As we move closer to the debt ceiling “deadline,” there are 2 points I would like to make. First, the U.S. WILL NOT NOT DEFAULT if the debt ceiling is not raised UNLESS President Obama chooses to do so. Monthly tax and other revenues are sufficient to cover interest on the debt, as well as Social Security and other obligations. The President has a good bit of authority to decide what gets paid and what doesn’t. The idea of a default is only propagated by those who have a personal interest in leading you to believe that the world will come to an end this weekend if we don’t continue spending more than we take in. It won’t.
The second point is a bit more complicated. President Obama and other Democrats have been talking DOWN the stock market for the past few weeks. I believe this is also being done to scare average Americans and old-guard Republicans into thinking that the debt flow must continue or their personal portfolios and retirement accounts will be at risk. Wall Street is responding to this rhetoric to a point, and some minute-by-minute analysis suggests that traders tend to sell off each time the President warns of financial catastrophe. But we must look at the bigger picture.
Wall Street has been and continues to be the beneficiary of Fed-financed government debt, much of which primes demand for securities and pushes prices upward. Like Washington, Wall Street is addicted to debt and the Fed’s artificially low interest rates. Expect stock prices to drop in the short run if and when one or both of these drugs is withheld. I don’t think this can be avoided. When this will occur, the extent of the decline, and our ability to recover are open to speculation.
The debt ceiling debate is only a symptom of the real problem, the debt that got us to this point in the first place. Raising the debt limit to keep the drug flowing is not a solution. In fact, doing so will simply increase the debt and create more pressure to raise the ceiling next year, the year after, and so on.
The Federal Reserve is a huge player as well. The Fed is financing much of our new debt because other nations, namely China, have become less willing to do so. Interest rates are being kept near zero–well below the natural market rate–to prime consumer spending and keep government debt payments low. As price inflation becomes more of a problem, it will be difficult for the Fed NOT to raise rates. This scenario is largely predictable and has the potential to wreak real havoc on our economy. It is brewing while many Republicans seem preoccupied with negotiating a “deal” to save the country from alleged default.
I read your blog sometimes but usually disagree. This post make no sense. Why do you think that a default won’t be catastrophic? It sounds like you want to destroy the economy because Obama is running it.
I don’t think you read the post. I agree that a default would be catastrophic, but THERE WILL BE NO DEFAULT even if the debt ceiling is not raised UNLESS the President goes out of his way to make that choice. Besides, our government is constitutionally required to service the debt and monthly revenues are several times what is required to do so. President Obama is supposed to be an expert in constitutional law yet he continues to use this rhetoric as if a default might actually occur. Also, I didn’t think any president supposed to “run the economy”…
John,
Have you ever written a piece on the Federal Reserve? I think I understand it on a basic level, but not as much as I’d like to. If not, any links to a good description? Perhaps a future blog? Thanks for the great site and keep up the good excellent work, your efforts are appreciated.
I cover the Fed from time to time. Here’s a previous post. I’ll consider updating it in the near future.
The Federal Reserve was established in 1913 for a number of reasons, most notably to lend stability to the U.S. banking system and control inflation. The central bank has failed in both respects. U.S. banking is experienced considerable instability under the Fed’s guidance, and we are all aware of what the current banking crisis is costing us. The dollar increased in value by 13% in all of the years prior to 1913, but has decreased by 92% since the establishment of the central bank. Simply stated, the Fed is the cause of much of the inflation and instability we experience. Any serious assessment of the Fed would consider it to be a failure, yet Bernanke and others continue to insist that it will do a better job if it gets more power and control. It’s time we end this facade.
Unfortunately, few Americans understand the damage that the Fed routinely inflicts on everyday Americans. The Fed attempts to steer the economy in several ways, two of which we’ll discuss here, (1) manipulating interest rates and (2) expanding the money supply. Absent the Fed, interest rates would be determined by the market. Banks would base their rates on availability of funds, risk (down payment, credit scores, collateral, etc.), and projected inflation (which would be less of a concern without the Fed anyway). Not everyone or every business would get a loan. Business startups or mortgages with little or no down payments or equity would move to the back of the line. These loans are the most likely to fail in the first place, and they shouldn’t be funded anyway.
