The Observation Deck

I heard one of the talking heads this morning who said that the American people need to be aware of and “ready to accept” the consequences of a failure to negotiate an increase in the debt ceiling. He mentioned higher interest rates on mortgages and car loans as possible consequences.

Well I for one WELCOME the consequences of a failure to increase the debt ceiling. I welcome the failure of banks and other businesses that over-levered and made bad business decisions. I welcome the necessity of the federal government to spend no more than it takes in. I welcome an end to the devaluation of our (my) money by the counterfeiting operation now carried on by the Fed in support of more debt and bank "stability." I welcome the reduction in new debt at all levels that higher interest rates will impose.

But most of all I welcome being once again paid a fair rate of interest on my savings. I’m tired of being bent over a table and having my savings emaciated by the banks and the federal government who would (will?) fail in the face of higher interest rates. I’m tired of the very same government guaranteeing its employees at all levels an 8% rate of return on pensions when the most I can get these days on my retirement savings, guaranteed, is somewhere in the 3% neighborhood. And I’m tired of being a tax donkey in support of out-of-control spending at all levels of government.

We live in a country where debtors are rewarded and savers are punished.

“Default?” Bring it on!

I also welcome a frank, adult discussion of what to do about impossible to sustain "entitlements," Medicare/Medicaid and Social Security in particular. Wouldn't it be nice if our children had even a remote chance instead of a $70 trillion dollar bill to pay?

Tim ---- Take a long bike ride. Stan

Let me begin by saying that I am not great lover of the individual and institutions that got us into this mess. I don't think that anyone is.

I am also not a big fan of Congress' inability to enact any kind of effective legislation on the guilty parties, despite the same advice from both ends of the spectrum of economic consultants. That's just embarrassing.

And I am even less of a fan of the lack of resolution to the debt ceiling issue. It's sad.

But Mr. Liston, I fear that your enthusiasm for a default is very very misplaced. You attribute far too many good qualities to the consequences than are deserved. For one, you seem to think that only the debtors will be punished and not the savers. Well, when inflation skyrockets, like it will if we default and our credit rating is dropped to an AA or even lower if S&P has it's way, your money will not have the purchasing power that it once had, so you will be hurt as well. In fact, those who owe interest or backpayments, provided they don't have a job, might actually have an easier time paying off their debts while your money continues to wither away under inflation.

And if our credit rating is lowered, that would just be terrible for the entire world economy.

The Fed doesn't counterfeit money. It's irksome when people don't understand the monetary policy system as well as they should. Expansionary monetary policy is not counterfeiting. They don't print bills. The Treasury Department prints the money, so they can never make counterfeits.

I agree with you, Tim, but only on principle.
We made our bed, we must now lie in it. We (collectively) voted in the Congressman, Senators and Presidents who put us in this predicament. We (again, collectively) chose to move away from true capitalism to a more welfare-minded system.

I'm concerned that higher interest rates are only scratching the surface. I fear there are much greater ramifications to hitting and passing the debt ceiling.

Thealexa,
1. Our money already doesn't have the purchasing power it once had. In the last few months alone, the 1/2 gallons of milk I buy weekly have gone up by 20 cents each.

Nikolai Bulganin wrote:"We can't appeal to the American working man, he's too well fed. But when, through inflation, America has priced herself out of the world markets, and unemployment follows, then we will settle our debt with the United States."

