American Debt Ceiling Debate- Default on August 2nd Looming

[Slathar]

http://www.washingtonpost.com/busine...31H_story.html

Much of the article talks about raising the debt ceiling by August 2nd or else America will default on the current debt. I see that this move is necessary to prevent another economic crash, but all this does is raise the amount that we can borrow. It does nothing to combat America's spiraling debt. The fact that so much of it has become politicized is problematic. Spending has to be cut from entitlements (SS, Medicare, etc), national defense, and everywhere else.

This is where things begin to look bad or even worse than bad. A default on a loan not only would lower America's triple AAA credit rating but it would shoot the stock market in the foot and stifle any hope for job creation. How this is combatted by Washington will determine how bad the 'fallout' is.

[Ihealyou]

Not raising the debt ceiling is like deciding not to pay your credit card bill because you're unhappy with how much you spent. It doesn't decrease the amount you spent, but it does get you in deep shit. That being said, care has to be taken with deficit reduction efforts. The Fed has warned politicians about the need to reduce our long term debt, but has not been as concerned about our short term debt. This is because, despite Republicans screaming otherwise, government spending has a stimulative effect on the economy. Its important not to drop this support while we're in such a weak recovery. Unfortunately, its easier to cut welfare, social services and other programs which actually help the economy than entitlements, which are the main drivers of our long term debt.

(Not extending the Bush tax cuts would have avoided this problem all together, but don't tell anyone that)

[Doors]

Wouldn't be surprised if this country defaulted. Most republican politicians want us to default because then it makes Obama look like shit and when it comes election time they will stand a better chance at getting a republican president elected. Which is just another example of why politics is fucking stupid and the people we elect into office are better off being flogged to death than given anything.

On the other hand, Obama's big plan for fixing our debt is to tax the living shit out of people in this country who actually got off their lazy asses and made it big here. That isn't going to solve anything and at the same time as he's taxing billionaires the trade off is that people who barely fit into this category (small business owners, couples living together with combined incomes) are going to get absolutely slammed.

Either way both sides suck ass.

[Doors]

Also we've been in a war with the Middle East for what, a decade now? Not to mention military involvement all over the world. Any country thats at war for that many years is going to have financial issues.

[Messianic]

Originally Posted by Ihealyou [You must be logged in to view images. Log in or Register.]

despite Republicans screaming otherwise, government spending has a stimulative effect on the economy.

What does it stimulate? Genuine economic growth, or phony GDP/Job numbers? I'd argue the latter, based on Bush+Obama's escapades in stimulus. Both were heavy stimulus abusers.

No one can show or prove that the stimulus was a success. We're just expected to believe it worked. I've looked at the numbers - even the job creation/saved numbers the presidency provides puts the cost of each job at $200,000 or higher. Countries that didn't stimulate are recovering far faster than we are.

Originally Posted by Ihealyou [You must be logged in to view images. Log in or Register.]

Unfortunately, its easier to cut welfare, social services and other programs which actually help the economy than entitlements, which are the main drivers of our long term debt.

It's quite a bit harder politically to deal with entitlements - but people on both sides who have tried to deal with them get ostracized by their own parties and demagogued by the opposition.

And there are a myriad of entitlements or government promises that are coming down the pike that no one even talks about - Veteran benefits for the tons of soldiers that aren't re-enlisting or have been wounded around the world, student loans, etc.

Originally Posted by Ihealyou [You must be logged in to view images. Log in or Register.]

(Not extending the Bush tax cuts would have avoided this problem all together, but don't tell anyone that)

That wouldn't have solved the problem at all. We probably would have spent more money on on turtle-tunnel stimulus or somewhere else since we may have had more projected revenue. The revenue difference isn't even that great. Long-term, revenues tend to some degree of normalization regardless of the tax rate since peoples' choices change in accordance with that rate.

[Ihealyou]

Originally Posted by Messianic [You must be logged in to view images. Log in or Register.]

What does it stimulate? Genuine economic growth, or phony GDP/Job numbers? I'd argue the latter, based on Bush+Obama's escapades in stimulus. Both were heavy stimulus abusers.

