Debtordammerung, Part IV: But why?
Jul. 26th, 2011 11:08 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
solarbirdIn Part I of this series, we discussed, briefly, salient elements of the politics of the current debt and budget conflict. Part II discussed the politics of economic statistics, and why the way GDP is calculated means that the total amount of government spending never gets reduced. Part III discussed possible economic ramifications of the current clash as it thus far appears to be playing out, ramifications acknowledged by at least some members of the Tea Party and economic right to be extremely negative.
We have not yet, however, discussed why the Hayakian right insists upon pursuing this path. The answer, of course, is quite simple: the alternative is worse. Not immediately, no; but in the medium term at best. The pain you take now is to avoid worse pain in the future.
Settle in, kids; this is gonna take a while.
First, briefly but importantly, you have to understand the corrupt nature of the finance system: the corporate socialism of bank and investment house bailout, the overweening arrogance of the executives of these beneficiaries, and in particular, the utter lack of ramifications they faced for driving the latest series of fraud-fueled bubbles leading to the crises of 2007-2008. This was systemic, blatant, intentional fraud, and, as I keep noting, nobody involved in those mechanisations has been punished - indeed, these same organisations are posting record profits, at taxpayer expense, throughout.
As impossible as it may seem to some on the progressive side of things, the Tea Party is much more upset about this than the Democratic party, supposed defender of the Common Man, but in reality, Defender of the Financial Interests, Banking and Finance. (The GOP, by contrast, are Defenders of Oil and Coal, if you're wondering. Both sides have War backing.) This provides no small amount of ethical justification and fervour.
It's also directly related to the actual question of Federal debt, though the connection is not obvious unless you've been following this for a while. This is critical, even in summary form, and starts with Ronald Reagan.
Really, here, I want to write about eight paragraphs about Ronald Reagan. I want to talk about the Junk Bond Crisis, the Savings and Loan Crisis, and the Crash of '87 - look it up, kids - but this post is already monstrously large, so I'll sum up: the banking system came closer to collapse than it had at any point since the Great Depression.
The take-away: it was a bubble, or more correctly, a couple of out-of-phase bubbles. Mr. Reagan came in to office promising to cut government and taxes and ran straight into the GDP calculation I described in Part II of this series. So instead, he borrowed-and-spent his way to deficits never before seen in the peacetime history of the West.
Then, we had the big tech boom - Apple and Microsoft and the PC wars, OS/2 and DESQview and VisiON and GEM and Windows and Novell. Mr. Greenspan spiked it, leading to the the first generation of the web, first boom, then bubble. Do you remember GEM? Do you remember pets.com? Stamps.com? Do you remember eighteen million other worthless companies boosted to insane valuations despite no way of ever making money, particularly in the web half of that boom?
Mr. Greenspan's new philosophy of blowing replacement and hopefully manageable bubbles in the face of severe downturns really took root here. It took root in the stock market and in finance and in investments, all of which eventually cascaded down in a shower of destroyed retirements and fortunes and the tip of a new Great Depression as it all fell over at the turn of the millennium, just like the tech boom of the 1920s - that one in telephone and radio - had fallen over in 19291.
In the Y2Crash, fewer people faced much punishment than in the previous couple of bubble pops. In the junk bond fiasco and the savings and loan debacle - both of which featured a lot of fraud - people went to jail. Oh, white-collar prison, and not all of those who should've got time did - but enough that it made an impression. In the tech crash - not as much. Fortunes were lost, though - that still hurt. The bailout architecture wasn't complete.
And Mr. Greenspan went to work: pump in liquidity, spike up debt, blow a new bubble with liquidity injections.
The new bubble was in property. The tech bubble at least had actual asset value under it; residential housing, particularly exurban single-family housing, is a fool's investment. Oh, it's good to own your residence outright; you do well enough by that. What you don't do is treat it as a profit-making investment that you use as an ATM - something, by the way, Mr. Greenspan himself encouraged. To brew this bubble, combine Mr. Greenspan and Mr. Bush's cheap-money and kickback policies with free trade with asymmetrical economies of scale (hi, China) finishing off a lot of the old American industrial base, and letting international money flood together into what CPR/PRI's This American Life later called "The Giant Pool of Money that Destroyed Everything." That pool of money started sloshing around, and built the housing balloon. It also built a secondary bubble in commodities. The housing bubble was the biggest bubble yet.