Ronald Reagan, 1961 wrote:Lenin said the way to destroy capitalism is to debauch the currency. Through a quiet process of planned inflation, a government can quietly and unobservedly confiscate the wealth of its citizens. Henry VIII did it openly. He substituted copper for silver in the coinage of the day. While our own government has been deliberate and dishonest in its inflationary policies. Your dollar last year lost another two cents in purchasing power. In 20 years, we know, all of use that it's shrunk to less than half its previous value. But we're told that we shouldn't worry because in this inflated market, our earnings have kept pace and we're earning two-for-one. But they forget the part played by that progressive income tax which is based not on the value of the dollar but on the number of dollars you earn. And so when you start earning two-for one to maintain your purchasing power, you find that you have to earn additional dollars, the vicious cycle begins. Additional dollars to pay your increased surtax as you have moved up through successive brackets. The $5000 a year man of 20 years ago today must earn $14,000. The $10,000 a year man must earn $31,000 and 12,000 of that represents his increased income tax. Would any of us care to project 15 years ahead, to 1975? The same gradual rate of inflation, keep the same tax system and pretend that then we shall have a free economy? When the $5000 a year man will have to earn $33,000. The $10,000 a year man, to break even, will have to earn $84,000. And any among us who are fortunate as to be at that lofty $50,000 a year plateau, well that fella's got earn $835,000 to break even.

2. Technically, you are correct. The Fed does not have the ability to print money. However, it was the Fed's monetizing our debt which allowed the Treasury to continue to print.
Money must be backed up by something. Before the US went off the Gold Standard, it was the gold reserves of the country. Even our coins operated at face value. A dime used to hold 10 cents worth of silver.

What backs it up now? Its not gold, silver or any other precious metal. Its faith in the United States government. Sorry, I may love my country, but I have no faith in its current government.

Roy,

I am well aware that inflation has caused a loss of purchasing power for many years. That was not my point. My point was that the consequences of default will make this already occurring process worse.

Actually, our currency system does not need to be backed up by anything other than our government's word. That is why it is called fiat money by definition. It is not a perfect system, but it is so much better than the gold standard for so many reasons.

So since our currency needs to be backed up by our government's word, it is essential that the government NOT default. As much as some people think we should just "lie in it" I think that is foolish since our currency system's worth is backed by our government's low risk of default.

Is this the best system? Again, no, not really. But there aren't any better options, so it is in everyone's best interests to back the system in place until something truly superior comes along. And when that does happen we should have serious discussions about adopting that system. Until then, worry about averting this default rather than accepting what's coming.

What I find encouraging about the panic over the debt ceiling is that it is revealing the inability of the government to govern.

Reasonable people could solve this problem. But when you have people who are at the beck and call of special interests, the public interest is not really a matter that concerns them. I think a weakness of democracy is that we end up with career politicians, whose prime concern is getting reelected, so they are unwilling to make hard decisions.

I'm far from certain that a default on government debt would cause inflation. I think the interest rate on federal debt would rise, as buyers of federal debt would demand a higher return in view of the greater possibility of further default. The interest rates individuals pay to borrow appears to be related to the interest rate the government pays, but that is because government debt is the standard; would it remain the standard if prospects of default were greater? Perhaps if federal bonds lose their luster, a new standard will arise. Perhaps top tier corporate bonds will become the standard and keep interest rates low.

Low interest rates are not necessarily a good thing, because often they make it easy for us to make bad decisions, buying things we don't really need. We are seeing the results of easy credit now, with people unable to handle mortgages they never should have been able to get, and drowning in credit card debt.

As a nonstatist, I do welcome any attention to limiting the reach of the federal government beyond those areas that only the federal government can handle (military actions, for example). I don't really see the need for the federal government to decree how many seeds there can be in a seedless grapefruit.

Will Brown said:

Reasonable people could solve this problem. But when you have people who are at the beck and call of special interests, the public interest is not really a matter that concerns them. I think a weakness of democracy is that we end up with career politicians, whose prime concern is getting reelected, so they are unwilling to make hard decisions.

Will--- It's the "career" politicians who are trying to do a deal, act in the broader public interest. It's the newcomers, the Tea Partiers who are beholden to a special interest who, because they are politically suicidal, are not willing to make a hard (compromise, adult) decision that are paralyzing the resolution of this issue.

Stan Austin

Stan Austin wrote:Will Brown said:

Reasonable people could solve this problem. But when you have people who are at the beck and call of special interests, the public interest is not really a matter that concerns them. I think a weakness of democracy is that we end up with career politicians, whose prime concern is getting reelected, so they are unwilling to make hard decisions.