No one can show or prove that the stimulus was a success. We're just expected to believe it worked. I've looked at the numbers - even the job creation/saved numbers the presidency provides puts the cost of each job at $200,000 or higher. Countries that didn't stimulate are recovering far faster than we are.

I'm not sure how you differentiate between genuine and phony growth, but government spending does have a real economic impact. In a strong economy, you can argue that the government crowds out private enterprise, but in a weaker economy government spending serves to replace the spending which was lost in the private sector. The government pays employees itself, and pays private contractors. These people go out and spend their money, which creates growth. As the private sector becomes stronger, the government should step back its spending. This way, the government promotes growth without crowding out private businesses.

With regards to the stimulus, yes it was expensive and yes it didn't help as much as anticipated, but it did have a real economic impact. The CBO estimated that the stimulus act would decrease the GDP by 0.1% to 0.3% in the long term, but would increase it by 1.1% to 3.3% in the short term (chart). I don't know if you would define this as a success or not, but it did help the economy from falling into a deeper recession.

I don't know much about countries who did not attempt to stimulate their economies, but you can look at Germany as an example of a successful stimulus program. Right now Germany is one of the most successful countries in the world, and they spent $110 billion on stimulus. This comes out to about 1.5% of their GDP, whereas the U.S. spent about 2% of its GDP on stimulus. The difference between the German and U.S. stimulus is Germany had a deficit reduction plan as part of its stimulus. Germany used short term deficit spending to stimulate the economy, while minimizing its impact on long term debt. This created growth without worrying investors and creating problems down the road. The U.S. needs to follow a similar path to ensure that we don't see the gains from the stimulus wiped out by debt. Reckless stimulus spending does more harm than good, but responsible stimulus can be a powerful tool to promote growth.

[Shannacore]

young economist

[Messianic]

Originally Posted by Ihealyou [You must be logged in to view images. Log in or Register.]

I'm not sure how you differentiate between genuine and phony growth, but government spending does have a real economic impact. In a strong economy, you can argue that the government crowds out private enterprise, but in a weaker economy government spending serves to replace the spending which was lost in the private sector. The government pays employees itself, and pays private contractors. These people go out and spend their money, which creates growth. As the private sector becomes stronger, the government should step back its spending. This way, the government promotes growth without crowding out private businesses.

This is the Macro 101 explanation - and after a lot of reading and number crunching, I can tell you one of the major the faulty premises is that all spending of money is growth, and that spending is relatively equal.

Money spent by private individuals, generated by their own efforts in the market is very valuable - money spent that came directly or indirectly from government, regardless of its intentions, ends up on aggregate being poured into less successful enterprises and the money has a dead end.

Both private and public source spending have a net % of failure - that is, money placed into something that cannot sustain itself - and a variable associated with the "growth" they build - the government version is negative over time, and has vast diminishing returns. Individuals and groups begin to alter their behavior because they expect government intervention, which in effect decreases the impact of the intervention because people are just gaming the system. That's partially why Bush's stimuli - although much smaller - actually had more an effect, although more of it has to do with monetary policy.

Even given all of this, the government isn't creating anything new when it spends money - it is taking money from the private sector to give it back to the private sector, with much administrative cost. There can't possibly be a reasonable gain with this methodology. If the government is borrowing to give to the private sector, it is also crowding out loans that weren't based in the idea of stimulus - but loans where private individuals risk their own credit to achieve something (which is far more successful than most government borrowing).

If the government is easing monetary policy to flood markets with credit, thereby lowering the "cost" of borrowing money, it creates mixed signals in a market - where people are trying to deleverage because they are in too much debt, it tells them to go into more debt, even though it is creating a situation where interest rates have to rise even higher in the future than they would have if they had been allowed to appreciate normally.

This is called a bubble. You usually can't control or predict where it goes, but it always goes somewhere. It's heading into commodities right now, but who knows where it will end up.

Originally Posted by Ihealyou [You must be logged in to view images. Log in or Register.]