Then - as, again, in the 1920s - all that exploded, starting with housing. (Remember how subprime was "contained"? Heh. Remember really old jokes about swampland in Florida? That comes out of the investment land boom in the South in the 20s, also driven by fraud. But I digress.) And this bubble collapse is where things really changed, in several ways.
One: Nobody moneyed - nobody really responsible - got punished. Nobody. All the naked fraud in the world, and not one punishment. A few fines which pale to nothing in the face of both profits and bailout gifts; that's an insult. They're still nakedly violating the law in foreclosures, as moral hazard has come to full flower.2
Two: No fortunes lost. Everyone at the top made whole, on the backs of the taxpayers. For bonus points, they bragged about it, and howled indignation when questioned; the arrogance and entitlement discussed above was ground in deeply.
Three: None of the bad debt was written down to zero. It's still all out there, as people pretend all those worthless CDOs and MBSes and so on have value, when they simply do not. That's a boat anchor on the economy that won't go away until that massive overarching debt - $16T if not more - is written down.
And worst of all, Four: A lot of those worthless instruments got backed by the Feds, courtesy the swap facilities set up after the crash.
So Mr. Greenspan set about blowing his latest bubble. This one is in government debt. It's a reinflation of the currency supply to make whole all those lost trillions of dollars, but without creating underlying value to support that kind of money supply. It simply isn't there, and there is no reasonable growth rate possible to make it up. Most projections aimed at making that liquidity whole make annual growth rate estimates which are frankly farcical - 8% per annum over 10-15 years, something achieved approximately never in modern history. It's not going to happen.
And this time, the bubble is in the currency itself. Who covers that when it pops?
And as part of that, right now, the US government is paying around US$375B a year in interest on debt, despite interest rates at zero by policy. With a ratings downgrade, rates go up. JP Morgan's analysts think a AA rating adds around $100B a year in interest to current debt, which is to say, more than the most severe cuts proposed will actually deliver.
That's right: the ratings downgrade alone will wipe out that "one trillion dollars in cuts! (across 10 years)" GOP plan, overnight. An actual rise in interest rates could double or quadruple that. You've heard of bond market vigilantes? You've laughed at the concept? Hi, these are they.
But, I hear you cry, back up! "Why the US?! There are other countries with worse debt to GDP ratios!" This is true. Japan is an example. They typically also lack the kind of massive and systemic trade deficit the US carries. I think you can get away with one or the other; the borrowing load in the case of the current-accounts deficit can be mediated by the net trade balance revenue, or a trade balance deficit is acceptable enough if you're not borrowing yourself to the limits at home. I don't think you can get away with both.
The thing is: that's not the scary part. No. That's a problem - a big problem - and it's scary, but it's not The Scary Part.
This is the scary part:
The higher percentage of budget you're paying to cover debt3 the more you have to borrow to do it, unless you start cutting other expenditures to balance, thus cutting headline GDP and some actual economic growth. And the more you have to borrow, the tighter credit gets, raising interest rates, and suppressing economic activity - cutting GDP and reducing tax revenue yet again, requiring increasing borrowing... which puts you back to the beginning of this paragraph.
This is called a currency death spiral4. They're scared of it, for good reason. It brings down governments. It's why they're willing to pull the debt-ceiling trigger: they'd rather play a round of Russian roulette than take an assured bullet straight to the brain.
Make sense, now? There's nothing crazy about that, now, is there?
1: Or did you think that was all cascading margin calls? Aheh, no. Tech and land, just like now.
2: It was neat, by which I mean infuriating, watching every Cascadian financial institution of note get handed over to Chase or someone else well-connected - and bailed out.
3: All else equal, which it never is; this is where I think they're insane with the no-taxes part of the demand. The counter-argument to that is that money is now too fungible; if you raise taxes you'll just prompt capital flight. There is some merit to this argument, but I think less than they think. Of course, you can really get at it by erecting further capital controls, which leads straight to hi there, Smoot-Hawley. That didn't work out so well last time.