Will--- It's the "career" politicians who are trying to do a deal, act in the broader public interest. It's the newcomers, the Tea Partiers who are beholden to a special interest who, because they are politically suicidal, are not willing to make a hard (compromise, adult) decision that are paralyzing the resolution of this issue.

Stan Austin

With all due respect Stan, I think your idea of "the broader public interest" isn't even shared with "the broader public". I just pulled up Rasmussen. On Thursday, they released the results of a poll in which 55% of their respondents were against raising the debt ceiling.
http://www.rasmussenreports.com/public_content/business/taxes/july_2011/55_oppose_tax_hike_in_debt_ceiling_deal

Tea Party candidates wouldn't have even been elected if a majority (i.e. the broader public) of people didn't believe in what they stand for. The special interest they are beholden to is the American taxpayer and that's who's going to throw them out of office if they fail to do what is necessary.

As for the paralysis of the resolution of this issue, I don't believe it was the good President who simply walked out of a meeting. Are the republicans being unreasonable? Perhaps, but these are unreasonable circumstances. The debt situation should never have been allowed to get to this point.
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Let me show you what needs to be done. I was digging through some documents from the St. Louis Federal Reserve for a little project I'm working on.
http://fraser.stlouisfed.org/publications/usbudget/page/11435/2089/download/11435.pdf

This PDF is the Federal budget from 1901 to 1965. Look at the years of 1917 through 1920.
1917, end of WW1, Federal expenditures were a mere $2 billion. Tax receipts were about $1.1 billion.
1918, Federal expenditures jumped to over $12 billion. Tax receipts stalled, only $3.8 billion.
1919, Federal expenditures moved to over $18 billion. Tax receipts had minimal growth, only $5 billion.
1920, Federal spending is cut in 1/3 of its previous level, $6.3 billion. Receipts stand at $6.6 billion...budget surplus!!
From there on until 1930, through the presidencies of Harding and Coolidge, we had budget surpluses, including one over $1 billion. Harding and Coolidge never raised taxes. In fact, from 1922 to 1925 the top marginal tax rate was cut from 73% to 25%.

Tax increases won't be the answer. Deep cuts are needed to bring the US back from the brink.

Roy Pitchford wrote:With all due respect Stan, I think your idea of "the broader public interest" isn't even shared with "the broader public". I just pulled up Rasmussen. On Thursday, they released the results of a poll in which 55% of their respondents were against raising the debt ceiling.
http://www.rasmussenreports.com/public_content/business/taxes/july_2011/55_oppose_tax_hike_in_debt_ceiling_deal

With all due respect Roy, public interest isn't the same as public opinion. For example, most 65% of Americans with an iPhone (which is alot of them) think they have a 4G phone. Over 50% of Americans can't find their own state on a map. And there are many, many other examples I could give.

Point? That Americans aren't always the smartest bunch, especially when it comes to complex issues like economics.

Tea Party candidates wouldn't have even been elected if a majority (i.e. the broader public) of people didn't believe in what they stand for.

I can guarantee you a majority of people did not vote for the Tea Party. Since less than 50% usually vote and then of that 50% let's say 51% of that 50% voted for the Tea Party quack, that's far less than a "majority" of the people believing in their values.

The public knows, the Tea Party is holding this whole negotiation hostage by their unwillingness to act like adults and work well with others. The GOP must know that the public will absolutely blame them if this debt crisis explodes, why do you think they've been so quick to back down and give alternatives the last few days? You know they must be reading the polls too.

Tax increases won't be the answer. Deep cuts are needed to bring the US back from the brink.

Really Roy? Because every sane, trained economist pretty much agrees that the only way to get out of this mess is a combination of both. If you actually knew anything about the budget numbers, you'd realize that cutting alone is not even possible without cutting enough to shut down the entire Federal Government.

Or is that really what you want? It's hard to tell sometimes.

