we have are due to high debt and deficits. They are dissatisfied and disappointed that the politicians could not agree on a plan, but I see no indication of a preference for a plan involving more fiscal stimulus as such (everyone wants more spending on their favored projects, of course, but only at the expense of someone else’s project).

              • I don’t think Obama will insist on any real tax increases except perhaps on the middle class. See this one by Ezra Klein, one of the President’s mouthpieces, in my view.

                • Yeah, I just heard the other day somebody says he wants to repeal the rest of the Bush tax cuts. It’ll never fly.

  5. Thanks Golfer1john for the feedback. I’ll amend as you indicate and add some explanation from your post as clarification. Now I need to add a section on a central bank and T-bills and such.

    • I’m not sure I would have T-bills, if I were starting from scratch like this. If Texians were to become the world reserve currency of choice, maybe, but I don’t see the need for them in this example. They don’t help the government. I’m not sure the government needs to help the people who would buy them.

      I might also do a government bank like North Dakota, rather than a central bank to serve private banks. Or maybe just provide no-risk vehicles for small investors, such as savings bonds. Everyone nowadays has a central bank, though, so maybe it is necessary, if only to provide clearing functions. I wouldn’t have it doing “monetary policy” as we know it today. I would have something less cumbersome than the legislature to adjust tax policy, though.

      • Or maybe just provide no-risk vehicles for small investors, such as savings bonds. golfer1john

        Oh, yeah! Let’s reward risk-free money hoarding!

        You have chance to start over ethically and you blow it immediately?

        • What’s unethical about saving?

          • Save all you want but no one is entitled to a risk-free return at government expense. And beyond normal liquidity needs, people should be charged for the risk-free storage of their fiat – to cover operating costs and beyond that an additional hoarding penalty.

            • What “government expense”? Government creates money, and endures no hardship by doing so.

              It’s not an entitlement, it’s a government service for the public good. No one is “entitled” to an Interstate Highway System either.

              We already have a hoarding penalty, it’s called income tax.

              • What “government expense”?GJ

                The government’s limited ability to deficit spend without price inflation should not be wasted providing welfare in the form of needless usury!!!

                It’s not an entitlement, it’s a government service for the public goodGJ

                No it’s not. It’s welfare for those with the most fiat to hoard.

                • Those with the most fiat won’t be buying $25 savings bonds. The transaction costs alone would wipe out any interest. It’s for grandparents to give their grandchildren, to teach them how to save. I wouldn’t be selling $Billions in T-Bonds to Goldman Sachs. And the interest rate would be near 0, not usurious.

                  • 1) Any positive interest is usury!
                    2) Since the interest is unnecessary it is disguised welfare. If people need welfare, we should just give it to them without subterfuge.
                    3) Saving is not the Biblical ideal; investment is.

                    Usury should not be encouraged! Don’t people ever learn?

              • We already have a hoarding penalty, it’s called income tax. GJ

                So you take back 30% of what you give away needlessly. And your point is?

                • Nominally. In real terms, when inflation is taken into account, savings bonds are a loser in the 30% bracket.

  6. Well today I was on HuffPo and made a comment on the Ralph Nader article about government fiat money and Joe’s trillion dollar coin. The comment underwent moderation and never posted. So getting the message out is hard.

    • Joe Firestone

      I’ve made plenty of comments about the platinum coin there, and they’ve always been approved. Also Mark Gongloff, a HuffPo financial commentator is favorable to both MMT and PCS, and has cited my work a number of times in his columns.