4: And no, you can't print your way out of it; that devalues the currency and sends rates up just as assuredly, and also depresses economic activity. Well, okay, you can, sorta, if you don't mind not having a currency. That trick... rarely works.
We have not yet, however, discussed why the Hayakian right insists upon pursuing this path. The answer, of course, is quite simple: the alternative is worse. Not immediately, no; but in the medium term at best. The pain you take now is to avoid worse pain in the future.
Settle in, kids; this is gonna take a while.
First, briefly but importantly, you have to understand the corrupt nature of the finance system: the corporate socialism of bank and investment house bailout, the overweening arrogance of the executives of these beneficiaries, and in particular, the utter lack of ramifications they faced for driving the latest series of fraud-fueled bubbles leading to the crises of 2007-2008. This was systemic, blatant, intentional fraud, and, as I keep noting, nobody involved in those mechanisations has been punished - indeed, these same organisations are posting record profits, at taxpayer expense, throughout.
As impossible as it may seem to some on the progressive side of things, the Tea Party is much more upset about this than the Democratic party, supposed defender of the Common Man, but in reality, Defender of the Financial Interests, Banking and Finance. (The GOP, by contrast, are Defenders of Oil and Coal, if you're wondering. Both sides have War backing.) This provides no small amount of ethical justification and fervour.
It's also directly related to the actual question of Federal debt, though the connection is not obvious unless you've been following this for a while. This is critical, even in summary form, and starts with Ronald Reagan.
Really, here, I want to write about eight paragraphs about Ronald Reagan. I want to talk about the Junk Bond Crisis, the Savings and Loan Crisis, and the Crash of '87 - look it up, kids - but this post is already monstrously large, so I'll sum up: the banking system came closer to collapse than it had at any point since the Great Depression.
The take-away: it was a bubble, or more correctly, a couple of out-of-phase bubbles. Mr. Reagan came in to office promising to cut government and taxes and ran straight into the GDP calculation I described in Part II of this series. So instead, he borrowed-and-spent his way to deficits never before seen in the peacetime history of the West.
Then, we had the big tech boom - Apple and Microsoft and the PC wars, OS/2 and DESQview and VisiON and GEM and Windows and Novell. Mr. Greenspan spiked it, leading to the the first generation of the web, first boom, then bubble. Do you remember GEM? Do you remember pets.com? Stamps.com? Do you remember eighteen million other worthless companies boosted to insane valuations despite no way of ever making money, particularly in the web half of that boom?
Mr. Greenspan's new philosophy of blowing replacement and hopefully manageable bubbles in the face of severe downturns really took root here. It took root in the stock market and in finance and in investments, all of which eventually cascaded down in a shower of destroyed retirements and fortunes and the tip of a new Great Depression as it all fell over at the turn of the millennium, just like the tech boom of the 1920s - that one in telephone and radio - had fallen over in 19291.
In the Y2Crash, fewer people faced much punishment than in the previous couple of bubble pops. In the junk bond fiasco and the savings and loan debacle - both of which featured a lot of fraud - people went to jail. Oh, white-collar prison, and not all of those who should've got time did - but enough that it made an impression. In the tech crash - not as much. Fortunes were lost, though - that still hurt. The bailout architecture wasn't complete.
And Mr. Greenspan went to work: pump in liquidity, spike up debt, blow a new bubble with liquidity injections.
The new bubble was in property. The tech bubble at least had actual asset value under it; residential housing, particularly exurban single-family housing, is a fool's investment. Oh, it's good to own your residence outright; you do well enough by that. What you don't do is treat it as a profit-making investment that you use as an ATM - something, by the way, Mr. Greenspan himself encouraged. To brew this bubble, combine Mr. Greenspan and Mr. Bush's cheap-money and kickback policies with free trade with asymmetrical economies of scale (hi, China) finishing off a lot of the old American industrial base, and letting international money flood together into what CPR/PRI's This American Life later called "The Giant Pool of Money that Destroyed Everything." That pool of money started sloshing around, and built the housing balloon. It also built a secondary bubble in commodities. The housing bubble was the biggest bubble yet.