Funny, only 21% of Americans approve of the GOP handling of the debt ceiling debate...latest poll:
http://www.latimes.com/news/politics/la ... ?track=rss

So tell me again Roy, where's that majority of Americans that agree with the Tea Party?

Oh wait, is this it?

""Voters say, 67 – 25 percent, that an agreement to raise the debt ceiling should include tax hikes for the wealthy and corporations, not just spending cuts"
http://www.politico.com/news/stories/0711/58961.html

Nope, that's not very tea party/GOP either...hmm....

Oh and here's one more for good measure:
http://www.huffingtonpost.com/2011/07/1 ... 00953.html

At some point, even die hard GOP parrots are going to have to finally admit this has been a PR nightmare for the GOP.

A PR nightmare for the GOP? Just the GOP? This is a PR nightmare for EVERYONE.

The problem is, as I see it, that politicians either cannot do math or pretend to not know how and then seem shocked when issues like this suddenly appear. They keep playing hot potato with issues no one wants to deal with and eventually get burned.

And I think, tea party or no, most Americans don't want to face the consequences of a default.

Bryan Schwegler wrote:Funny, only 21% of Americans approve of the GOP handling of the debt ceiling debate...latest poll:
http://www.latimes.com/news/politics/la ... ?track=rss

So tell me again Roy, where's that majority of Americans that agree with the Tea Party?

GOP <> Tea Party
Democrats oppose GOP plan because, well, I think that's obvious.
Tea Party opposes GOP plan because it has debt ceiling increase.
Between those 2, I can see that poll as being reasonably accurate.

Bryan Schwegler wrote:Oh wait, is this it?

""Voters say, 67 – 25 percent, that an agreement to raise the debt ceiling should include tax hikes for the wealthy and corporations, not just spending cuts"
http://www.politico.com/news/stories/0711/58961.html

Nope, that's not very tea party/GOP either...hmm....

Well, of course people would support tax hikes for the rich...47% of the population pays no income tax. Real easy to support any tax increase that doesn't include you. To bad they don't realize that those rich people are the ones who supply jobs to everyone else.

Bryan Schwegler wrote:Oh and here's one more for good measure:
http://www.huffingtonpost.com/2011/07/1 ... 00953.html

At some point, even die hard GOP parrots are going to have to finally admit this has been a PR nightmare for the GOP.

Really? You're going to hold up a HuffPo piece? Might as well pull straight from Obama's own teleprompter.

Thealexa Becker wrote:The problem is, as I see it, that politicians either cannot do math or pretend to not know how and then seem shocked when issues like this suddenly appear. They keep playing hot potato with issues no one wants to deal with and eventually get burned.

The majority of people in Washington DC have law degrees.
They aren't math majors, history majors or business majors.
They've never run a business. Many probably never worked for a business, they went straight from school to politics.
Of course they don't understand.

Reaganomics is a lie. Globalism is a lie. the conservative party line is a line.

Republicans don't make such a fuss when deficits show up under their Presidents.

whose Idea was it to invade Iraq without increases in progressive taxes?

A growing money supply is necessary for any growing economy.
The private sector and wall street have consistently proved they innovate themselves into disaster in this capacity.

the democrats and republicans are more alike than at any time in history. The dramatic conflicts and impasses are the success of meaningless marketing of nonsense. (reaganomics, contract with america, globalism).

enjoy the fruit. Reagan's boys borrowed 2 trillion from japan and through a party. lowered federal funds rate consistently. in the old days the deficits were mostly funded by americans. in consistent outsourcing and diminishing of the value of production, the main growing markets were suburban sprawl and starchitecture junk. so we have the biggest surplus of empty and derelict property in the world, and the greatest growing real estate and finance markets. based on what? it is okay: he gave Ron Paul a medal for being a gold bug. It doesn't make any sense, but it impresses people!

sprawl=decay=equal oil wars. nothing wrong with enjoying it. as Dark Helmet said, "Smoke 'em if you got 'em".

it is okay. Social Security is running a 2.6 trillion dollar surplus.