The Rambling Redneck

Commentary on the Zeitgeist

Friday, April 15, 2011

Checkmate?

Turbo Tax Timmy keeps saying if the debt ceiling isn't raised we will default. The first reaction is WTF is he smoking. However, when you think about it, He doesn't just need to rollover the debt; he also needs to borrow the money to pay the interest. That is the first clue that we are screwed, when we have to borrow to pay interest expense things have gone seriously wrong. On the other hand, we are in the middle of the fiscal year so it can be argued that we are only in this position because the tax revenue has already been spent on stimulus and the solution is to balance the budget. However, if we kill the stimulus and make the cuts necessary to balance the budget our tax base collapses putting us right back where we started, but with more misery and more have-nots.


 

Keep in mind this is not an either or but more of a continuum where we can pick any spot along the curve we want and have a combination of both. What we can't do however is break out of this trap without either raising taxes, growing our economy, defaulting or some combination of the three. While some taxes certainly need to be raised as part of rebalancing our economy; others, especially taxes that tend to discourage productive employment need to be reduced and we are not going to gain very much, if any, revenue that way. If we attempt to fill the gap with a tax increase, it's going to slow down the economy triggering increases in unemployment payments, food stamps, an increase in bankruptcies that ultimately hit the FDIC, stock market declines some of which gets foisted onto the PBGC, etc. again offsetting the gain and probably dragging it into net loss territory. Growing our economy at this point is also a non starter. Ultimately every job is dependent on someone selling something; otherwise while it may be beneficial to you, it is not paid work. The public is deep in debt with dwindling opportunity for employment and sales. The only way we get people to spend, raising demand, is for them to either pay down their debts or default; so they have the money to spend. So at the moment we are caught in a trap where there isn't enough demand to raise employment nor enough employment to raise demand; ultimately it will be resolved via defaults but that doesn't help the national government. Those defaults will fall squarely on the FDIC and PBGC raising government expenses. Thus we are left with borrowing that ensures an eventual default in order to stave off default today.


 

Once you accept that there is no alternative to seemingly insane borrowing save immediate default, where do we borrow the 1.6 trillion dollars? M3 is no longer tracked but various sources all put it at around 10 trillion, that is so much money in relation to the total dollars in existence that it would ramp up interest rates economy wide regardless of the health of the borrower. There just aren't enough people willing to hold t-bills at zero interest to support that. Since eX is a slower route to default than e2X either the fed monetizes the debt or interest rates explode taking out the economy and bringing about an accelerated path to default. It would seem that they have had their financial engineers optimize the whole damn thing with respect to time; except, at this stage price inflation is hitting essential commodities such as food and fuel increasing defaults as people can't keep up with both essentials and their debts. To borrow a phrase from Thomas Jefferson "It is like holding a wolf by the ears. We can neither afford to let go nor continue to hold on."

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