Then - as, again, in the 1920s - all that exploded, starting with housing. (Remember how subprime was "contained"? Heh. Remember really old jokes about swampland in Florida? That comes out of the investment land boom in the South in the 20s, also driven by fraud. But I digress.) And this bubble collapse is where things really changed, in several ways.
One: Nobody moneyed - nobody really responsible - got punished. Nobody. All the naked fraud in the world, and not one punishment. A few fines which pale to nothing in the face of both profits and bailout gifts; that's an insult. They're still nakedly violating the law in foreclosures, as moral hazard has come to full flower.2
Two: No fortunes lost. Everyone at the top made whole, on the backs of the taxpayers. For bonus points, they bragged about it, and howled indignation when questioned; the arrogance and entitlement discussed above was ground in deeply.
Three: None of the bad debt was written down to zero. It's still all out there, as people pretend all those worthless CDOs and MBSes and so on have value, when they simply do not. That's a boat anchor on the economy that won't go away until that massive overarching debt - $16T if not more - is written down.
And worst of all, Four: A lot of those worthless instruments got backed by the Feds, courtesy the swap facilities set up after the crash.
So Mr. Greenspan set about blowing his latest bubble. This one is in government debt. It's a reinflation of the currency supply to make whole all those lost trillions of dollars, but without creating underlying value to support that kind of money supply. It simply isn't there, and there is no reasonable growth rate possible to make it up. Most projections aimed at making that liquidity whole make annual growth rate estimates which are frankly farcical - 8% per annum over 10-15 years, something achieved approximately never in modern history. It's not going to happen.
And this time, the bubble is in the currency itself. Who covers that when it pops?
And as part of that, right now, the US government is paying around US$375B a year in interest on debt, despite interest rates at zero by policy. With a ratings downgrade, rates go up. JP Morgan's analysts think a AA rating adds around $100B a year in interest to current debt, which is to say, more than the most severe cuts proposed will actually deliver.
That's right: the ratings downgrade alone will wipe out that "one trillion dollars in cuts! (across 10 years)" GOP plan, overnight. An actual rise in interest rates could double or quadruple that. You've heard of bond market vigilantes? You've laughed at the concept? Hi, these are they.
But, I hear you cry, back up! "Why the US?! There are other countries with worse debt to GDP ratios!" This is true. Japan is an example. They typically also lack the kind of massive and systemic trade deficit the US carries. I think you can get away with one or the other; the borrowing load in the case of the current-accounts deficit can be mediated by the net trade balance revenue, or a trade balance deficit is acceptable enough if you're not borrowing yourself to the limits at home. I don't think you can get away with both.
The thing is: that's not the scary part. No. That's a problem - a big problem - and it's scary, but it's not The Scary Part.
This is the scary part:
The higher percentage of budget you're paying to cover debt3 the more you have to borrow to do it, unless you start cutting other expenditures to balance, thus cutting headline GDP and some actual economic growth. And the more you have to borrow, the tighter credit gets, raising interest rates, and suppressing economic activity - cutting GDP and reducing tax revenue yet again, requiring increasing borrowing... which puts you back to the beginning of this paragraph.
This is called a currency death spiral4. They're scared of it, for good reason. It brings down governments. It's why they're willing to pull the debt-ceiling trigger: they'd rather play a round of Russian roulette than take an assured bullet straight to the brain.
Make sense, now? There's nothing crazy about that, now, is there?
1: Or did you think that was all cascading margin calls? Aheh, no. Tech and land, just like now.
2: It was neat, by which I mean infuriating, watching every Cascadian financial institution of note get handed over to Chase or someone else well-connected - and bailed out.
3: All else equal, which it never is; this is where I think they're insane with the no-taxes part of the demand. The counter-argument to that is that money is now too fungible; if you raise taxes you'll just prompt capital flight. There is some merit to this argument, but I think less than they think. Of course, you can really get at it by erecting further capital controls, which leads straight to hi there, Smoot-Hawley. That didn't work out so well last time.