Under our central banking system, the Federal Reserve makes funds available to banks and controls the percentage that can be loaned at any given time. The Fed also provides funds to banks and determines the interest rates, which directly affects the rates banks charge their customers. When the economy is sluggish, the Fed lower interests rates and makes more funds available to spur borrowing to reignite the economy, but this provides an incentive for banks to make more credit available than the market can support. Sooner or later, loan defaults rise as a result. The left might blame greedy banks for this debacle, but the direct cause is Fed.
The second way the Fed intervenes is through expanding or contracting the money supply. This can be done by printing more greenbacks, but we see the same effect when the Fed changes bank loan requirements or intervenes in financial markets buy purchasing t-bills or other securities. Whenever the amount of money increases, each dollar in circulation is worth proportionally less. In other words, the Fed is TAXING YOU by reducing the value of your savings and increasing future prices whenever it expands the money supply.
In both instances, the Fed is borrowing from tomorrow’s prosperity to prime today’s economy. This is classic, flawed Keynesian logic. Keynes insisted on heavy government intervention during recessions and is famous for the quip, “in the long run we are all dead.” Unfortunately we’ve been going down this road since the 1930s, and today we are seeing the long term effects. We are not dead yet, but it seems like the economy is.
The ONLY way out of the current recession is to let the market sort it out. Congress and the Fed can do little to help other than stay out of the way. This means no moratoria on mortgage bankruptcies. The housing market is overvalued and must find its real market values before it can recover, painful as it may be. This means no bailouts. Weak companies must be allowed to fail and pave the way for new, stronger businesses.
This also means a massive overhaul of the Federal Reserve so that its ability to manipulate the economy can be severely curtailed, if not eliminated altogether. We’re probably a long way from making much progress on this front because most Americans don’t understand the long term damage the Fed inflicts on our economy. The Republicans will have an opportunity to lay the foundation if all goes well in two weeks. Let’s hope they don’t settle for the middle ground…again.
If the U.S. will not default, even if the debt ceiling is not raised, and assuming that the President has good faith and doesn’t choose to default, then what is the reason for the government shutdown? Is it because Republicans don’t like Obamacare, a law that passed in Congress in a democratic manner? This is not playing by the rules. They had a chance to repeal it, had Romney won, but they lost.
Aliza, Congress has the purse strings. Everything must be funded every year. The people elected divided government so Congress and Obama must negotiate a solution. These are the rules. The President is not the king. Read the Constitution!
It is easy to point to the few people who will be helped by Obamacare. Anecdotes and stories that tug at the heart strings are abundant. It is not so easy to point to the “invisible man” who will never get a good job because of Obamacare and its suppressive effects on the economy. Further, it is a stretch to say the law passed in a democratic manner. The law passed without a single Republican vote. It was rammed through with a parliamentary gimmick – reconciliation – after all sorts of unsavory and probably unethical backroom deals and vote buying aka the “Cornhusker Kickback”, etc… There has never been a major entitlement law passed in this country without bipartisan support. The law was never popular and still is not.
If Republicans were not there to vote against it, they did not fulfill their parliamentary duty and can blame no one but themselves.
Aliza, what are you talking about?
John,
Obviously some of your readers don’t read your material, or they don’t understand it. This is a great piece and clears things up for anybody other than a serious kool-aide drinker that worships Obama like so many other dictators have been worshiped in the past…until their people woke up from their stupor. Jeff gets it…Aliza and Battle4what are from the crowd that will wonder what happened when their dollar is worthless, they can’t find medical care, and interest rates climb to 10 or 15% and they can’t afford to borrow a nickel. They’ll probably blame the Republicans or the Tea Party. You can bet on it.