Thursday, July 28, 2011

Do we really KNOW whether gov't can make payments without ceiling lift? MSN piece asks for "sacrifice"; could FDIC deposit insurance be at risk?

Let me reiterate a point about yesterday’s Tea Party “spy visit.”

I think it is quite likely that the government can may most of its obligations (maybe all) in August without a debt extension by Aug. 2.  That would include bond obligations and Social Security obligations. But even with that, there can be day-to-day cash flow problems that can delay payments temporarily.

Obviously, without debt extension, the government could not go on for a long time without extraordinary cuts to future obligations – leading to economic dislocations with which we are already familiar (layoffs, to start).

 But at least it could have met its existing obligations, and its credit, if it stretched them out, was late with some, and then stopped spending, perhaps shutting down whole departments (Education, HHS, Commerce, etc).   I’m not advocating that, I’m just doing the analysis.

What galls me is that Tea Party legislators and supporters (including Michele Bachmann, who pretends to be a presidential candidate), claim that they know that the government can pay its bills, when there is no way they could know.  Then, if the president doesn’t, they can “blame” Obama and the administration for not paying the bills, when there is no absolute way to “prove” that the money is there or isn’t there (except maybe in court). This is the kind of maneuvering that goes on before political and social revolutions, and tremendous breakdowns.  This is essentially a kind of war that destroys lives. 

One point needs to be very clear. We are talking about the personal dislocations caused by the government’s failure to make good on existing obligations, which, if prolonged very long, causes others to fail, leading to a chain reaction and tailspin that could destroy the entire fiat economy quickly.  This is different from the more customary downturn that results from large cutbacks in spending (commitment to future obligations after paying existing ones), leading to more unemployment in a more conventional way. 

It is true that some of this was the case in 2008. After all, major financial institutions could not meet their obligations, which is almost like government not doing so.  I guess we’re refuting the idea that “government is too big to fail.”  And indeed the Bush bailouts did contribute to the huge deficits since Obama took office.

Total financial collapse did occur in the 1930s, and remember it wasn’t just stocks and bonds that were at risk, so were cash accounts. And even today some people criticize deposit insurance, and it’s not clear that the government could guarantee the FDIC insurance if it couldn’t pay its other obligations.

It’s in that vein that I was quite upset with the tone of this MSN piece posted a while ago, “Could social security checks stop? … some things to do if it does”.   Much of this applies to other items, such as welfare or veterans payments, food stamps, etc.  Look at some of the suggestions:

Cancel services -- cable, cellphones, Internet, newspaper, books -- that were necessities yesterday but now are a luxury.”

“Sell some belongings. A yard sale might get you by for a couple weeks.

“Ask family and friends for help. These will be tough times, so don’t be proud.”

They are talking about real personal sacrifices, not because of economic dislocation in the usual sense (recession), but because of what is almost tantamount to crime.

The crime consists of playing roulette with the ability to pay existing obligations, and then possibly trying to repudiate them later in some sort of “purification”.

The MSN reference was here.   

This is not something the nation or its people needs to go through.  It is possible to implement a deficit reduction program that satisfies the credit markets and that avoids sudden dislocations.  But there may be some people who want it to go through this so they can seize power.

Of course, sacrifice and destruction of stable lives occurs for all kinds of reasons.  These could include pandemics, and natural disasters (like a huge geomagnetic solar storm, which we are unprepared for).   And sacrifice is demanded because of the aggression of others, and that’s usually called War.  To say that one should never sacrifice because of the wrongs of another it sot say one should never serve in the military to answer aggression caused by the demands of others.  History repeats itself.


While John Boehner's control of his own GOP Party implodes tonight: 

CNN Money has this report on the Analysis of the Bipartisan Policy Center, high level link with some day-to-day analysis, link here.   The devil is in the details in the PDF link; we'll look at it more soon.  The BPC says the Treasury may well have enough cash to get to Aug. 10.  Stay tuned.  

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