4: And no, you can't print your way out of it; that devalues the currency and sends rates up just as assuredly, and also depresses economic activity. Well, okay, you can, sorta, if you don't mind not having a currency. That trick... rarely works.
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no subject
Date: 2011-07-27 08:32 am (UTC)no subject
Date: 2011-07-27 04:38 pm (UTC)no subject
Date: 2011-07-27 08:57 am (UTC)Thank you so much! May I rec this post?
no subject
Date: 2011-07-27 04:40 pm (UTC)Also, as Livejournal is having DDoS attack issues, I have made a summary post over on my band blog with links to all four posts rehosted elsewhere. That link is here:So you may want to reference both.
no subject
Date: 2011-07-27 07:33 pm (UTC)no subject
Date: 2011-07-27 07:36 pm (UTC)no subject
Date: 2011-07-27 07:34 pm (UTC)no subject
Date: 2011-07-27 08:16 pm (UTC)Oh, okay, fine. Lots of things. The banking system needs to be purged of its debt, and the comprehensive fraud must be purged as well; it's a boat anchor around the neck of the economy. If you want tax receipts to recover, you must do this. Sadly, that's probably not politically possible. Were I Tzar, I'd go through and decimate the financial system's upper management; the biggest offenders must be punished to put any possibility of a functional financial system back onto the field.
From a budget standpoint, it's a disaster. Several wars-of-choice have to be ended; the military will have to be cut. Al Qaeda isn't an organisation as much as it is a meme; you're looking at an organisation estimated at this point to have 20-30 people functioning in it. Spending a trillion or so invading poorer and poorer countries chasing a meme is insanity.
The Obama health-care plan can gain some indirect cost controls by mandating that core coverage be run as nonprofits, with the money opportunity being available on the inevitable resulting flotilla of supplemental coverage plans. (This is how Germany makes this system work; I'm skipping ideology here - I think the mandate is unconstitutional - and going towards functionality as best I can with this mess.) If this went really well, this could be a route towards solving some of the medicade/medicare crisis.
The Bush tax cuts are some of the most economically unproductive cuts in recent memory, and need to be eliminated. I'd actually prefer a massive overhaul of the tax system, but that really does take months, at best.
Social Security maximum retirement age will have to be ramped slowly upwards to 67, in stages, which is a cut and the Democrats probably won't go along. (Even with exemptions for health.) I'd strongly suggest extending the maximum income on the SS payroll tax as well, perhaps on an inverse-teir (higher brackets pay lower percentages, not higher. Yes, it's regressive; cope). Ballooning spending to boost GDP will not work - the money multipliers are showing that it hasn't been working and won't moving forward until the systemic debt is purged, rather than reinflated.
The housing mortgage deduction will have to be examined very, very carefully, and quite possibly phased out. A whole lot of corporate subsidies need to go away. And, of course, DHS needs to shut its fucking doors right the fuck now. But, honestly, I'm veering into politics now more than just economics. (Not, really, that there's much difference in the end.)
That's a rough outline, but these steps would, I think, start to clear the decks for actual economic recovery. It does not solve the China issue, however, and that's a big fucking deal. I have several ideas that work on paper but which have zero chance of going anywhere and would quite possibly trigger a series of overreactions leading to places we do not want to go, so as yet I do not have very good answers. I wish people had listened to me about this back in the 90s, but, well, I say that a lot. The core of these, had they been implemented then - rather than a straight slam to MFN trading status - would've been taken as positive, rather than negative, steps, and would've cushioned a lot of the problems of the last decade and a half. But, well.
no subject
Date: 2011-07-27 10:19 pm (UTC)There are many ways to make the health system work. unfortunately, the government is way too slow in acting in it's best interest. I also agree, DHS needs to go away NOW. They're probably the most corrupt department in the government with the worst list of personnel and that is saying A LOT.