The CBO estimated that the stimulus act would decrease the GDP by 0.1% to 0.3% in the long term, but would increase it by 1.1% to 3.3% in the short term (chart). I don't know if you would define this as a success or not, but it did help the economy from falling into a deeper recession.

It's based upon certain assumptions which aren't coming true. It's academic, but many argue a kind of constant value multiplier effect for government spending. It's not quite so simple as they say - which is why none of the people who argue in favor of government stimulus predicted the 2008 recession. There were plenty of people who predicted it in fairly certain terms (they weren't just doomsaying) with a good degree of accuracy.

Originally Posted by Ihealyou [You must be logged in to view images. Log in or Register.]

I don't know much about countries who did not attempt to stimulate their economies, but you can look at Germany as an example of a successful stimulus program. Right now Germany is one of the most successful countries in the world, and they spent $110 billion on stimulus. This comes out to about 1.5% of their GDP, whereas the U.S. spent about 2% of its GDP on stimulus. The difference between the German and U.S. stimulus is Germany had a deficit reduction plan as part of its stimulus. Germany used short term deficit spending to stimulate the economy, while minimizing its impact on long term debt. This created growth without worrying investors and creating problems down the road. The U.S. needs to follow a similar path to ensure that we don't see the gains from the stimulus wiped out by debt. Reckless stimulus spending does more harm than good, but responsible stimulus can be a powerful tool to promote growth.

Because Germany/US plans are extraordinarily complex and comparing them proved difficult, I'm looking more at the underlying proofs of stimulus as a whole - and I point out that Paul Krugman was doomsaying about a second 1937 because we didn't spend enough - i.e. we didn't go into debt enough. He'd certainly support a higher-tax deficit reduction plan, but he supports running hard deficits until the world ends. Ironically, that's exactly what we did in the 30s - we never stopped spending. Never stopped stimulating. Never stopped acquiring more and more control over private industry. Created entitlements. His argument is that we didn't do enough.

And my proof regarding bad recessions and the real effect of spending is to look at the actual spending difference between Hoover and Roosevelt. The difference is very, very tiny. It's been a while since I did the study, but it was very marginal.

And the bad thing about stimulus is if it works, it gets credit for working. If it fails, proponents just say we didn't stimulate enough. There aren't underlying and reliable ways to predict its effects or even how to stimulate in the most effective ways.


Stimulus just creates the massive up and down swings of the economy as opposed to reasonable recessions and expansions - and honestly, the fiscal side of things isn't nearly as big as the monetary side. All the focus on taxes and spending belies the real damage being done by near-zero interest rates.


We never stimulated during some of our largest booms as a country - Yet during the ones where we did, a massive bust follows. It seems too much power for an administration - Bush or Obama - to flood the economy with money (as Bush did following the 2000 recession, where home starts increased for the first time on record in a recession) and leave a bust for the next guy. If Obama wins a second term and continues on the track he's on, My bet is we'll see an even larger crash on the next guy, because the crash cycles are starting to spiral inward and become more frequent (using the last 90 years as a frame of reference). Heck, it might even crash during the next presidential term, regardless. I'm watching some really bad technicals in world markets, and China is no exception. China is setting up one of the largest busts in history by their own stimulus efforts - it may take a decade, but China will see a massive bust in the future based on poor investment by its government.

Do we really trust politicians to determine the right velocity of the economy? I don't trust any of them to do that. And Obama absolutely ignored the deficit for his first two years, and was entirely complicit with the previous house not even passing a budget (do you just spend uncontrollably with your home finances, or do you actually make budgets). If Republicans hadn't even passed a budget, I would want political blood (because I'm registered as one to try to affect their primaries - I want libertarian minded republicans who don't want foreign wars and federal social legislation).

[Fist_The_Lord]

Seriously the war on drugs is by far our biggest loss, we pay to imprison potheads. Fully legalize and tax that shit, you get a multi-billion dollar industry, which in turn stimulates the economy.

[nalkin]

It's time to start learning chinese my friends.