What do you suspect will actually happen? We're going to crash, but how bad? End of the Union bad or something which can be recovered from?
no subject
Date: 2011-07-28 12:21 am (UTC)As to what, exactly, is going to happen? Fuck, I dunno. There are a lot of possible paths here and I guarantee you that a lot of arms are being very seriously twisted right now by the corporate Powers That Be. I don't know which faction of those is going to win, tho'. I really don't. If I have to give advice, it's this:
1. Be flexible. Be adaptive.
2. Cut ongoing obligate expenses as much as possible.
3. Lose debt. In particular, lose variable-rate debt.
no subject
Date: 2011-07-28 05:27 pm (UTC)no subject
Date: 2011-07-29 12:55 am (UTC)It's particularly galling because the whole point of this exercise is to manufacture a crisis and destroy the social safety net (whether this is because the Tea Party folks are racist fuckheads who care more about keeping government money from going to Those People than they do about keeping themselves afloat, or because their backers want cheap labor that won't talk back), and no matter what changes are made to the spending profile to fix the deficit, the moment the Republicans get back in, they'll pass another round of tax cuts and gosh look at this huge deficit. We know this because they've already done it twice (1980, 2000). We know it's manufactured because all of these supposed deficit hawks only come out when there's a Democratic administration.
worked pretty well in 1939-1945, when we had the biggest public works project of all time (otherwise known as World War II) which is what finally got us out of the Great Depression. What matters is what you're spending the money on. I agree that you don't want to use it to prop up zombie banks and make a few billionaires whole. Using it to employ large numbers of currently unemployed people and (re)build necessary infrastructure is quite another matter.
no subject
Date: 2011-07-29 01:48 am (UTC)worked pretty well in 1939-1945, when we had the biggest public works project of all time (otherwise known as World War II) which is what finally got us out of the Great Depression. What matters is what you're spending the money on. I agree that you don't want to use it to prop up zombie banks and make a few billionaires whole. Using it to employ large numbers of currently unemployed people and (re)build necessary infrastructure is quite another matter.
Yes, then there's what we have, which is to say, not 1939, but instead propping up zombie banks and making billionaires whole. I don't see that changing substantially. Most of any money spent will go towards fluffing up dead investments to make them appear not dead; that's the debt overhang I keep talking about; that's what must be purged before this approach will work again. In other words, yes, that's part of what I keep saying: until and unless the debt overhang is cleared, adding more (new) debt won't help, because it will go to propping up the overhang rather than actual economic activity. That won't change unless you can somehow magically make the finance system behave completely differently than it's been behaving for the last few decades.
no subject
Date: 2011-07-29 06:01 am (UTC)Then, again, that means it's the rest of the government that needs to be fixed.
I said, "What matters is what you're spending the money on. ... [Use] it to employ large numbers of currently unemployed people and (re)build necessary infrastructure..." Those people will be able to spend money on goods and services, businesses will see a surge of consumer demand and be able to hire people, who in turn will likewise become able to spend money, etc... Do that on a large enough scale and you've jump-started the economy. Yes we also need to kick over the dead banks and prosecute people; do that, too.
Obama's stimulus worked — without it we'd be in Great Depression Mark II right now. The problem is it just wasn't big enough to get a real recovery going.
no subject
Date: 2011-07-29 07:14 am (UTC)Yes, but the Clinton/Gingrich revisions in the late 90s supposedly extended the breakeven point to between 2014-2016.
The trust-fund surplus isn't there, because it's been borrowed and spent by the rest of the government.
Then, again, that means it's the rest of the government that needs to be fixed.
Potaeto, patato. Seriously, this is making a difference that is no difference at all. What the accounting books say doesn't matter at all if the money. is. not. there.
As for the size of stimulus and the debt overhang issue, I go back to money being fungible and the giant debt hole continuing to suck the life out of everything. Until that's fixed, nothing gets fixed, and more debt can very well make the problem worse, not better. (More on that in tonight's second post.)
no subject
Date: 2011-07-28 12:50 am (UTC)First of all, which "they" are you're referring to here?
Secondly, calling this "Russian roulette" presupposes that there are empty chambers in the gun and I'm not seeing any "empty chamber" outcomes that either the teatards or their backers could possibly want, cf. the still-remotely-possible scenario where Obama says "fuckit" and invokes the 14th Amendment option to make the debt ceiling a dead letter, which then means the House Republican caucus has burned their ammunition…
Barring that, if the premise is that the debt ceiling is Real and they simply will not accept any deal, then either the government is forced into default which increases borrowing costs, or forced into massive spending cuts which further trash the economy and further reduce revenue, either way borrowing costs become a larger percentage of the budget, which, by your reasoning seem to get us into a definite currency death spiral now rather than a possible currency death spiral later. The only people who win in that world are the proto-fascists (hmm…)
Wait, Smoot-Hawley was a set of tarriffs on imports enacted by the Republicans in 1930, which then led to a tarriff war, which then crashed the global economy even deeper -- were about protection of domestic industries and had nothing to do with capital control.
The actual capital controls enacted by FDR post-1933 (i.e., the gold confiscation and other measures), as I recall, worked out just the way they were supposed to — at least until the 1970s. Granted, I don't think another gold confiscation is in the cards, but they won't need it: given that, these days, most major monetary flows are electronic, and given the anti-terrorism/anti-money-laundering/national-security infrastructure that exists now, the Feds today have cross-border monetary surveillance/control that FDR could only dream about. The only real question will be one of political will.
no subject
Date: 2011-07-28 01:36 am (UTC)"They" meaning the Tea Party. This post is about explaining why they're doing this.
Secondly, calling this "Russian roulette" presupposes that there are empty chambers in the gun and I'm not seeing any "empty chamber" outcomes that either the teatards or their backers could possibly want
Again, this part is explaining their POV. It's why they are doing this. (If it hasn't been made clear from various comments - and this post has garnered comments everywhere, so it may not be in this set of replies - this is not what I would do.)
Barring that, if the premise is that the debt ceiling is Real and they simply will not accept any deal, then either the government is forced into default which increases borrowing costs, or forced into massive spending cuts which further trash the economy and further reduce revenue
It will be the latter, of course. They're aware of this; again, as per above, "The pain you take now is to avoid worse pain in the future."
[Capital controls] Smoot-Hawley [was] about protection of domestic industries and had nothing to do with capital control.
And I'm referring in this case to reducing the fungibility of capital across borders (c.f. addressing capital flight); I'm talking about effective tariffs on (or outright bans on) capital transfers across borders. I think once you get into that game, trade barriers are implicit, and retaliation will be made. I could be wrong about that, but I wouldn't want to try to find out.
no subject
Date: 2011-07-29 01:28 am (UTC)Looks to me more like, "We just want to burn everything down and start over."
Trade, in which one is exchanging goods & services for presumably-equal-valued currency or other goods & services does not (ideally) involve net transfers of capital. There are already pretty significant restrictions on straight capital transfers and GATT is just fine with it (...I'm pretty sure if I were to withdraw the entire balance of my SSB account and wire it to a Canadian bank, all kinds of hell would break loose...)
no subject
Date: 2011-07-29 01:36 am (UTC)I'm sure it does. What's relevant is what it looks like to them.
If it makes you feel better, I'll absolutely decline to rule out "burn everything down and start over" as an underlying motivation, whether they know it or not.
There are already pretty significant restrictions on straight capital transfers and GATT is just fine with it (...I'm pretty sure if I were to withdraw the entire balance of my SSB account and wire it to a Canadian bank, all kinds of hell would break loose...)
But they're manageable. I mean, we still see this going on - there's a neat trick going on right now where a lot of corporations started shifting profits back out of the US after that big reward during the amnesty in ....2006? to bring them back in. So now they're of course lobbying for another tax amnesty - wash, rinse, repeat. It's been in a couple of versions of these various debt limit bills.
Like I said, I'm not as concerned about capital flight in the face of higher taxes as both the Hayakians and the Marixists I know are, but I don't think it's silly either.
no subject
Date: 2011-07-29 06:41 am (UTC)According to this survey, more than a third of Tea Partiers are Evangelicals, and nearly half identify with the religious right. I wonder how many of them (consciously or not) identify economic catastrophe with Armageddon.
no subject
Date: 2011-07-30 07:26 am (UTC)And of course a downgrade will result in soaring rates because that's what happened with Japan when they were downgraded, right? Oh wait.
Let's face it, these ratings are a political tool, highly inaccurate and of questionable impact on the market, especially when there aren't a lot of good options.